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CCH® PENSION — 1/10/07

IRS Requests Comments On PPA Provision That Allows In-Service Pension Distributions At Age 62

from Spencer’s Benefits Reports: In Notice 2007-8, the Internal Revenue Service states that it is considering proposed guidance under IRC Sec. 401(a)(36), which permits pension plans to make in-service distributions to participants who have attained age 62. In the notice, the IRS requests comments on issues presented by Sec. 401(a)(36) with respect to defined benefit plans.

In general, a qualified pension plan (that is, a defined benefit plan or a money purchase pension plan) may not pay benefits before retirement. However, in November 2004, the IRS issued proposed regulations that would permit a pension plan to make in-service distributions to a participant before normal retirement age under a bona fide phased retirement program. Most recently, the Pension Protection Act of 2006 (PPA) added Sec. 401(a)(36) to the Tax Code, effective for distributions in plan years beginning after Dec. 31, 2006. As provided by Sec. 401(a)(36), a pension plan does not fail to qualify under Sec. 401(a) solely because the plan provides that a distribution may be made to an employee who has attained age 62 and who has not separated from employment at the time of the distribution.

IRC Sec. 411(a) provides that a pension plan must provide that an employee’s right to his or her normal retirement benefit is nonforfeitable upon the attainment of normal retirement age. For purposes of a defined benefit plan, Sec. 411(a)(7) generally defines the term “accrued benefit” as an employee’s accrued benefit determined under the plan and expressed in the form of an annual benefit commencing at normal retirement age. Furthermore, IRC Sec. 411(d)(6)(A) generally provides that a plan is treated as not satisfying the requirements of Sec. 411 if the accrued benefit of a participant is decreased by a plan amendment. In addition, Sec. 411(d)(6)(B) provides that a plan amendment that has the effect of eliminating or reducing an early retirement benefit or a retirement-type subsidy, or eliminating an optional form of benefit, with respect to benefits attributable to service before the amendment is treated as impermissibly reducing accrued benefits.

Comments On Specific Issues

In Notice 2007-8, the IRS requests comments on the following specific issues under Sec. 401(a)(36):

• Should an in-service distribution of a benefit to a participant who has attained age 62 but who has not attained normal retirement age be limited to no greater than the benefit to which the participant would be entitled at normal retirement age, reduced in accordance with reasonable actuarial assumptions (e.g., should only unsubsidized benefits be permitted pursuant to Sec. 401(a)(36))?
• If subsidized benefits are permitted to be distributed to a participant who has attained age 62 but is still in-service and has not yet attained normal retirement age, how should the subsidized benefits be characterized for purposes of Sec. 411? For example, should the subsidized benefits be treated as a subsidized early retirement benefit despite the fact that the participant has not yet separated from employment?
• If the subsidized benefits are not treated as a subsidized early retirement benefit, should the subsidized benefits be treated as a part of the participant’s accrued benefit, or is there some other characterization of the subsidized benefits for purposes of Sec. 411?
• Should final regulations be issued permitting in-service distributions under a bona fide phased retirement program, in light of the ability of plans to permit in-service distributions after age 62 pursuant to Sec. 401(a)(36)?

Written comments should be submitted by April 16 to: CC:PA:LPD:DRU (Notice 2007-8), Room 5203, IRS, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments may be emailed to notice.comments@irscounsel.treas.gov (Notice 2007-8). For further information, contact Kathleen Herrmann at (202) 283-9888.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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