Reasonable Amount of Allocation for a Benefit Plan

February 8, 1973 BIR RULING NO. 003-73 Reasonable amount of allocation for a benefit plan . A plan may be contributory or non-contributory on the part of the officials or employees. The amount allocable to the retirement fund shall be such amounts as shall be required, under accepted actuarial principles to maintain the Plan in a sound condition. One of the requirements for qualification of a plan under Republic Act No. 4917 as implemented by Revenue Regulations No. 1-68 is that there must be no discrimination in contributions or benefits in favor of employees who are officers, shareholders, supervisors, or highly compensated, as against other employees whether within or without the plan. Variations in contributions or benefits may be provided so long as the plan, viewed as a whole for the benefit of employees in general, with all its attendant circumstances, does not discriminate in favor of employees falling within the four classes just mentioned. (par. 2611, pp. 30, 094-30, 100, Vol. 3 CCH 1970). Income of the plan, liability to income tax . The income of the trust fund from its investments are exempt from income tax Provided all the statutory requirements for a reasonable retirement benefit plan are met and complied with. An increasingly important aspect of the administration of an employee's plan is that dealing with the investment powers and policies of the administrators of the plan. A qualified plan may invest some or all of its funds without losing its tax-exempt status provided that in such investment activity said funds are not actually used or diverted to purposes other than for the exclusive benefit of the employees or their beneficiaries. In other words, once approved, an employees' benefit plan will lose its tax exemption only if variations from the approved plan prejudice the employee benefits and improve or increase indirect employer benefit. (Time Oil Co. vs. Comm. 259 F (2d) 237 cited in B.I.R. Ruling No. 67-32, dated Sept. 11, 1967) Whole amount of allocation from employer, deductibility from income tax . If the Plan meets the requirements of Republic Act No. 4917 as implemented by Revenue Regulations No. 1-68, the employer can, deduct its contributions to the retirement fund. However, the amount of contributions which an employer may deduct differ with respect to the three types of plan, i e., stock bonus, pension and profit-sharing plans. (par. 2805.013, p. 30,030, Vol. 3 CCH (1970) For income tax purposes, the employer may deduct, within reasonable limits, contributions to the plan as they are made. Under Section 30(j) of the National Internal Revenue Code as amplified by Section 118 of the Income Tax Regulations, the deductions are as follows: (a) contributions by the employer during the taxable year to cover the pension liability accrued during that year may be deducted as business expense, and (b) one-tenth (1/10) of the contributions by the employer to fund past service cost may be deducted for the taxable year in which the contributions are made and for each of the nine succeeding taxable years. An employee's contribution to a pension trust (under a contributory plan) is not deductible from his taxable income.