BIR Ruling

January 23, 1969 Messrs. Ross, Salcedo, Del Rosario, Bito & Misa Ramon Magsaysay Center Roxas Boulevard Manila S i r : This refers to your letter dated September 5, 1968 assailing the compatibility of paragraphs (g) and (h) of Section 2 of Revenue Regulations No. 1-68 quoted as follows: (g) Non-forfeitures . It must provide for non-forfeitable rights, that is upon the termination of the plan or upon the complete discontinuance of contributions under the plan, the rights of each official or employee to benefits accrued to the date of such termination or discontinuance, to the extent than funded, or the rights of each employee to the amounts credited to his account at such time are non-forfeitable. (h) Forfeitures . The plan must expressly provide that forfeitures arising from severance of employment, death or for any other reason, must not be applied to increase the benefits any employed would otherwise receive under the plan at any time prior to the termination of the plan or the complete discontinuance of employer contributions thereunder. The amounts so forfeited must be used as soon as possible to reduce the employer's contributions under the plan. In reply, I have the honor to inform you as follows: Paragraph (g) contemplates a situation where a benefit plan is terminated that is, it ceases operation. The non-forfeiture provision thereof simply means that all benefits accruing to the employees and all amounts credited to their account to the extent then funded must be given to them and not revert to the employer. On the other hand, paragraph (h) contemplates not the discontinuance of termination of the plan but mere separation or severance of employment of individual employees. In such cases, the employees who are separated lose their entitlement to the benefits then accrued to them at the time of separation. The philosophy behind this forfeiture is that the fund is intended as a retirement fund and the rights therein of its covered employees becomes absolute only after their actual retirement. In other words, to each individual employee, benefits accrue to them only when they retire. You will note, therefore, that there is no incompatibility of the provisions of the two paragraphs in question. aisadc Please be guided accordingly. Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue