Pension Protection Act Blog

The IRS has issued Final Regulations on Distributions From a Pension Plan on Attainment of Normal Retirement Age, which permit employees to take distributions from retirement plans once they reach retirement age but are still employed by the employer. These types of distributions are also referred to as distributions during phased retirement or working retirement.

Section 905(b) of the Pension Protection Act referred to these distributions as Distributions During Working Retirement. Effective for distributions in plan years beginning after December 31, 2006, Section 905(b) added Internal Revenue Code section 401(a)(36), which states:

‘‘(36) DISTRIBUTIONS DURING WORKING RETIREMENT.—A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.’’.

The IRS states that these regulations modify existing regulations on two important points. First is a change in the rules which require a qualified pension plan to only make distributions after the employee actually retires and terminates employment with the employer. These regulations permit distributions to the employee once they reach retirement age, regardless of whether they retire and terminate employment with the employer.

The second change provides rules on how low a plan’s normal retirement age is permitted to be. These regulations require that the normal retirement age under the terms of the plan is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. The regulations also contain a safe harbor normal retirement age of age 62. It states:

To address comments about the need for a safe harbor age, these regulations provide that a normal retirement age of at least age 62 is deemed to be not earlier than the typical retirement age for the industry in which the covered workforce is employed. Thus, a plan satisfies this safe harbor if its normal retirement age is age 62, or if its normal retirement age is the later of age 62 or another specified date, such as the later of age 62 or the fifth anniversary of plan participation. However, a plan that is subject to section 411 cannot provide for a normal retirement age that is later than the later of the time the participant attains age 65 or the fifth anniversary of the time the participant commenced participation in the plan. See section 411(a)(8)(B).

If the plan sets the normal retirement age between age 55 and age 62, the IRS says it will use a facts-and-circumstances test to determine if such a retirement age is reasonable, recognizing that in some industries, age 55 is an entirely reasonable retirement age.

The IRS said that they are still considering the regulations relating to in-service distributions pursuant to a bona-fide phased retirement program. The IRS requested comments on such in-service distribution in Notice 2007-8.

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