Guest Article

(From the January 8, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

IRS Seeking Comments on Phased Retirement

During the last decade phased retirement has been oft-cited by policy wonks and policymakers as one option for keeping baby boomers in the workforce a little bit longer. But phased retirement arrangements have not become as prevalent as many thought they might, at least not so far. One reason for this is current IRS regulations that prevent defined benefit plans from making pre-retirement distributions. The IRS took a stab at addressing this problem by issuing proposed regulations on phased retirement in 2004, but critics have called those proposals unworkable. More recently, Congress got involved by amending the Internal Revenue Code to permit pre-retirement distributions from defined benefit plans beginning at age 62. Now the ball is back in the IRS's court, and the agency has issued Notice 2007-8 to solicit comments from interested parties on how to proceed.

According to new IRC § 401(a)(36), as added by the Pension Protection Act (PPA) of 2006 (P.L. 109-280), effective for plan years beginning after December 31, 2006 a pension plan does not fail to satisfy the tax-qualification requirements solely because it allows distributions to employees who are at least 62 years old and still working. The IRS's 2004 proposed regulations, which have not been finalized, would permit plans to make pre-retirement distributions beginning at age 59½ pursuant to a "bona fide phased retirement program." The proposed regulations also include rules for accruing benefits during the phased retirement period, adjusting phased retirement benefits in cases where the employee works more hours than expected, and offsetting the employee's full retirement benefit by any phased retirement benefits paid. Any guidance the IRS issues pursuant to IRC § 401(a)(36) presumably will need to address many of these same issues. The IRS is seeking general comments on what guidance it should issue with respect to IRC § 401(a)(36), as well as on whether it should also issue the 2004 proposals in final form. Additionally, Notice 2007-8 identifies the following specific issues on which the IRS is seeking comments:

Comments must be submitted to IRS by April 16, 2007.

The 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, Taina Edlund 202.879.4956, Laura Edwards 202.879.4981, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.