Difference in the Tax Treatment of Non-Trusteed or Insured Retirement Plans vis-a-vis Trusteed Retirement Plans

June 24, 1986 BIR RULING NO. 092-86 29 (c) (7) (A) 095-85 092-86 Gentlemen : Reference is made to your position paper which seeks clarification on the difference in the tax treatment of so-called non-trusteed or insured retirement plans vis-a-vis trusteed retirement plans. In connection thereto, please be informed as follows: 1. An insured plan which is a written program that uses a Deposit Administration Contract (DAC) or Group Deferred Annuity Contract (GDAC) as its funding instrument is a non-trusteed plan . While no particular words are required for the creation of an express trust, a trust must clearly be intended. (Art. 1444, New Civil Code) Trust cannot be implied in a contract of insurance, in the same way that authority to perform trust functions cannot be implied from an authority to issue insurance contracts. The trust must be evidenced by an executed written document setting forth the terms thereof, and executed by and between the employer as trustor and the trustee or trustees of the employee's retirement trust fund, duly signed by the parties to the trust and acceptance by the trustees indicated therein. (See Rev. Rul. 56-673, C.B. 1956-2, 281 & Rev. Rul. 69-231 I.R.B. 1969-19, 11, p. 40, 044, par. 2605.70, CCH Vol. 3 (1970)) As distinguished from a trust fund plan, a trust agreement is not employed in insured group pension plans. (p. 134, Pension Planning by Allen, Melone and Rosenbloom, 3rd ed.) Neither the DAC nor the GDAC of insured plans complies with the foregoing requirements. Moreover, under Central Bank Circular Nos. 824 and 825, the DAC or the GDAC cannot be considered an agreement constituting a trust relationship because the insurance company or the insurer under the DAC or GDAC assumes the risk or responsibility in case of loss in the investment; it guarantees a face amount or income; and the DAC or GDAC contains a stipulated fixed rate of interest or return to be credited to funds help by the insurer. This is not so, however, in the case of trust fund plan because unlike the insurer, the trustee under the trust indenture does not make such guarantees and stipulations as it is required to account for all the income earned and turn over the same to the client-beneficiaries net only of his fees and necessary expenses. Accordingly, an insured plan which is established and maintained by the employer under a DAC/GDAC executed by and between the said employer as the insured or policyholder, and the insurance company as the insurer is a non-trusteed plan. 2. Income from all kinds of deposit administration fund investments is subject to income tax . Exemption from taxation is never presumed nor implied. The grant of tax-exemption must be express, clear and unambiguous. In other words, a claim of exemption from tax payment must be clearly shown. It should be based on the language in the law too plain to be mistaken. (Govt. of the Philippine Islands vs. Monte de Piedad, 51 Phil. 352; New York v. Tax Commissioners, 199 U.S.I., 25 Sup. Ct. 705, 50 L. ed. 65, 4 Ann. Cas. 381) Thus, exemption from taxation of the retirement benefits paid to private employees under a reasonable retirement benefit plan maintained for their exclusive benefit by their employer is expressly provided for by Section 29(c)(7) (A) of the Tax Code as amended. Likewise, Section 54(b) (formerly Section 56(b) of the same Code is explicit that earnings or income from employees' retirement fund investments are exempt from income tax only when they accrue to a trust fund plan; hence, indubitably excluding from the ambit of the tax exemption, insured plans which are non-trusteed plans. 3. Deductible contributions of the employer shall consist only of the premiums actually withdrawn from the deposit administration fund . Premiums collected in connection with insured pension plans become a part of the insurer's general assets and these premiums constituting the employer contributions are not allocated to specific employees until retirement date; hence, the employer may deduct the retirement benefit payments (but not the annuity premiums) to the extent that they are reasonable in the year the retirement benefits are paid, regardless of when accrued. (par. 2643.02, p. 30, 351, Vol. 3 CCH (1970)) 4. The employer is not entitled to a deduction for past service liability contributions to insured plan . Under Section 30(j) of the Tax Code, an employer's past service contributions are deductible only when such contributions are made or accrue to a trust. Section 30(j) explicitly, refers to "pension trust" thus excluding from its application, retirement funds which are not trusteed. Accordingly, since the insured plan is a non-trusteed plan, the employer cannot claim deduction for past service liability contributions thereto. aisadc Very truly yours, (SGD.) BIENVENIDO A. TAN, JR. Commissioner