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Guest Article

Deloitte logo

(From the April 23, 2012 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Changes Announced for Normal Retirement Age in Governmental Plans


The IRS is proposing to modify the rules regarding "normal retirement age" for governmental plans. The changes would provide that: (1) governmental plans that do not allow in-service distribution before age 62 would not be required to have a definition of normal retirement age, and (2) the age-50 safe harbor would apply to a group of employees substantially all of whom are qualified public safety employees regardless of whether they are covered by a separate plan. Public comments are requested by July 30.

The 2007 NRA Regulations

In 2007, the Treasury Department issued final regulations under Code sections 401(a) and 411(d)(6) regarding distributions from pension plans upon the attainment of normal retirement age. The regulations make clear that there are two exceptions to the prohibition — contained in regulations under Code section 401(a) and also in pre-ERISA regulations—against the payment of benefits during employment. Plans are permitted to commence an in-service distribution only after the attainment of normal retirement age (as defined in the 2007 regulations) or after an employee reaches age 62 as provided under Code section 401(a)(36). In defining normal retirement age (NRA), the 2007 regulations prohibit the NRA from being earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed (i.e., the "reasonably representative" test). The regulations establish a safe harbor for plans in which substantially all the participants are qualified public safety employees. For those plans, an NRA of age 50 or later is deemed to satisfy the "reasonably representative" test.

Changes for Governmental Plans

Public comments raised issues regarding the applicability of the 2007 NRA regulations to governmental plans. In response, the IRS issued Notice 2012-29 that outlines two expected changes to the 2007 regulations. First, a governmental plan that is not subject to the Code section 411 minimum vesting standards—Code section 411(e) typically exempts governmental plans—and does not provide for in-service distribution before age 62, will not be required to have a definition of NRA in order to satisfy the requirement that a plan provide "definitely determinable benefits." (Code section 401(a) regulations and pre-ERISA regulations require that a pension plan provide for the payment of "definitely determinable benefits" after retirement.) Notice 2012-29 points out, however, that a definition of NRA may be important for other qualification purposes—such as in determining eligibility for favorable tax treatment under Code section 402(l) (which provides an income exclusion for certain distributions for health and long-term care insurance premiums for retired public safety officers) or under the special catch-up provisions of the Code section 457 regulations.

Second, the 2007 NRA regulations will be amended to liberalize the age-50 safe harbor by not requiring substantially all the participants in the plan to be qualified public safety employees, but rather allowing the safe harbor to apply to a group of employees substantially all of whom are qualified public safety workers regardless of whether they are covered by a separate plan. As explained in the Notice:

... [A] requirement that qualified public safety employees be in a separate plan, rather than a separate group within a larger plan containing other employees with higher NRAs, may impose inappropriate administrative burdens on state and local governments.

Extended Effective Date for Governmental Plans

Further, the Notice announces that the effective date of the 2007 NRA regulations for governmental plans will be changed to "annuity starting dates that occur in plan years beginning on or after the later of: (1) January 1, 2015, or (2) 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 the final regulations are published in the Federal Register." Governmental plan sponsors are entitled to rely on this announced extension until the 2007 regulations are amended.

Comments Sought on Other Potential Safe Harbors

Comments regarding the Notice are requested by July 30, 2012—and are specifically requested on whether a new safe harbor should be provided for qualified public safety employees that recognizes an NRA after 20 or 30 years of service. Comments are also specifically requested on whether other categories of governmental employees exist with career spans similar to qualified public safety employees that would justify a similar rule for them. Also requested is information on the overall retirement patterns of employees in government service, so as to enable the IRS to determine the earliest age that would satisfy the "reasonably representative" test for that group.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact:

Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.220.2692, Bart Massey 202.220.2104, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Deborah Walker 202.879.4955.

Copyright 2012, Deloitte.


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