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Retirement Age on the plan


dragondon
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What is the purpose of Normal Retirement Age in the plan document? There is a section that specifies in service distributions can begin at 59.5 but then there is another section specifying that normal retirement age is 65. What benefits must start at 65? This does not mean that they have to start taking RMD's at age 65 correct?  

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For many individual-account retirement plans that permit retirement distributions (even without waiting for severance from employment) as soon as age 59½ and (by requiring no more than a few years of vesting service) make most participants’ accounts nonforfeitable before an individual’s 60-something age, that a written plan specifies a normal retirement age seems mostly a vestige.

As Riley Bretton mentions, many plans do not impose an involuntary distribution earlier than needed to meet Internal Revenue Code § 401(a)(9)’s tax-qualification condition, which now usually refers to age 72 (for a participant who is no longer employed, or is a more-than-5%-owner).

Although I imagine few plans so provide, a plan may provide an involuntary distribution once the participant reaches the plan’s normal retirement age or, if later, age 62.

Immediately distributable.  Participant consent is required for any distribution while it is immediately distributable, [that is], prior to the later of the time a participant has attained normal retirement age (as defined in section 411(a)(8)) or age 62. Once a distribution is no longer immediately distributable, a plan may distribute the benefit . . . in the normal form . . . without consent.”

26 C.F.R. § 1.411(a)-11(c)(4) https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.411(a)-11#p-1.411(a)-11(c)(4)

Under Reorganization Plan No. 4 of 1978 § 101, the Treasury department’s rule interprets not only Internal Revenue Code of 1986 § 411 but also ERISA § 203.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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As noted above, it's mostly about vesting, and with accelerated vesting schedules compared to the olden days, it often doesn't matter. But sometimes it does...some years ago, my mother-in-law left a job after working only a few years, and they were going to pay her a partially vested amount. But she was over 65, and the plan said NRA was 65 with no service requirement, so we pointed that out and got her the full account balance.

Ed Snyder

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Yes - NRA is an important definition when doing nondiscrimination testing, combo or not, and lots of profit sharing contributions with 1000 hour and last day rules have exceptions for normal retirement (among others).

It is also relevant to note that ANY separation on or after the date a person qualifies for normal (or early, if applicable) retirement is considered "retirement" regardless of whether the person terminated/retired voluntarily, was laid off or involuntarily terminated.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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Let’s ask our BenefitsLink experts this plan-design question:

For an employer with only an individual-account (defined-contribution) retirement plan:

Beyond the possibility I mentioned, in what circumstances and for what reason might a plan sponsor prefer to set a normal retirement age earlier or less onerous than the latest that doesn’t offend an ERISA or Internal Revenue Code requirement?

Or is it always rational to specify the latest?

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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1 hour ago, Peter Gulia said:

Any takers? When using an IRS-preapproved document and its many adoption-agreement choices, this is a real question clients ask all the time.

I think what you said is the most likely/perhaps only reason - it boils down to simplification; if you're going to allow distributions at 59 1/2 then just make that NRA and be done with it. I don't think most* sponsors actually care about holding onto the money or even the vesting.

*Of course there are a few, and if you make an assumption and they find out that Joe Blow who screwed them by quitting is 100% vested and it didn't have to be that way, well, then there will be some unhappiness. I was "raised" with the idea that the typical small plan is mostly a tax shelter for the owner, and anything and everything that limits access and amounts paid out is good. Of course things are different now, but I have a hard time letting go. Only recently did we start writing plans with age 65 and no service/participation requirement. Shrug. 

Ed Snyder

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Bird, thanks.

CuseFan, just for my curiosity, how does normal retirement age relate to nondiscrimination testing (when there is no combo)?

(I ask out of ignorance; I haven't reviewed a nondiscrimination test report since the 1990s.)

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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34 minutes ago, Peter Gulia said:

how does normal retirement age relate to nondiscrimination testing (when there is no combo)

If you have new comparability and cross-test your profit sharing (and maybe SHNE), you project those contributions to NRA and convert to annuity at NRA. Depending on specific plan demographics, proposed designs should be tested at different NRAs to see which is most advantageous. However, if adding a CB in the near future is a real consideration, then I suggest NRA no earlier than 62 unless you want to amend later and track separate balances with different NRAs.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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One could write a small book about the significance of "Normal Retirement Date" in different types of deferred compensation plans.  I know that this of no help to you, but inferentially I'm saying that this is a complicated subject, with lots of history.  Be careful.

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I believe the code now allows in-service commencement for DC and DB pension plans as early as age 59 1/2. See IRC 401(a)(36).

 

(36)Distributions during working retirement.—

(A)In general.—

A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 59½ and who is not separated from employment at the time of such distribution.

(B)Certain employees in the building and construction industry.—Subparagraph (A) shall be applied by substituting “age 55” for “age 59½” in the case of a multiemployer plan described in section 4203(b)(1)(B)(i) of the Employee Retirement Income Security Act of 1974, with respect to individuals who were participants in such plan on or before April 30, 2013, if—

(i)  the trust to which subparagraph (A) applies was in existence before January 1, 1970, and

(ii)  before December 31, 2011, at a time when the plan provided that distributions may be made to an employee who has attained age 55 and who is not separated from employment at the time of such distribution, the plan received at least 1 written determination from the Internal Revenue Service that the trust to which subparagraph (A) applies constituted a qualified trust under this section.

But, you don't have to change your Normal Retirement Age, nor your Normal Retirement Date to accomplish early payout. 

In past plan sponsor roles, I never considered early commencement from the DB pension plan. There is no mandatory retirement age (except for certain executives). And, once the individual has two streams of income, and once they get used to that dual income flow, I'm thinking separation no longer sounds so appealing ... especially if there are a lot of other benefits and perquisites to continuing employment and the retirement income was insufficient to maintain pre-retirement standards of living.  

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