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IRS Proposes New Normal Retirement Age Safe Harbors for Governmental Plans

The Internal Revenue Service (IRS) has issued proposed regulations that will revise the rules for determining whether the normal retirement age (NRA) under a governmental plan, as defined in section 414(d) of the Internal Revenue Code (the "Code"), satisfies the qualification requirements of Code section 401(a). The proposed regulations would revise the existing regulations issued in 2007 (the "2007 regulations").

A copy of the proposed regulations is at https://www.gpo.gov/fdsys/pkg/FR-2016-01-27/pdf/2016-01639.pdf.

Action Needed Now: Sponsors of governmental plans should review their plans to determine the impact of the proposed NRA rules. If their plan's NRA is inconsistent with the proposed rules, they may want to submit comments on the proposed regulations.

Comments are due by April 26, 2016 and may be submitted via:

  • Mail: Send submissions to CC:PA:LPD:PR (REG-147310-12), room 5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044,
  • Hand-delivery: Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-147310-12), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC, 20224, or
  • Electronically: Via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-147310-12).

BACKGROUND

A plan's NRA generally defines the age at which a participant may begin receiving pension benefits without the consent of the plan sponsor, and is generally important in determining whether the plan meets the requirements for qualification under the Code. For example, a pension plan may provide for the payment of retirement benefits to employees who have attained NRA, but have continued to work for the employer.

The 2007 Regulations: The 2007 regulations applied to all qualified plans and set limits on the earliest age that a plan could use as its NRA. Under those rules, a plan's NRA must be reasonably representative of the typical retirement age for the industry in which the covered workforce is employed (hereinafter referred to as the "reasonably representative requirement"), and comply with the following guidelines:

  • An NRA of age 62 or later is deemed to satisfy the reasonably representative requirement,
  • Whether an NRA below 62 but not earlier than 55 satisfies the reasonably representative requirement is based on a facts and circumstances analysis,
  • An NRA lower than age 55 is presumed not to satisfy the reasonably representative requirement unless determined otherwise by the Commissioner based on facts and circumstances, and
  • In the case of a pension plan in which substantially all of the participants are qualified public safety employees (as defined in Code section 72(t)(10)(B) - generally police, firefighters, and emergency medical personnel), NRA of age 50 or later is deemed to satisfy the reasonably representative requirement.

Notice 2012-29: After issuance of the 2007 regulations, the IRS issued a series of notices that delayed the effective date of those rules for governmental plans. In Notice 2012-29, the IRS and Treasury announced their intent to modify the 2007 rules as they apply to governmental plans in certain respects and requested comments as to what additional changes should be made.1

SUMMARY OF THE 2016 PROPOSED REGULATIONS

The proposed regulations reflect certain comments submitted to the IRS and set forth safe harbors that will apply only for governmental plans. The proposed rules clarify that in the case of a governmental plan that does not provide for distributions before retirement, the plan's NRA is not required to comply with the reasonably representative requirement. However, governmental plans that provide for distributions before retirement (i.e., in-service distributions before age 62) must comply with the reasonably representative requirement. The proposed regulations would allow different normal retirement ages for qualified public safety employees versus other employees covered by the same plan.

The proposed regulations provide several NRA safe harbors for governmental plans in general, as well as some special safe harbors for governmental plans covering qualified public safety employees. Each safe harbor is deemed to satisfy the reasonably representative requirement.

  • Safe Harbors to Use for All or Just Non-Qualified Public Safety Employees

The proposed regulations contain the following safe harbors that governmental plans can use for all participants, including qualified public safety employees, or which the plan can use just for employees who are not qualified public safety employees:

Safe Harbors for  ALL Employees

General Safe Harbor

Age 62

Age 62 or the later of age 62 or another specified date, such as the fifth anniversary of plan participation

Reasonably Representative Safe Harbors

Age 60 with
5 years of service

Later of age 60 or the age at which the participant has been credited with at least 5 years of service under the plan

Age 55 with 10 years of service

The later of age 55 or the age at which the participant has been credited with at least 10 years of service under the plan

Rule of 80

The participant's age at which the sum of the participant's age plus the participant's number of years of service under the plan equals 80 or more

Age at
25 years of service

A participant's age at which the number of years of service credited to the participant under the plan equals 25, if that age is earlier than what the participant's NRA would be under the other applicable safe harbors

  • Safe Harbors to Use for Qualified Public Safety Employees

Under the 2007 rules, the special age 50 NRA rule for qualified public safety employees only applies if substantially all employees covered by the plan are public safety employees. The proposed regulations would allow a different NRA for any qualified public safety employee in a plan than for other employees. The proposed regulations contain the following additional special safe harbors for qualified public safety employees, each of which is deemed to satisfy the reasonably representative requirement for an NRA:

Safe Harbors for Qualified Public Safety Employees

Age 50

An NRA of age 50 or later

Rule of 70

The participant's age at which the sum of the participant's age plus the participant's number of years of service that have been credited under the plan equals 70 or more

Any age with 20 years of service

The participant's age at which the participant's number of years of service under the plan equals at least 20

  • Other Normal Retirement Ages

If a governmental plan uses an NRA that falls outside of the safe harbors set forth in the proposed regulations, the determination of whether the NRA satisfies the reasonably representative requirement is based on all the facts and circumstances. The preamble to the proposed regulations states that the IRS expects that deference will be given to an employer's good faith determination of the typical retirement age for the industry in which the covered workforce is employed, so long as the determination is reasonable under the facts and circumstances and the NRA is otherwise consistent with the pre-ERISA vesting requirements (which generally require vesting upon attainment of NRA under the plan).

  • No Requirement to Define NRA

It appears that the proposed regulations do not change the pre-ERISA rule that governmental plans are not required to define the NRA. Instead, governmental plans may specify one or more ages at which employees have the right to retire without the consent of the employer and receive an unreduced retirement benefit, with the lowest such age treated as the NRA for statutory and regulatory purposes.

CHEIRON OBSERVATION

  • A governmental plan may use multiple NRAs within the plan, including various combinations of age and service, and use different NRAs for different classifications of employees or for employees hired as of a certain date, as long as the NRAs are consistent with the safe harbors under the proposed regulations. Such flexibility permits cost-effective plan design, taking into account the variances in the plan sponsor's workforce.

EFFECTIVE DATE

The proposed regulations will be effective for employees hired during plan years beginning on or after the later of: January 1, 2017; or, the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date that is 3 months after issuance of final regulations. However, governmental plan sponsors may rely on these proposed regulations for periods prior to the effective date.

Cheiron pension consultants can assist you in analyzing the impact of these proposed changes.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.


1See the Cheiron Pension Alert dated April 24, 2012 which can be found here: https://www.cheiron.us/cheironHome/viewArtAction.do?artID=92

 
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