The Treasury Department and Internal Revenue Service issued Dec. 22
Notice 2007-8 seeking comments as they consider whether to issue a
proposal relating to in-service distributions from phased retirement
programs under new tax code Section 401(a)(36).
Section 401(a)(36) was added to the tax code by Section 905(b) of
the Pension Protection Act of 2006 (Pub. L. 109-280). For plan years
beginning after Dec. 31, 2006, “a pension plan does not fail to
qualify under §401(a) solely because the plan provides that a
distribution may be made to an employee who has attained age 62 and
who has not separated from employment at the time of the
distribution,” according to the notice.
The appropriateness and limitations of normal retirement age
provisions were discussed at a March 2005 public hearing on proposed
regulations (REG-114726-04) relating to phased retirement programs (50
DLR A-6, 3/16/05). The proposed rules would amend regulations under
Section 401(a) to permit distributions from the pro rata share of an
employee's pension plan benefits for bona fide phased retirement
programs.
In Notice 2007-8, IRS and Treasury officials requested comments on
specific issues related to any guidance that could be issued relating
to new Section 401(a)(36), including:
• whether
an in-service distribution to a participant who is at least age 62,
but not yet the normal retirement age, should be capped at the
actuarial equivalent of the normal retirement age benefit;
• how
to characterize subsidized benefits that are distributed to a
participant who has attained age 62, but still is in-service and
younger than normal retirement age, for purposes of Section 411;
and
• whether
final regulations permitting in-service distributions at age 62, under
a bona fide phased retirement program, still are needed given the
ability of plans to permit such distributions under the newly enacted
section.
Notice 2007-8 is scheduled to be published in Internal Revenue
Bulletin 20067-03, dated Jan. 16,
2007.
Nondiscrimination, Anti-Cutback Rule Concerns.
Gerald Cole, special counsel for Milliman's Washington, D.C.-based
Employee Benefits Research Group, told BNA he is concerned about
issues that he believes may pose problems for employers, related to
the way IRS treats the phased retirement programs.
“The major issue that I see is that IRS needs to allow
employers to have the maximum flexibility to construct their phased
retirement programs to fit their individualized situations,”
Cole said, adding that the programs should not be subject to
nondiscrimination rules, nor should the benefits be treated as
protected under Section 411(d)(6).
According to Cole, the extent to which IRS treats a phased
retirement program under Section 401(a)(36) as a protected early
retirement subsidy, rather than as a nonprotected benefit, could well
have a chilling effect on whether employers adopt the programs. With
the former, the programs would be protected under the anti-cutback
rules Section 411(d)(6), he said, and employers would be unable to
change the benefits.
Employers may want the right to decide on a case-by-case basis
whether a particular worker is suitable for phased retirement,
according to Cole. There may be concerns whether once a program is in
an employer's plan it will be protected by Section 411(d)(6) so that
it can never be changed. “If you are an employer that is looking
at that possibility--of not being able to change the program--are you
going to go ahead and implement one in the first place knowing that
once you implement it you are stuck with it?” he
asked.
Handling Could Render Provision Moot.
Cole cautioned that if IRS officials are not careful in the way
they handle the treatment of the phased retirement programs--meaning
if they try to subject them to the usual nondiscrimination rules--they
could create the problem of rendering the entire PPA provision
moot.
IRS is very sensitive about avoiding plan discrimination, Cole
added. But when dealing with phased retirement programs, IRS may need
to come up with a different set of nondiscrimination rules than the
ones that are there now, he suggested.
Cole said a delicate balancing act would be required between the
needs of employers and IRS's desire not to allow discrimination and to
protect plan benefits. He said his personal view was that this was a
special provision by Congress and he was unsure whether there was
enough discussion about the nondiscrimination rules when it was put in
the PPA.
If IRS wants to promote phased retirement programs, there will have
to be a lot of flexibility to allow employers to experiment and change
their designs if need be, Cole said.
According to Notice 2007-8, written comments are due by April 16,
and should be sent to: CC:PA:LPD:DRU (Notice 2007-8), Room 5203,
Internal Revenue Service, POB 7604 Ben Franklin Station, Washington,
D.C. 20044. Comments may be hand delivered between the hours of 8 a.m.
and 5 p.m., Monday through Friday, to the courier's desk at Internal
Revenue Service Building and marked: Attn: CC:PA:LPD:DRU (Notice
2007-8), 1111 Constitution Avenue, NW, Washington D.C. Comments also
may be submitted via the Internet at
notice.comments@irscounsel.treas.gov (Notice 2007-8).
By Sheila R. Cherry
This notice is scheduled to be published in Internal Revenue
Bulletin 20067-03 dated Jan. 16,
2007.
Part III - Administrative, Procedural, and
Miscellaneous
In-ServiceBenefits Permitted to be Providedat Age
62by a Pension Plan
Notice 2007-8
I. PURPOSE
The Treasury Department and the Internal Revenue Service are
considering proposing guidance under § 401(a)(36) of the Internal
Revenue Code, as added by section 905 of the Pension Protection Act of
2006, Public Law 109-280, 120 Stat. 780 (PPA ’06). This notice
requests comments on issues presented by § 401(a)(36) of the Code
with respect to defined benefit
plans.
II. BACKGROUND
In-service distributions from a pension
plan
Section 401(a) provides rules for qualified pension plans,
profit-sharing plans, and stock bonus plans. Section 1.401-1(a)(2) of
the Income Tax Regulations provides that a qualified pension plan
(i.e., a qualified defined benefit plan or money purchase pension
plan) is a definite written program and arrangement that is
communicated to employees and that is established and maintained by an
employer to provide for the livelihood of the employees or their
beneficiaries after the retirement of such employees through the
payment of benefits. Under § 1.401-1(b)(1)(i), a qualified
pension plan must be established and maintained by an employer
primarily to provide systematically for the payment of definitely
determinable benefits for employees over a period of years, usually
for life, after retirement. Following the enactment of the Employee
Retirement Income Security Act of 1974 (ERISA), Public Law 93-406 (88
Stat. 829), the regulations under § 401(a) were modified to
provide that § 1.401-1(b)(1)(i) continues to apply, except as
otherwise provided. See § 1.401(a)-1(b)(1)(i).
Accordingly, a qualified pension plan is generally not permitted to
pay benefits before retirement. See also Rev. Rul. 56-693,
1956-2 C.B. 282, as modified by Rev. Rul. 60-323, 1960-2 C.B.
148.
A notice of proposed rulemaking (REG-114726-04) under §401(a)
was published in the Federal Register (69 FR 65108) (the
proposed regulations) on November 10, 2004. The proposed regulations
would permit a qualified pension plan to make in-service distributions
to a participant before normal retirement age under a bona fide phased
retirement program. In addition, the proposed regulations would modify
§ 1.401(a)-1(b)(1) by permitting a qualified pension plan to make
in-service distributions to a participant upon the participant's
attainment of normal retirement age and by clarifying that a plan's
normal retirement age cannot be set so low as to be a subterfuge for
avoiding the requirements of § 401(a). On March 14, 2005, the IRS
held a public hearing on the proposed regulations. Written comments
responding to the proposed rulemaking were also
received.
Section 401(a)(36), as added by section 905(b) of PPA ’06,
provides that, for plan years beginning after December 31, 2006, a
pension plan does not fail to qualify under § 401(a) solely
because the plan provides that a distribution may be made to an
employee who has attained age 62 and who has not separated from
employment at the time of the
distribution.
Application of
§ 411(a)
and (b) to defined benefit plans
Section 401(a)(7) provides that a plan must satisfy the
requirements of §411.1
Section 411(a) provides that a qualified plan must provide that an
employee's right to his or her normal retirement benefit is
nonforfeitable upon the attainment of normal retirement age, and also
provides vesting requirements with respect to an employee's accrued
benefit. For purposes of a defined benefit plan, § 411(a)(7)
generally defines the term “accrued benefit” as an
employee's accrued benefit determined under the plan and expressed in
the form of an annual benefit commencing at normal retirement age.
Under § 411(a)(9), the term “normal retirement
benefit” is defined as the greater of the early retirement
benefit under the plan or the benefit under the plan commencing at
normal retirement age.
Under § 411(a), a defined benefit plan must satisfy one of the
three anti-backloading rules described §§ 411(b)(1)(A),
411(b)(1)(B), and 411(b)(1)(C). These anti-backloading rules govern
the minimum rate at which a participant's accrued benefit accrues.
These rules are designed to ensure that the minimum vesting rules of
§ 411(a) are not circumvented through a plan formula under which
accruals are inappropriately deferred. In addition, under §
411(b)(1)(G), a defined benefit plan is not permitted to reduce a
participant's accrued benefit on account of any increase in the
participant's age or service, and under § 411(b)(1)(H), a defined
benefit plan is not permitted to cease a participant's benefit
accrual, or reduce the rate of an employee's benefit accrual, because
of the attainment of any age.
Section 411(d)(6) protections
Most of the § 411 requirements outlined above protect a
participant's accrued benefit. Section 411(d)(6)(A) generally provides
that a plan is treated as not satisfying the requirements of §
411 if the accrued benefit of a participant is decreased by a plan
amendment. In addition, § 411(d)(6)(B) provides that a plan
amendment that has the effect of eliminating or reducing an early
retirement benefit or a retirement-type subsidy, or eliminating an
optional form of benefit, with respect to benefits attributable to
service before the amendment is treated as impermissibly reducing
accrued benefits.
Sections 1.411(d)-3 and 1.411(d)-4 provide rules relating to §
411(d)(6) protected benefits. Section 1.411(d)-3(g) distinguishes
among the types of benefits protected under §411(d)(6). A §
411(d)(6) protected early retirement benefit is defined as the right
to commence distribution of a retirement-type benefit at a particular
date after severance from employment with the employer and before
normal retirement age. Generally, under these regulations, a §
411(d)(6) protected retirement-type subsidy, such as a subsidized
early retirement benefit and a subsidized qualified joint and survivor
annuity, is the excess of the actuarial present value of a
retirement-type benefit over the actuarial present value of the
accrued benefit commencing at normal retirement age or at the actual
commencement date. A plan provision that permits a participant to
receive an in-service distribution is an optional form of benefit that
is protected under § 411(d)(6), but is not an early retirement
benefit. See §§ 1.411(d)-3(g)(6) and 1.411(d)-4,
Q&A-1(a)(3), Q&A-1(b)(1), and
Q&A-2(a)(1).
III. COMMENTS REQUESTED
The Treasury Department and the Internal Revenue Service are
considering issuing guidance with respect to § 401(a)(36).
Comments are requested on the guidance that should be issued. In
particular, comments on the following specific issues related to
§ 401(a)(36) and defined benefit plans are
requested:
• Should in-service distribution of a benefit to a
participant who has attained age 62 but who has not attained normal
retirement age be limited to no greater than the benefit to which the
participant would be entitled at normal retirement age, reduced in
accordance with reasonable actuarial assumptions (e.g., should only
unsubsidized benefits be permitted pursuant to §
401(a)(36))?
• If subsidized benefits are permitted to be
distributed to a participant who has attained age 62 but is still
in-service and has not yet attained normal retirement age, how should
the subsidized benefits be characterized for purposes of §
411?
• For example, should the subsidized benefits be
treated as a subsidized early retirement benefit despite the fact that
the participant has not yet separated from
employment?
• If the subsidized benefits are not treated as a
subsidized early retirement benefit, should the subsidized benefits be
treated as a part of the participant's accrued benefit, or is there
some other characterization of the subsidized benefits for purposes of
§ 411?
• Whether final regulations permitting in-service
distributions under a bona fide phased retirement program should be
issued, in light of the ability of plans to permit in-service
distributions after age 62 pursuant to §
401(a)(36)?
Written comments should be submitted by April 16, 2007. Send
submissions to CC:PA:LPD:DRU (Notice 2007-8), Room 5203, Internal
Revenue Service, POB 7604 Ben Franklin Station, Washington, D.C.
20044. Comments may be hand delivered between the hours of 8 a.m. and
5 p.m., Monday through Friday, to Courier's Desk, Internal Revenue
Service, Attn: CC:PA:LPD:DRU (Notice 2007-8), 1111 Constitution
Avenue, NW, Washington D.C. Alternatively, comments may be submitted
via the Internet at notice.comments@irscounsel.treas.gov (Notice
2007-8). All comments will be available for public
inspection.
DRAFTING INFORMATION
The principal drafter of this notice is Kathleen Herrmann of the
Employee Plans, Tax Exempt and Government Entities Division. For
further information regarding this notice, please contact the Employee
Plans' taxpayer assistance telephone service
at
1-877-829-5500 (a toll-free number) between the hours of 8:30 a.m.
and 4:30 p.m. Eastern Time, Monday through Friday. Ms. Herrmann may be
reached at (202) 283-9888 (not toll-free number).
1
Under §411(e), certain plans are treated as meeting the requirements of §411 if such plans meet the vesting requirements resulting from the application of §§401(a)(4) and 401(a)(7) as in effect on September 1, 1974.
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