[Code of Federal Regulations]

[Title 26, Volume 7]

[Revised as of April 1, 2005]

From the U.S. Government Printing Office via GPO Access

[CITE: 26CFR1.501(c)(18)-1]



[Page 36-37]

 

                       TITLE 26--INTERNAL REVENUE

 

    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 

                               (CONTINUED)

 

General Rule--Table of Contents

 

Sec. 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.



[[Page 37]]



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 not 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 

Sec. Sec. 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.



[T.D. 7172, 37 FR 5618, Mar. 17, 1972]