[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
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)
 
PART 1_INCOME TAXES--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]