1.501(c)(18)-1. Certain funded pension trusts
(a) In general. --Organizations described in section 501(c)(18)
are trusts created before June 25, 1959, forming part of a plan
for the payment of benefits under a pension plan funded only
by contributions of employees. In order to be exempt, such trusts
must also meet the requirements set forth in section 501(c)(18)(A),
(B) and (C), and in paragraph (b) of this section.
(b) Requirements for qualification. --A trust
described in section 501(c)(18) must meet the following requirements
--
(1) Local law. --The trust must be a valid,
existing trust under local law, and must be evidenced by an
executed written document.
(2) Funding. --The trust must be funded solely
from contributions of employees who are members of the plan.
For purposes of this section, the term "contributions of
employees" shall include earnings on, and gains derived
from, the assets of the trust which were contributed by employees.
(3) Creation before June 25, 1959
(i) In general. --The trust must have been created
before June 25, 1959. A trust created before June 25, 1959 is
described in section 501(c)(18) and this section even though
changes in the makeup of the trust have occurred since that
time so long as these are not fundamental changes in the character
of the trust or in the character of the beneficiaries of the
trust. Increases in the beneficiaries of the trust by the addition
of employees in the same or related industries, whether such
additions are of individuals or of units (such as local units
of a union) will generally not be considered a fundamental change
in the character of the trust. A merger of a trust created after
June 25, 1959 into a trust created before such date is not in
itself a fundamental change in the character of the latter trust
if the two trusts are for the benefit of employees of the same
or related industries.
(ii) Examples. --The provisions of this subparagraph
may be illustrated by the following examples:
Example (1). Assume that trust C, for the benefit
of members of participating locals of National Union X, was
established in 1950 and adopted by 29 locals before June 25,
1959. The subsequent adoption of trust C by additional locals
of National Union X in 1962 will not constitute a fundamental
change in the character of trust C, since such subsequent adoption
is by employees in a related industry.
Example (2). Assume the facts as stated in example
(1), except that in 1965 National Union X merged with National
Union Y, whose members are engaged in trades related to those
engaged in by X's members. Assume further that trust D, the
employee funded pension plan and fund for employees of Y, was
subsequently merged into trust C. The merger of trust D into
trust C would in itself constitute a fundamental change in the
character of trust C, since both C and D are for the benefit
of employees of related industries.
(4) Payment of benefits. --The trust must provide
solely for the payment of pension or retirement benefits to
its beneficiaries. For purposes of this section, the term"retirement
benefits" is intended to include customary and incidental
benefits, such as death benefits within the limits permissible
under section 401.
(5) Diversion. --The trust must be part of a
plan which provides that, before the satisfaction of all liabilities
to employees covered by the plan, the corpus and income of the
trust cannot (within the taxable year and at any time thereafter)
be used for, or diverted to, any purpose other than the providing
of pension or retirement benefits. Payment of expenses in connection
with the administration of a plan providing pension or retirement
benefits shall be considered a payment to provide such benefits
and shall not affect the qualification of the trust.
(6) Discrimination. --The trust must be part
of a plan whose eligibility conditions and benefits do not discriminate
in favor of employees who are officers, shareholders, persons
whose principal duties consist of supervising the work of other
employees, or highly compensated employees. See sections 401(a)(3)(B)
and 401(a)(4) and §§1.401-3 and 1.401-4. However,
a plan is not discriminatory within the meaning of section 501(c)(18)
merely because the benefits received under the plan bear a uniform
relationship to the total compensation, or the basic or regular
rate of compensation, of the employees covered by the plan.
Accordingly, the benefits provided for highly paid employees
may be greater than the benefits provided for lower paid employees
if the benefits are determined by reference to their compensation;
but, in such a case, the plan will not qualify if the benefits
paid to the higher paid employees are a larger portion of compensation
than the benefits paid to lower paid employees.
(7) Objective standards. --The trust must be
part of a plan which requires that benefits be determined according
to objective standards. Thus, while a plan may provide similarly
situated employees with benefits which differ in kind and amount,
these benefits may not be determined solely in the discretion
of the trustees.
(c) Effective date. --The provisions of section
501(c)(18) and this section shall apply with respect to taxable
years beginning after December 31, 1969. [Reg. §1.501(c)(18)-1.]
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