Date: January 8, 1997 [VAOPGCPREC 1-97]{.underline}

From: General Counsel (022)

Subj: Countability of Distributions from Individual Retirement Accounts
as Income for Purposes of Pension and Parents\' Dependency and Indemnity
Compensation \--XXXXXXXX, XXXXX X X XXX XXX

To: Acting Under Secretary for Benefits (20)

[QUESTION PRESENTED]{.underline}:

Are distributions from an individual retirement account (IRA) countable
as income for purposes of the improved pension program, the section 306
pension program, the old law pension program, and parents\' dependency
and indemnity compensation (DIC)?

[COMMENTS]{.underline}:

1\. This question arose in connection with a Board of Veterans\' Appeals
(Board) decision that IRA distributions should not be countable as
income for improved-pension purposes until the claimant has recouped the
amount of the claimant\'s contributions to the IRA. The Board based its
decision on VAOPGCPREC 1-93 (O.G.C. Prec. 1-93), in which the General
Counsel held that proceeds of a life insurance policy that is
surrendered for cash should not be considered income for purposes of
determining entitlement to improved pension under title 38, United
States Code, to the extent that such proceeds consist of return of sums
paid as part of the insurance premiums. The Board reasoned that IRA
with-drawals are more analogous to proceeds of a life insurance policy
that is surrendered for cash than to disbursements from a retirement
fund held in trust for the benefit of a retiree.

2\. Noting the conclusion of VAOPGCPREC 23-90 (O.G.C. Prec. 23-90)
(formerly Op. G.C. 1-82) that withdrawal of retire-ment-fund
contributions constitutes income for improved-pension purposes, the
General Counsel, in VAOPGCPREC 1-93, drew a distinction between life
insurance and retirement funds. Although the surrender of life insurance
for cash was recognized as somewhat analogous to withdrawal from a
retirement fund, VAOPGCPREC 1-93 noted the clear congressional intent to
include retirement-fund withdrawals as income for improved-pension
purposes. Congress, on the other hand, did not address the surrender of
life insurance in its various amendments of the pension laws. In the
absence of clear direction from Congress, the General Counsel applied to
the surrender of life insurance a liberal interpretation of the law,
concluding that Congress\' treatment of retirement funds should not be
extended by analogy to other types of proceeds. See VAOPGCPREC 1-93.

3\. We do not agree with the Board\'s view that an IRA is more analogous
to a life insurance policy than to a retire-ment fund. An IRA is
essentially a retirement plan that is not funded by employer
contributions. See 60A Am. Jur. 2d Pensions and Retirement Funds §§ 42,
71 (1988). Contrary to the Board\'s analysis, the terms \'\'individual
retirement account\'\' and \'\'retirement fund\'\' both refer to sums
that are held in trust for the eventual benefit of retirees. See
26 U.S.C. § 408(a); see also 33A Am. Jur. 2d Federal Taxation ¶ 8968
(1996); 60A Am. Jur. 2d Pensions and Retirement Funds § 42. Use of the
term \'\'retirement\'\' reflects the retirement-planning objective in
both cases. Although cash-surrender value is a consideration in the
purchase of life insurance, the primary objective of life insurance is
usually not retirement planning but financial security for beneficiaries
in the event of the insured\'s death. The fact that an IRA may not be
used to purchase life insurance contracts, see 26 U.S.C. § 408(a)(3);
33A Am. Jur. 2d Federal Taxation ¶ 8968; 60A Am. Jur. 2d Pensions and
Retirement Funds § 43, also suggests a distinction between the purposes
of IRAs and life insurance.

4\. It is apparent from the above discussion that IRAs may be considered
private retirement, annuity, and endowment plans, as referenced in the
legislative history of the improved pension program. H.R. Rep. No. 1225,
95th Cong., 2d Sess. 38 (1978), reprinted in 1978 U.S.C.C.A.N. 5583,
5619. As we noted in VAOPGCPREC 1-93, that history makes clear that
Congress intended that payments from such plans be counted as income for
improved-pension purposes under Pub. L. No. 95-588, 92 Stat. 2497
(1978). In commenting on the legislation eliminating in its entirety the
exclusion of certain retirement-fund distributions from pension income
determinations, the House Committee report criticized recoupment of
retirement-fund contributions under prior law as creating a period of
\'\'false entitlement\'\' for persons with little or no real need. H.R.
Rep. No. 1225, 95 Cong., 2d Sess. 7, reprinted in 1978 U.S.C.C.A.N. at
5588. In view of the foregoing, we conclude that the holding in
VAOPGCPREC 23-90 that retirement-fund withdrawals constitute income for
improved-pension purposes, regardless of whether interest is included in
the payment, is equally applicable to IRAs.

5\. Under the major revision of the pension laws in 1959, which created
what is now known as \'\'section 306\'\' pension, payments from a public
or private retirement, annuity, or endowment plan were not considered
countable income for pension purposes until the pensioner had recouped
his or her own contributions to the plan. See Pub. L. No. 86-211,
§ 2(a), 73 Stat. 432 (1959); see also former 38 C.F.R. §§ 3.251(d)(4)
and 3.252(c)(4) (Supp. 1963) (providing by regulation a similar
recoupment rule applicable to parents\' DIC and old law pension). In
1964, Congress amended the statutes governing what is now known as
section 306 pension to provide for the exclusion of ten percent of
\'\'the amount of payments to an individual under public or private
retirement, annuity, endowment, or similar plans or programs.\'\' See
Pub. L. No. 88-664, § 1(a), 78 Stat. 1094 (1964). Similar exclusions
applicable to old law pension and parents\' DIC were enacted in Pub. L.
No. 88-664, § 10, 78 Stat. at 1096, and Pub. L. No. 89-730, § 2, 80
Stat. 1157, 1158 (1966), respectively.

6\. Although Congress eliminated the ten-percent exclusion when it
established the improved pension program in 1978, the exclusion still
applies to old law and section 306 pension and parents\' DIC. Under
section 306(a)(2) of

Pub. L. No. 95-588, 92 Stat. at 2508, any person entitled to receive
pension as of December 31, 1978, (the day prior to the day on which the
improved pension program took effect) under laws then in effect, could
continue to receive pension at the rate being paid as of that date,
subject to the laws applicable as of that date. A similar provision
applicable to old law pension was included in section 306(b)(3) of Pub.
L. No. 95-588. The ten-percent exclusion applicable to parents\' DIC was
not affected by Pub. L. No. 95-588 and is currently codified at 38
U.S.C. § 1315(f)(1)(G). Regulations governing implementation of the
ten-percent exclusion are currently codified at 38 C.F.R. § 3.262(e)(1),
(2), (4).

7\. By replacing the statutory and regulatory provisions permitting
recoupment of a retiree\'s contributions to a retirement fund with
provisions permitting the exclusion of ten percent of payments under a
retirement plan, Congress made clear that all retirement distributions
not excluded by the ten-percent exclusion are to be considered income
for purposes of old law and section 306 pension and parents\' DIC.
Since, as discussed above, an IRA is in the nature of a retirement plan,
an individual receiving old law or section 306 pension or parents\' DIC
may exclude from income only ten percent of any distributions from an
IRA. IRA distributions not so excluded must be considered income,
regardless of whether the payment derives from the retiree\'s
contributions or from interest.

[HELD]{.underline}:

Distributions from an individual retirement account are fully countable
as income for purposes of the improved pension program. Ten percent of
such distributions may be excluded from income for purposes of benefits
under the section 306 pension program, benefits under the old law
pension program, and parents\' dependency and indemnity compensation
payable under 38 U.S.C. § 1315.

Mary Lou Keener