5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
The IRS has issued final regulations permitting distributions to be made from a pension plan upon the attainment of normal retirement age prior to a participant’s severance from employment with the employer maintaining the plan. The regulations are generally effective on May 22, 2007. However, special effective dates apply to governmental and collectively bargained plans.
IRS Reg. §1.401(a)-1 generally requires a pension plan to be maintained primarily to provide systematically for the payment of definitely determinable benefits after retirement. The final regulations clarify that a pension plan is permitted to commence payment of retirement benefits to a participant after the participant has attained normal retirement age and provide rules on how low a plan’s normal retirement age is permitted to be.
Code Sec. 401(a)(36), enacted under the Pension Protection Act of 2006 (PPA; P.L. 109-280), provides that a trust forming part of a pension plan is not treated as failing to constitute a qualified trust solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 62 and who is not separated from employment at the time of such distribution. In November 2004, the IRS issued proposed regulations that would have allowed in-service distributions after normal retirement age, but would not have permitted a normal retirement age to be set so low as to be a subterfuge to avoid qualification requirements (see CCH Pension Plan Guide ¶20,261G ). The proposed regulations would also have permitted in-service distributions before normal retirement age under a bona fide phased retirement program. In light of the enactment of Code Sec. 401(a)(36) by the PPA, only the portions of the proposed regulations relating to normal retirement age and in-service distributions upon attainment of normal retirement age are being finalized at this time.
The final regulations adopt the rule of the proposed regulations under which a defined benefit or money purchase plan is permitted to pay benefits upon an employee’s attainment of normal retirement age, even if the employee has not yet had a severance from employment with the employer maintaining the plan. However, the proposed regulations would have provided that a plan’s normal retirement age could not be set so low as to be a subterfuge to avoid the requirements of Code Sec. 401(a), and, accordingly, normal retirement age could not be earlier than the earliest age that is reasonably representative of a typical retirement age for the covered workforce. The final regulations replace the subterfuge standard with a requirement that the normal retirement age under a plan be an “age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.”
A “safe harbor age” is established under which a normal retirement age of at least age 62 is deemed to be not earlier than the typical retirement age for the industry in which the covered workforce is employed.
Thus, a plan will satisfy the safe harbor if its normal retirement age is age 62, or if its normal retirement age is the later of age 62 or another specified date, such as the later of age 62 or the fifth anniversary of plan participation. If a plan’s normal retirement age is earlier than age 62, the determination of whether the age is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed will be based on relevant facts and circumstances. If the normal retirement age is between ages 55 and 62, then it is generally expected that a good faith determination of the typical retirement age for the industry in which the covered workforce is employed that is made by the employer (or, in the case of a multiemployer plan, made by the trustees) will be given deference, assuming that the determination is reasonable under the facts and circumstances. However, a normal retirement age that is lower than age 55 will be presumed to be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry of the relevant covered workforce absent facts and circumstances that demonstrate otherwise.
The final regulations amend the existing Code Sec. 411(d)(6) anti-cutback rules to permit a plan to be amended during a transition period to conform to the rules concerning normal retirement age. Thus, a plan amendment that changes the normal retirement age under the plan to a later normal retirement age will not violate Code Sec. 411(d)(6) merely because the amendment eliminates a right to an in-service distribution prior to the amended normal retirement age. However, this rule does not provide any other relief. For example, this rule does not permit the amendment to reduce benefits in some other manner that fails to satisfy Code Sec. 411(d)(6).
For more information on this and related topics, consult the CCH Pension Plan Guide.
Visit our News Library to read more news stories.