April 18, 2012 - Updated information on IRS Normal Retirement
It appears that under a new IRS proposal, public pension plans will still be able to provide a retirement benefit when members meet service credit requirements (without regard to age) and terminate employment. Plans that do not allow in-service distributions (collecting a pension and a paycheck from the same employer) before age 62 will be fine. For plans that are impacted, the original implementation date of January 1, 2013, has been moved to January 1, 2015, at the earliest.
The IRS and Department of Treasury issued Notice 2012-29 on April 17th to announce their intent to issue guidance on the applicability of Treas. Reg. section 1.401(a)-1(b) (the 2007 Normal Retirement Age regulations) to Internal Revenue Code section 414(d) governmental plans.
As described in the attached discussion of the notice from Ice Miller, the proposed regulation addresses in-service distributions from a pension plan upon attainment of normal retirement age and does not affect plan distributions based upon retirement, which still may be made, without regard to age, when members meet service credit requirements and terminate employment.
It appears that public plans will be okay as long as they don’t provide in service distributions before age 62. West Virginia’s retirement plans do not allow for in service distributions.
Our understanding of their definition of an “in-service distributions” is that it would allow for an employee to "retire", start receiving a retirement benefit, but continue to work for the same employer under the same retirement plan. In other words, the employee is receiving a pension check and also a pay check from the same employer. West Virginia’s retirement plans permit working after retirement but all require there be a real retirement and true separation from service for some designated period before the person returns to work.
This development was covered on a NCTR webinar today on federal issues and one of the points raised was that we will need clarification on how teachers who retire from full-time work but then work part-time after retirement could be affected.
“Based on the guidance issued for the modification of the IRS Normal Retirement Age Requirements, it should not impact your individual retirement decision. It will not require participants in West Virginia retirement plans to wait until age 62 to retire. Our retirement plan rules will remain the same. Once you meet the current age and years of service requirement of the plan, you will be eligible to retire,” states WVEA Executive Director David Haney.
NEA will be working with other groups in the public pension plan community to further analyze the guidance.
April 12, 2012
WVEA Statement Regarding the IRS Normal Retirement Age Regulations
We have received many inquiries regarding an article posted on the Retirement Board website regarding the IRS Regulations for the Normal Retirement Age.
The revision of the Normal Retirement Age is something that has been going on since 2007. As we understand it, it affects pension plans and the plan’s reporting requirements and not necessarily participants in the plan.
For individuals asking the question “I’m not ready to retire but I am eligible. Can you advise me on what I should so? Should I go ahead and retire before the 1/1/2013 deadline? WVEA cannot give advice on individual retirement decisions; however, it doesn’t seem like there’s any reason at this point in time for people to retire before they are ready. We should have something more definitive from the IRS and Treasury on this issue well in advance of 1/1/2013. At that point, individuals can reassess their retirement decision.
After discussing the issue with the NEA, they have prepared the statement that appears below.
What’s Happening with the IRS Normal Retirement Age Regulations?
The National Education Association has been monitoring the proposed IRS normal retirement age regulations that would apply to tax-qualified defined benefit plans maintained by state and local governments. NEA has been involved in discussions with the Internal Revenue Service and the Department of Treasury on this issue over the last several years and has submitted formal comments. In the latest discussions with IRS and Treasury, NEA focused on these key points:
· NEA represents 3 million employees who participate in Governmental Plans, the vast majority of which provide for normal retirement after the completion of a stated number of years of service with or without reference to age.
· NEA respectfully requested that the upcoming scheduled amendments to the Normal Retirement Age Regulations include a safe harbor confirming that Governmental Plans that provide a normal retirement pension based (in whole or in part) on a specified number of years of service representative of a full career in government service comply with the definitely determinable requirement of the tax-qualification rules.
· Such a service-based safe harbor would be consistent with the goals of the definitely determinable requirement and the existing NRA Regulations in that it would ensure that Governmental Plans are maintained to provide secure retirement income to employees, rather than being available to employers or employees for other purposes.
· In essence, a service-based safe harbor would apply the same standard in substance as already incorporated in the age-based rules applicable to plans subject to the vesting and accrual rules under ERISA and the Internal Revenue Code.
· A service-based safe harbor could include a requirement that employees must terminate employment with the employer maintaining the Governmental Plan to begin a normal retirement pension.
For reasons described above, NEA requested that Treasury amend the NRA Regulations to confirm that Governmental Plans that provide a normal retirement pension based (in whole or in part) on a specified number of years of service that is typical for a full traditional career in the government service in which the covered workforce is employed comply with the definitely determinable requirement.
Although we cannot predict what the Treasury Department and the IRS will do, there is some speculation that they may soon release for comment proposed new regulations dealing with the meaning of “normal retirement age” as applied to governmental plans. In addition, it may be that this release will be accompanied by another extension of the application of the regulations in order to accommodate this process.
WVEA will provide additional information on this issue when it is available.