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CCH® PENSION AND BENEFITS — 8/24/07

IRS provides temporary relief from regs permitting in-service distributions on attainment of normal retirement age

The IRS has issued a Notice providing temporary relief from certain provisions of recently-issued final regulations that permit pension plans to commence payment of retirement benefits prior to the participant’s severance from employment, as long as the participant had attained “normal retirement age.”

2007 regulations

The final regulations, issued on May 22, 2007 (see CCH Pension Plan Guide ¶24,508Q ), established that a plan’s “normal retirement age” must generally be an age reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. The regulations further provided that a plan with a normal retirement age of at least age 62 would fall within a safe harbor and thus be deemed to be not earlier than the typical retirement age for the industry.

The regulations presume that, unless demonstrated by unique circumstances (such as that for certain public service employees whose normal retirement age is age 50), a normal retirement age below age 55 would be considered earlier than the earliest age reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.

Plan sponsor concerns

In reaction to the presumption under the new regulations that a normal retirement age of less than age 55 is not reasonable, certain plan sponsors providing in-service distributions upon attainment of normal retirement age expressed confidence that they could demonstrate to the satisfaction of the IRS that a retirement age below age 55 was normal for their industry. However, without a determination letter to that effect from the IRS, uncertainty was created by the regulations’ presumption that the plan does not satisfy those requirements. In particular, if a plan were required to raise its normal retirement age retroactively, in-service distributions made between the effective date and adoption date of the amendment would not satisfy the plan qualification requirements.

Sponsors who defined normal retirement age as the earlier of a fixed age or the completion of a lengthy period of service (e.g., 30 years) also asserted that this was typical of their industry, even though under the plans, normal retirement age could be as early as age 47 or 48. These sponsors were concerned that the 2007 regulations might cause them to take unnecessary action to achieve compliance which may later become unnecessary.

Two forms of temporary relief offered

In response to these concerns, the IRS has now provided two forms of temporary relief for plans which might otherwise require amendment to raise the plan’s normal retirement age effective before the first day of the first plan year beginning after June 30, 2008, in order to satisfy the 2007 regulations.

In the first form of relief, plans not satisfying the requirements of the new regulations will not be disqualified by the IRS solely on that basis as long as:

• Prior to the issuance of the 2007 regulations, the plan had set its definition of normal retirement age at an age earlier than age 62;
• It was not possible for a plan participant hired at age 18 or older to attain the normal retirement age before the age of 40;
• The plan sponsor adopts a good faith interim amendment to comply with Reg. §1.401(a)-1(b) effective no later than the first day of the first plan year beginning after June 30, 2008, unless the sponsor reasonably and in good faith determines that no amendment is necessary; and
• The good faith interim amendment is adopted by the later of (a) the last day of the first plan year beginning after June 30, 2008, or (b) the due date for filing the employer’s income tax return for the employer’s taxable year that includes the first day of the first plan year beginning after June 30, 2008.

Under the second form of relief, eligible plans with a normal retirement age lower than 55 will temporarily be accorded the same presumption as plans with a normal retirement age between age 55 and 62. Thus the plan sponsor’s good faith determination of the typical retirement age for the industry in which the covered workforce is employed will generally be given deference, assuming that the determination is reasonable under the facts and circumstances. In order to be eligible for this form of relief:

• Prior to the issuance of the 2007 regulations, the plan had set its definition of normal retirement age at an age earlier than age 55;
• It was not possible for a plan participant hired at age 18 or older to attain the normal retirement age before the age of 40; and
• The plan sponsor submits by June 30, 2008 a request for a letter ruling on whether its definition of normal retirement age satisfies the standard in the 2007 regulations. The Notice contains application procedures for such requests.

Under this form of relief, if the IRS determines during the ruling process that the plan’s normal retirement age does not reasonably represent the typical retirement age for the industry in which the covered workforce is employed, the IRS will require corrective action to be taken prospectively only from the date of issuance of the letter ruling, so that the plan’s normal retirement age will not be required to be raised retroactively.

Scope of relief and comment request

The IRS cautions that the relief in this Notice is limited to compliance with the 2007 regulations and thus, for example, would not extend to any violation of Code Sec. 411 that may arise from a plan’s definition of normal retirement age as other than a stated age. Written comments on the Notice should be submitted prior to November 25, 2007 and directed to CC:PA:LPD:PR (Notice 2007-69), Room 5203, Internal Revenue Service, POB 7604 Ben Franklin Station, Washington, DC 20044 or electronically at Notice.comments@irscounsel.treas.gov.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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