[Code of Federal Regulations]
[Title 26, Volume 5]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.401-2]

[Page 13-14]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.401-2  Impossibility of diversion under the trust instrument.

    (a) In general. (1) Under section 401(a)(2) a trust is not qualified 
unless under the trust instrument it is impossible (in the taxable year 
and at any time thereafter before the satisfaction of all liabilities to 
employees or their beneficiaries covered by the trust) for any part of 
the trust corpus or income to be used for, or diverted to, purposes 
other than for the exclusive benefit of such employees or their 
beneficiaries. This section does not apply to funds of the trust which 
are allocated to provide medical benefits described in section 401(h) as 
defined in paragraph (a) of Sec. 1.401-14. For the rules prohibiting 
diversion of such funds and the requirement of reversion to the employer 
after satisfaction of all liabilities under the medical benefits 
account, see paragraph (c) (4) and (5) of Sec. 1.401-14. For rules 
permitting reversion to the employer of amounts held in a section 415 
suspense acount, see Sec. 1.401(a)-2(b).
    (2) As used in section 401(a)(2), the phrase ``if under the trust 
instrument it is impossible'' means that the trust instrument must 
definitely and affirmatively make it impossible for the nonexempt 
diversion or use to occur, whether by operation or natural termination 
of the trust, by power of revocation or amendment, by the happening of a 
contingency, by collateral arrangement, or by any other means. Although 
it is not essential that the employer relinquish all power to modify or 
terminate the rights of certain employees covered by the trust, it must 
be impossible for the trust funds to be used or diverted for purposes 
other than for the

[[Page 14]]

exclusive benefit of his employees or their beneficiaries.
    (3) As used in section 401(a)(2), the phrase ``purposes other than 
for the exclusive benefit of his employees or their beneficiaries'' 
includes all objects or aims not solely designed for the proper 
satisfaction of all liabilities to employees or their beneficiaries 
covered by the trust.
    (b) Meaning of ``liabilities''. (1) The intent and purpose in 
section 401(a)(2) of the phrase ``prior to the satisfaction of all 
liabilities with respect to employees and their beneficiaries under the 
trust'' is to permit the employer to reserve the right to recover at the 
termination of the trust, and only at such termination, any balance 
remaining in the trust which is due to erroneous actuarial computations 
during the previous life of the trust. A balance due to an ``erroneous 
actuarial computation'' is the surplus arising because actual 
requirements differ from the expected requirements even though the 
latter were based upon previous actuarial valuations of liabilities or 
determinations of costs of providing pension benefits under the plan and 
were made by a person competent to make such determinations in 
accordance with reasonable assumptions as to mortality, interest, etc., 
and correct procedures relating to the method of funding. For example, a 
trust has accumulated assets of $1,000,000 at the time of liquidation, 
determined by acceptable actuarial procedures using reasonable 
assumptions as to interest, mortality, etc., as being necessary to 
provide the benefits in accordance with the provisions of the plan. Upon 
such liquidation it is found that $950,000 will satisfy all of the 
liabilities under the plan. The surplus of $50,000 arises, therefore, 
because of the difference between the amounts actuarially determined and 
the amounts actually required to satisfy the liabilities. This $50,000, 
therefore, is the amount which may be returned to the employer as the 
result of an erroneous actuarial computation. If, however, the surplus 
of $50,000 had been accumulated as a result of a change in the benefit 
provisions or in the eligibility requirements of the plan, the $50,000 
could not revert to the employer because such surplus would not be the 
result of an erroneous actuarial computation.
    (2) The term ``liabilities'' as used in section 401(a)(2) includes 
both fixed and contingent obligations to employees. For example, if 
1,000 employees are covered by a trust forming part of a pension plan, 
300 of whom have satisfied all the requirements for a monthly pension, 
while the remaining 700 employees have not yet completed the required 
period of service, contingent obligations to such 700 employees have 
nevertheless arisen which constitute ``liabilities'' within the meaning 
of that term. It must be impossible for the employer (or other non 
employee) to recover any amounts other than such amounts as remain in 
the trust because of ``erroneous actuarial computations'' after the 
satisfaction of all fixed and contingent obligations. Furthermore, the 
trust instrument must contain a definite affirmative provision to this 
effect, irrespective of whether the obligations to employees have their 
source in the trust instrument itself, in the plan of which the trust 
forms a part, or in some collateral instrument or arrangement forming a 
part of such plan, and regardless of whether such obligations are, 
technically speaking, liabilities of the employer, of the trust, or of 
some other person forming a part of the plan or connected with it.

[T.D. 6500, 25 FR 11672, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 
5072, Apr. 14, 1964; T.D. 7748, 46 FR 1695, Jan. 7, 1981]