IRS Issues Normal Retirement Age Proposed Regulations for Governmental Pension Plans

Practical Law Legal Update w-001-3892 (Approx. 6 pages)

IRS Issues Normal Retirement Age Proposed Regulations for Governmental Pension Plans

by Practical Law Employee Benefits & Executive Compensation

Background

The plan qualification requirements of Section 401(a) of the Internal Revenue Code (Code) affect how qualified retirement plans may determine a normal retirement age for plan participants. In 2007, the IRS issued final regulations on the normal retirement age requirements (2007 normal retirement age regulations) (72 Fed. Reg. 28604 (May 22, 2007)).

The 2007 normal retirement age regulations provide that:

A retirement plan's normal retirement age must be an age that 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 (referred to as the reasonably representative requirement).
An normal retirement age of age 62 or later satisfies the reasonably representative requirement.

(26 C.F.R. § 1.401(a)-1(b)(2).)

Code Section 414(d) defines a governmental plan as a retirement plan established and maintained for its employees by the federal, state, or local government, including agencies and instrumentalities of those governments. The normal retirement age in a governmental plan must satisfy the pre-ERISA vesting rules, which include rules relating to:

Vesting.
The right to commence benefits without reduction for early commencement.

(26 U.S.C. § 411(e)(2).)

Under IRS Revenue Ruling 71-147, the normal retirement age in a pension or annuity plan under the pre-ERISA vesting rules is generally the lowest age specified in the plan at which the employee has the right to:

Retire without the consent of the employer.
Receive retirement benefits based on the amount of the employee's service to the date of retirement at the full rate set forth in the plan.

Notice 2012-29 announced that the Treasury Department and the IRS intended to modify provisions of the 2007 normal retirement age regulations as applied to governmental plans.

Proposed Regulations

On January 26, 2016, the IRS issued proposed regulations under Code Section 401(a) that:

Provide guidance relating to the determination of whether the normal retirement age under a governmental plan satisfies the requirements of Code Section 401(a) by amending the 2007 normal retirement age regulations to provide additional rules, including additional safe harbors, for governmental plans.
Modify slightly the 2007 normal retirement age regulations to account for the addition of Code Section 411(f), which provides a special rule for determining normal retirement age that applies only to certain defined benefit plans that are not governmental plans.

In-Service Distributions Before Age 62

Under the proposed regulations, and consistent with IRS Notice 2012-29, a governmental plan that does not provide for in-service distributions before age 62 would not fail to satisfy 26 C.F.R. Section 1.401(a)-1(b)(1) merely because the plan has a normal retirement age that is earlier than permitted under 26 C.F.R. Section 1.401(a)-1(b)(2), as amended by the proposed regulations. Because Code Section 411(a) through (d) does not apply to governmental plans, the earlier normal retirement age under the plan is treated as the age at which an unreduced early retirement benefit is payable under the proposed regulations.

Reasonably Representative Requirement

The proposed regulations apply the reasonably representative requirement in the 2007 normal retirement age regulations to governmental plans, which means that the normal retirement age under a governmental plan must be an age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry of the covered workforce. The proposed regulations would apply to governmental plans the safe harbor in the 2007 normal retirement age regulations: that a normal retirement age of at least age 62 is deemed to satisfy the reasonably representative requirement. And, in response to comments on Notices 2007-69 and 2012-29, the proposed regulations provide four additional safe harbors in which a normal retirement age would be deemed to satisfy the reasonably representative requirement:

A normal retirement age that is the later of age 60 or the age at which the participant has been credited with at least 5 years of service.
A normal retirement age that is the later of 55 or the age at which the participant has been credited with at least 10 years of service.
A normal retirement age that is the participant's age if the sum of the participant's age plus the number of years of service that have been credited to the participant under the plan equals 80 or more.
A combination of any of the other safe harbors (except for the qualified public safety employee safe harbors) provided under the proposed regulations with 25 years of service.

The proposed regulations also provide three safe harbors for qualified public safety employees. Like the 2007 normal retirement age regulations, the proposed regulations define a qualified public safety employee by reference to 26 U.S.C. Section 72(t)(10)(B): as any employee of a state or political subdivision of a state who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of the state or political subdivision. These safe harbors may only be applied to qualified public safety employees. Specifically, the safe harbors:

Clarify that the safe harbor allowing for a normal retirement age of 50 may be used for one or more qualified public safety employees in a governmental plan without regard to whether substantially all of the participants in the plan or substantially all of the participants within a group of participants are qualified public safety employees.
Add a safe harbor under which a normal retirement age is the participant's age when the sum of the participant's age plus the number of years of service that have been credited to the participant under the plan equals 70 or more. This normal retirement age would be deemed to satisfy the reasonably representative requirement.
Add a safe harbor under which a normal retirement age is the participant's age when the number of years of service that have been credited to the participant under the plan equals 20 or more. This normal retirement age would be deemed to satisfy the reasonably representative requirement.

The proposed regulations allow for the use of multiple normal retirement ages in a governmental plan, with differences in normal retirement age based on employee classification or hire date. They also allow for a normal retirement age that is a combination of employee age and years of service.

If a normal retirement age under a governmental plan fails to satisfy any of the governmental plan safe harbors, the relevant facts and circumstances would be used to determine if the normal retirement age satisfies the reasonably representative requirement. An employer's good faith determination of the typical retirement age for the industry in which the covered workforce is employed will be given deference by the IRS.

Effective Date

These proposed regulations would take effect for employees hired during plan years beginning on or after the later of:

January 1, 2017.
The close of the first regular legislative session of the legislative body with authority to amend the plan that begins on or after the date that is three months after the final regulations are published in the Federal Register.

Practical Implications

Sponsors of governmental plans should be aware of the new safe harbors for normal retirement age provided by the proposed regulations. If finalized in their current form, the proposed regulations could provide greater flexibility to governmental plans. The preamble to the proposed regulations does not specify when the comment period on the proposed regulations ends.

IRS Issues Normal Retirement Age Proposed Regulations for Governmental Pension Plans | Practical Law