IRS Issues Guidance on Pension Distributions at Age 59 1/2
The Internal Revenue Service (IRS) issued Notice 2020-68, which provides partial guidance on the retirement plan changes made by the Further Consolidated Appropriations Act, 2020 (the "Budget Bill"). The Budget Bill contained the SECURE Act and the Miners Act.1 See the Cheiron Pension Alert of January 6, 2020, describing the provisions that affect defined benefit pension plans. Notice 2020-68 provides guidance on the reduction in the minimum age allowable for in-service distributions made by the Miners Act, and other provisions of the SECURE Act. This alert will discuss the guidance with respect to the Miners Act.
Prior to the passage of the Miners Act, section § 401(a)(36) of the Internal Revenue Code (Code) provided that a pension plan could allow an “in-service” distribution to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.
The Miners Act amended § 401(a)(36) to permit a plan to make an in-service distribution to a participant who has attained age 59½. The Miners Act also amended § 457(d) to allow in-service distributions at age 59½ from governmental deferred compensation plans.
Notice 2020-68 (Q&A F-1 and Q&A F-2) makes it clear that:
- a plan is not required to provide in-service distributions,
- a plan that currently provides in-service distributions need not reduce the eligible age from 62 to 59½, and
- the reduction to age 59½ for in-service distributions does not alter the rules regarding normal retirement age contained in section 1.401(a)-1(b)(2) of the Treasury Regulations, which currently provide that age 62 is presumed to be a valid normal retirement age.
Thus, a plan wishing to reduce its normal retirement age to age 59½ must be able to show that age 59½ is “reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.” For purposes of the reasonably representative requirement, Notice 2020-68 states that governmental pension plans may continue to rely on proposed regulations that were published in 2016. See Cheiron's Pension Alert of January 29, 2016, for more information on the proposed regulations.
The notice effectively allows a plan to provide in-service distributions at age 59½ now and be formally amended later provided that a plan amendment to allow the age 59½ in-service distributions is adopted:
- For a qualified non-collectively bargained plan by the last day of the first plan year beginning on or after January 1, 2022; and
- For an applicable collectively bargained plan or a qualified governmental plan by the last day of the first plan year beginning on or after January 1, 2024.
Notice 2020-68 confirms that there is no action that must be taken with respect to the change in law. It is also helpful that the notice clarifies that a governmental plan may continue to rely upon the 2016 proposed regulations. An in-service distribution option can be used if an employer wishes to establish a phased retirement plan and allow participants who continue working part-time to access a portion of their retirement benefit so that they can maintain their income. The reduction to age 59½ can facilitate the application of a phased retirement program.
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.
1 Division O of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534 (2019), is the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act); and Division M of the Further Consolidated Appropriations Act, 2020, is the Bipartisan American Miners Act of 2019 (Miners Act).