May 22, 2007 – The IRS publishes Final Regulations on Distributions from a Pension Plan Upon Attainment of Normal Retirement Age. They add paragraphs (b)(2), (b)(3) and (b)(4) to Treas. Reg. 1.401(a)-1 about normal retirement age definitions in qualified plans. Treas. Reg. 1.401(a)-1(b)(2)(i) says: “The 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.”
This creates a compliance issue because there is no readily available and reliable source which provides the typical retirement ages for most industries.
These regulations are promulgated under Code section 411(a)(8), which defines “normal retirement age” as the earlier of:
(a) the time a participant attains normal retirement age under the plan or
(b) the later of the time a plan participant attains age 65 or the 5th anniversary of the time a plan participant commenced participation in the plan.
The regulations contain a safe harbor for plans using a normal retirement age of age 62 or later.
For plans using a normal retirement age between age 55 to age 62, the regulations create a facts-and-circumstances test to determine whether the normal retirement 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 employees.
For plans using a normal retirement age lower than age 55, the regulations say that it will be presumed to be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed unless the Commissioner of the IRS determines that the age is not unreasonably based on all the facts and circumstances or all of the participants in the plan are qualified public safety employees which meet the age 50 safe harbor for qualified public safety employees.
May 10, 2000 – The IRS issues Opinion 200032004, addressing whether the IRS can levy upon and collect the assets in a taxpayer’s 401(k) account balance when the taxpayer has an immediate right to elect normal retirement but instead elects to defer retirement.
The question arose because a taxpayer had an unpaid joint income tax liability. The IRS had filed a federal tax lien. The taxpayer filed Chapter 7 bankruptcy, discharging the tax debt but the IRS said the taxpayer’s property remained liable for the debt secured by the tax liens.
The taxpayer was owner of a company and one of his assets was his account balance in his company’s 401(k) plan. The 401(k) contained a normal retirement age of 65, at which time the participant could elect to receive his account balance in the form of an annuity or a lump sum payment, or, with the consent of the company’s Board of Directors, the participant could defer his retirement. The taxpayer attained normal retirement age but elected to defer retirement. The IRS served the plan administrator with a notice of levy requesting that the taxpayer’s 401(k) account balance be paid to the IRS in a lump sum, and the administrator refused.
The opinion said that the plan administrator is not required to honor the levy until the benefits become payable to the taxpayer under the terms the plan, which, in this case, is when the taxpayer retires. The IRS levy remains active until that time, and the IRS does not need to issue a second levy when the taxpayer elects to stop deferring retirement and actually retires.
I try not to write about bills pending before Congress because most ERISA-related legislation is introduced with little fanfare and then will spend months or years in obscurity before dying on the Dec. 31st of an even-numbered year when the Congressional term ends. A quick search of Thomas.gov today revealed 47 bills introduced during this Congressional term containing the word “ERISA”. Only one of those bills has become law (H.R. 2832 which became Public Law 112-40) and it didn’t really affect the ERISA landscape in any major way. It mostly had to do with amending the Trade Act of 1974 and only had a little to do with amending the Internal Revenue Code to extend the tax credit for health insurance costs paid by TAA (Trade Adjustment Assistance).
An exception to this rule is H.R. 3561, the Small Business Pension Promotion Act of 2011. It has everything to do with ERISA. In concise and efficient language, it proposes these important changes by:
1. Allowing a later valuation date to determine required minimum distributions (RMDs), and allowing additional time for making RMDs;
2. Changing the way net earnings from self-employment are calculated beginning after Dec. 31, 2011, by including deductions for pension and IRA contributions;
3. Changing Code section 436(j)(2) to adjust the funding target attainment percentage for single-employer defined benefit plans;
4. Repealing Code section 4972, the tax on nondeductible contributions to qualified employer plans, for taxable years beginning after Dec. 31, 2011;
5. Instructing the Secretary of the Treasury to provide greater flexibility and reduce plan sponsor burden for interim amendments to qualified plans;
6. Adding Code section 411(f), grandfathering plans with normal retirement age based on earlier of attainment of specific age or completion of 30 or more years of benefit accrual services;
The Small Business Pension Promotion Act, H.R. 3561, was introduced on Dec. 5, 2011 by Rep. Ron Kind (R-WI) and was immediately referred to the House Ways and Means Committee and the House Education and the Workforce Committee. It remained there with nothing happening until March 29, 2012, when it was referred to the Subcommittee on Health, Employment, Labor and Pensions. It is a small step but it means that this bill may be moving forward into worth-watching territory.
If this bill does move forward, it would be nice to see something added to it which amends Code section 401(a)(9) to increase the required beginning date for required minimum distributions from age 70 ½ to at least age 75. When the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) added the age 70 ½ required beginning date requirement to Code section 401(a)(9), it was debated whether age 70 ½ was too young, and a later date, such as age 75, would be more realistic while still accomplishing the same public policy goal. With so many participants delaying retirement due to the rough economy over the last several years, maybe it is time to re-open the debate over what is, or should be, the best required beginning date for required minimum distributions.