Regulations existing prior to these final rules provided that a plan generally cannot pay out benefits until a participant has retired from service. The new regulations amend that rule to allow for in-service distributions to participants once they attain normal retirement age even if they continue working, and also establish guidelines for how low the normal retirement age specified by a plan can be.
The final rules clarify that the normal retirement age for a plan cannot be earlier than the typical retirement age for the industry in which the workforce is employed, and goes on to establish age 62 as the safe harbor normal retirement age for all plans (age 50 for plans covering public safety employees). Normal retirement ages between 55 and 62 are acceptable if they are representative of the typical retirement age for the industry, while a normal retirement age under 55 is not acceptable.
For those plans needing to raise the normal retirement age to comply with the new regulations, the IRS established an exception to the anti-cutback rules of section 411(d)(6) to allow conforming amendments during a transitional period.
These final rules solidify the addition of Tax code Section 401(a)(36) , established with the enactment of the Pension Protection Act of 2006 (PPA), which provides that: “a trust forming part of a pension plan is not treated as failing to constitute a qualified trust under Section 401(a) 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.”
Regulators requested comments on issues relating to 401(a)(36) in December 2006 (See IRS Calls for Comment on PPA In-Service Payout Provision).
The new regulation also paves the way for guidelines on a bona fide phased retirement program, first proposed by regulators in November 2004 (See IRS Puts Out “Phased Retirement” Proposal ).
The final rules are effective and generally applicable as of May 22, 2007 but will apply to government plans beginning on or after January 1, 2009. For collective bargaining plans, the new rules apply after the first year that begins after the last of current agreements terminates, or, if earlier, May 22, 2010.
The final rules in the Federal Register for May 22, 2007 are here .