IRS and Normal Retirement Age
September 24, 2008

The new rules on Normal Retirement Age, currently scheduled to apply to plan years beginning on or after January 1, 2009, would require that governmental pension plans specifically define normal retirement age, or redefine normal retirement age, so that it is not based wholly or partly on years of service. Because of this new imposition on public plans, and other issues with the regulations, one of the top priorities for NCPERS is to delay the implementation of, and then seek major modifications to the Normal Retirement Age regulations.

In the spring of 2007, the IRS issued final regulations that would take effect beginning January 1, 2009 dealing with in-service distributions after normal retirement age. The new regulations would allow payment of benefits to an employee upon attainment of normal retirement age, whether or not the employee has stopped working for the employer maintaining the plan. Subsequently, the IRS issued Notice 2007-69, which emphasized that the new regulations dealing with in-service distributions do not also provide a safe harbor for retirement plans that use a retirement age as a condition on the completion of a stated number of years of service. In so doing, the IRS raised the issue of normal retirement age in a broader context, and requested comments from sponsors of governmental plans.

Previously, IRS had convened a roundtable with representatives of public funds to discuss the traditionally “underserved” public plan community. At the time, IRS suggested that it wanted to work in a cooperative effort. At that meeting, IRS also announced its intent to create a survey on tax qualification that it wanted to send to public plans. The survey, however, was developed without any input from the public plan community, and then was delivered to NCPERS, NASRA, and NCTR who were told to keep it secret and provide comments within 24 hours.

For the purposes of in-service distributions, the new regulations indicate that normal retirement age under a plan must 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.” Several safe harbors are provided. For example, a normal retirement age of at least age 62 would meet this new “typical retirement age” standard; for plans with normal retirement ages between ages 55 and 62, there will be a presumption that they are acceptable based on 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.”

For a normal retirement age lower than age 55, there is a presumption that it does not meet the new standard “absent facts and circumstances that demonstrate otherwise.” However, for plans where substantially all of the participants in the plan are qualified public safety employees, a normal retirement age of age 50 or later would be qualified under the new standard.

These regulations raise a number of troubling issues for governmental plans. Prior to promulgation of the final regulations, there was no authority that prohibited governmental pension plans from determining and setting an appropriate normal retirement rate. Moreover, the IRS has routinely approved service-based normal retirement ages through the determination letter process.

NCPERS and 18 other public sector organizations filed a letter in April 2008 to formally request an extension of the effective date. We anticipate that the IRS will rule on our request in the very near future.