Normal Retirement Age

[katieinny]

I sometimes have clients ask how low they can go for a Normal Retirement Age when they complete their adoption agreements. So far, the lowest we've gone is age 55. Has anyone seen an NRA lower than that?

[Don Levit]

I was under the impression that normal retirement age could be any age cited in the plan document, as long as the person was fully-vested for retirement benefits. According to Tax Facts, "The normal retirement age in a pension or annuity plan is the lowest age specified in the plan at which the employee has the right to retire without the consent of the employer and receive retirement benefits based on service to date of retirement at the full rate set forth in the plan (i.e.,without actuarial or similar reduction because of retirement before some later specified age)."

[david rigby]

I believe there are some qualified (cash balance) plans that define NRA (or is it NRD?) as the earlier of age 30 or 5 years of service.

[katieinny]

Wow -- I didn't expect to see an NRA as low as 30! However, becoming fully vested and able to take a distribution from the plan doesn't negate the early withdrawal penalty which would apply to distributions to participants under age 55 (unless taking substantially equal payments or rolling the money over).

[E as in ERISA]

Is age 30 used in a cash balance plan to somehow address the whipsaw issue?

[MGB]

Yes. Many cash balance plans are being designed with no age; just a 5-year service requirement that coincides with vesting. No whipsaw for anyone.

Having said that, the funding assumption of retirement decrements in a DB plan may not reflect such young ages. The IRS has often challenged any retirement decrements that too young. Just because the NRD is 40 for a person does not mean you can fund for it if that produces a larger deduction than using something like 55 to 65.

[Tom Poje]

we process the plan (granted it is a nonqualified) for one of the sports. retirement age is later of 49 or when the person quits actively

If professional football is anything similar, it wouldn't surprise me if NRA is 30 and 5 years. And that would be a legitimate and realistic retirement age.

[AndyH]

Imagine doing a general test for a plan with such a NRA? Testing age of 30 or 40? That would be bizarre.

[mbozek]

The NRA for major league baseball players is 45. Many professionals in indiviual sports, e.g., tennis, set up Q. retirement plas with earlier NRA such as 35 because their playing careers are limited.

[AndyH]

Hope their bodyguards, accountants, and other paid entourages are not employees, not to mention housekeepers, gardeners, and nannies!.

Q: Can they pay their spouses a salary and cover him/her in the plan?

[E as in ERISA]

The sports teams can also be problems. Many are owned by persons/families that have a variety of other closely held businesses. And they "sometimes" forget about the controlled group rules.

[mbozek]

The plans for athletes are usually set up as a personal service corporation and does not cover any other persons who work on a full time basis. The assistants are usualy seasonal employees who are not employed for 1000 hrs in a year.

[katieinny]

Now I'm being told that in order for a participant to take an in-service distribution from a money purchase plan, NRA must be at least 59 1/2. What happened to the "reasonable age" for the type of business?must

[Kirk Maldonado]

I don't think you can have an in-service distribution from a money purchase pension plan at any age.

[KJohnson]

I don't have a cite handy, but I thought you could begin distributions from any type of pension plan (db or mpp) after normal retirement age.

With the changes to 401(a)(9) is clear that the IRS allowed mpp's to keep "forcing" distributions at age 70 1/2 to active participants even if these distributions were no longer required under 401(a)(9). The guidance also allowed mpp's to keep 70 1/2 distributions as an option. In fact 411(d)(6) relief was required to eliminate this "option."

If these distributions are no longer required, they would appear to be in-service distributions after normal retirement age.

[Kirk Maldonado]

KJohnson is correct with regard to in-service distributions after attainment of normal retirement age.

[katieinny]

But, in the case of a money purchase plan, must NRA be at least 59 1/2 in order for participants to be able to take in-service distributions? I think not. I think age 55 would be acceptable, but I'm being told by another person in the office that it must be 59 1/2. We have a client for whom this issue is very important, so I want to be sure I give the correct answer.

[KJohnson]

I don't know where 59 1/2 would come from with regard to setting NRA for a mppp. What are they giving you to support this?

The prohibitiion on in-service distributions under age 59 1/2 is applicable only to elective deferrals under a 401(k) plan (and amounts treated like elective deferrals).

Are you dealing with a merger with a 401(k)?

In the case of a merger of a merger an mppp an mpp into a 401(k) plan with an in-service dsitribution option at age 59 1/2 this could arise. I have had sponsors that did not want to have to deal with all of the different rules with regard to QJSA's and in-service distribuitons. What we did was to make QJSA/QPSA applicable to all distribuitons, lowered NRA to 59 1/2, and then provided for "in-service" distribuiton of all money types at 59 1/2. However, so there would be no confusion, with the IRS reviewer, I actually broke the "in-service" distirbuiton provisions into two different sections in the plan and labeled the section with regard to the money purchase pension plan assets a "post-normal retirement age" distribuiton rather than an in-service distribuiton.

[katieinny]

No, there's been no mergers. Our goal is to permit in-service distributions from the MP plan at age 55, which means we need to set NRA at age 55. That's the lowest we can go to keep the 10% early withdrawal penalty from applying, and it's also a "reasonable age."

[MGB]

Age 55 should have nothing to do with avoiding the 10% excise tax. The only way the 10% can be avoided is if it is after 59-1/2 or is paid in substantially equal payments over life expectancy.

Age 55 only applies to distributions on account of termination of employment.

[katieinny]

Does it make sense that penalty free withdrawals can be made at 55 if you terminate service, but not for in-service distributions?

[MGB]

Yes.

This provision was specifically added to the Code to accomodate the standard practice in DB plans of having age 55 as the earliest early retirement age. You cannot receive your DB early retirement benefits without terminating employment. In fact, it originally said that the exception is only available if the plan has an early retirement provision (it was later changed to be any termination of employment).

The 10% penalty is designed to support the idea that these are retirement plans and people should not have access to the money until they retire, i.e., terminate employment.

Of course, "making sense" has never been a major driving factor in the comparisons across various rules in the Code.

[katieinny]

Okay, I see your point and agree that you are correct.

So, I have another client with a profit sharing plan who refuses to permit distributions prior to retirement age, even though he understands that finding these people could be a nightmare. NRA is 65, but early retirement age is 55.

I believe that the participants can request their distributions at early retirement age rather than waiting for NRA. But to avoid the 10% early withdrawal penalty the participant must have terminated service in the year he or she turns 55 (or older).