Normal Retirement Age

[James Matt Ullakko]

Plan's NRA 65

Plan's Early Retirement Age 60.5

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Is it true that normal retirement age must be defined at least 59.5 thru 65 maximum?

If plan has early retirement provision, does this mean that the retirement distributable event is the early retirement age (provided that this is 59.5 - 65)?

[Mike Preston]

I see no reason why NRA has to be defined between 59.5 and 65. However, most 401(k) plans do so because deferrals and QNECS and QMAC's can't be distributed before 59.5 on an inservice basis, even if the NRA is less than 59.5.

Yes, if NRA is 59.5 through 65 and a participant reaches that age, they are entitled to a distribution.

[mbozek]

Long long ago in a galaxy far far away the IRS would not permit a retirement age less than 55 because distributions were supposed to be on account of retirement and employees did not retire before 55. Then the IRS relented and said that they would accept plans with retirement ages of less than 55 if it could be justified by the business of the sponsor (e.g., plans for tennis players whose careers end before 35). I dont know what the current policy is now since most people roll over funds upon termination. Check the alert guidelines for plan retirement age?? The only reason for the IRS to restrict low retiement ages may be to prevent an increase in deductible contributions in DB plans because the period for funding is reduced. But u need to check with an actuary.

[AndyH]

But, Mike, I think you'll agree that the latest NRD can be is the earliest of

a. the NRD in the plan, or

b. the later of age 65 or the 5th anniversary of participation

So, it can't be past 65 for somebody participating before age 60.

Right?

[AndyH]

Well, now I'll admit to putting my foot in my mouth by remembering that I have a DB plan that defines NRA as SSRA!

Yes, it's general tested.

And, despite our failure to understand why, it keeps getting favorable determination letters!

[Mike Preston]

Yes, I agree that 411(a)(9) defines NRA the way you describe.

I agree with you that the rules surrounding the use of SSRA as the "retirement age" in a plan (not to be confused with the NRA) are confusing. I think, in a db plan, that the requirements are that a participant be fully vested at NRA and that the participant be entitled to a distribution unless the plan satisfies the suspension of benefit rules. There are also some accrual rules.

All of which CAN be dealt with in a plan that defined NRD (not NRA) as SSRA.

Are you sure the plans of which you speak define NRA as SSRA and not NRD?

[AndyH]

Yes, I just double checked it. NRA is not defined. NRD is defined as the first of the month coincident with or next following the later of the fifth anniversary of participation or a table, which is a SSRA table.

And I can understand your points about how such a thing could possibly work, (if benefits were always vested at 65+5 and allowed to be paid then) but in this case ERD is age 60 at which time you get your vested accrued benefit, so there isn't full vesting at age 65 if your SSRA is 66 or 67.

For what it's worth, it was written by a law firm. I realize there is some uncertainty about SSRA being ok for testing age, but I thought you'd have to vest someone at 65+5 P. That is clearly not true in this plan. Maybe the IRS reviewers just missed this.

[david rigby]

One minor caution. IRC 411(a)(8) defines the latest point at which the plan can define NRA. 411(a)(9) then defines "normal retirement benefit", commencing at NRA. But many plans also use a definition of NRB. This plan definition should not be confused with the Code definition.

[AndyH]

I have to amend my comments; I was partially incorrect. The plan in question does provide for full vesting at age 65.

Oddly enough, NRD used to be defined as the first of the month following age 65, but it was amended 1/1/89 to change NRD to SSRA as I noted, but also to stipulate that someone is always vested at age 65. Further, it allows early retirement at age 60 (of the vested accrued benefit), so even though NRD is defined as later than the statutory date, benefits are always vested and always payable (although reduced) at age 65, so I suppose that's why it was approved. And I suspect that somebody made sure that nobody's accrued benefit would be reduced (the formula was radically changed).

[MGB]

I disagree that 411(a)(8) requires a plan to conform to that definition for NRA. NRA may be any age (e.g., 80).

What everyone always misses in this are the words "for purposes of this section." The NRA defined in the law is for determining vesting (411(a)), minimum accrual requirements (411(B)) and allocation between ER and EE benefit (411©). It does not require that the plan follows the 65&5 for its definition of when the NRA is.

They even provide a hint that the NRA defined for purposes of 411 is a completely different concept than the one in the plan when they state that the NRA for purposes of 411 is the earlier of the NRA in the plan or 65&5. There would be no reason to say this if the plan were limited to 65&5 by law.

Those that have "locked into" the idea that a plan may not have anything greater than 65&5 are confused by the discussions of SSNRA. There should be no such confusion because there is no limitation stopping a plan from using SSNRA.

Getting back to Matt's original question, no, the ERD is not a distributable event.

[AndyH]

That certainly would explain the plan I described; and I'd guess that it was what Mike was alluding to. Very interesting. Thank you.

[mbozek]

MGB:IRC 401(a)(14) states that that unless a participant elects otherwise, retirement benefits must commence no later than the earlier of age 65 or the the plan's normal retirment age. There are limited extensions until terminaton of employment after NRA or until the 10th aniversary of participation. This provision was added by ERISA to prevent employers from denying employees the right to retirement benefits when they attained SS retirement age. I though the origional queston related to the date the benefits could be distributed?? The NRA cannot be any age. I don't understand why the ERD cannot be a distributable event since a participant could recieve a lump sum an roll it over to an IRA.

[Mike Preston]

I agree with MGB on the NRA clarification. In a 401(k) plan, the attainment of the early retirement age (or even the NRA) specified in the plan is not sufficient to allow a distribution of restricted 401(k) monies. Until the participant reaches age 59 and 1/2 the restriction remains in place no matter what the plan's definition of ERA, NRA or NRD happen to be.

[mbozek]

I was thinking of a DB plan with an ERD. There is no need to have an early retirement date in a 401(k) plan because payment cannot be made until attainment of age 59 1/2 if in service or upon termination. Early retirement is a useless concept in a PS plan and would have relevance in a money purchase plan only if the participant could commence retirment benefits at ERD without terminating employment.

[AndyH]

If I may request elaboration on this discussion, and I know this is a 401(k) forum, but ....

Assume you want to set up a new, small, DB plan for a principal age 62 who planned to work 5 more years. Would anything prohibit the following:

NRA is 67, ERA (providing full vesting) as 65, and the benefit is 50% of pay, payable at age 67.

This is as opposed to defining NRA as 65&5P and having the principal's benefit payable at age 67 and everybody else's as payable at age 65, or alternatively defining NRA as 65 and using an assumed retirement age of 67, in which case again the employees would get more than needed if the NRA were 67.

Is my question clear?

[mbozek]

NRA cannot be later than age 65 or 10P. If u want to put in a an age later than 65 be prepared answer questions from the IRS. The question is why do u want to go outside the statute instead of providing a NRA at the later of 65 or 5 yrs of participation for all participants?

[James Matt Ullakko]

Thank you all for your insights.