Final Normal Retirement Age Regs for Governmental Plans Still Appear to be in Limbo

It has been almost four years since the Internal Revenue Service (IRS) first asked the question whether normal retirement age under a public plan may be based, in whole or in part, on years of service. The issue was raised in connection with so-called “Normal Retirement Age” regulations that were released in final form in 2007, but whose application to governmental plans has been repeatedly delayed. Progress has been slow in resolving the matter, despite repeated meetings between governmental plan organizations, including NCTR, and the Treasury Department. Now, however, hundreds of determination letter requests are reportedly being held up by uncertainty regarding pending guidance in this area, and pressure is growing to provide a final ruling. Some believe that another extension may be in order, while others think that the matter may ultimately need to be dealt with legislatively.

Background

The so-called Normal Retirement Age(NRA) regulations that the IRS issued in May of 2007 in final form actually deal with the ability of individuals (both public sector and private sector) to receive “in-service” distributions. Generally speaking, the Internal Revenue Code (IRC) permits pension distributions only after a participant terminates employment, or reaches “normal retirement age.” The 2007 regulations, which currently apply to the private sector only, now additionally permit a pension plan to pay benefits to an employee who has not terminated if the employee has attained age 62 – a provision which was contained in the “Distributions During Working Retirement” language of the Pension Protection Act of 2006 (PPA).

With regard to what qualifies as “normal retirement age,” the regulations require that the normal retirement age under a plan 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 is deemed to 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.” (However, private sector employers have indicated this presumption is being interpreted as still requiring proof regarding the typical retirement age for the industry of the covered workforce.) For a normal retirement age that is lower than age 55, there is a presumption that it does not meet the new standard “absent facts and circumstances that demonstrate otherwise.” (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 is deemed to meet the new standard.)

In 2007, the IRS also issued Notice 2007-69, underscoring that the new regulations do not provide a safe harbor with respect to a retirement age that is conditioned (directly or indirectly) on the completion of a stated number of years of service. The IRS also requested comments from sponsors of governmental plans on whether “normal retirement age” under such a plan may be based on years of service.

Governmental Plan Issues

There are several problems with the final regulations, whose application to governmental plans has been extended several times and which are now set to apply to public plans in the first plan year beginning on or after January 1, 2013.

1. All governmental pension plans would be required to specifically define a normal retirement age as an actual age. However, many governmental plans define normal retirement age or normal retirement date as the time or times when participants qualify for unreduced retirement benefits under the plan, which is set forth in State and/or local statutes and may not state a specific age.
2. Many governmental plans define normal retirement age or normal retirement date often based wholly or partly on years of service. Furthermore, under many governmental pension plans, a participant can reach normal retirement age by satisfying one of several age and service combinations. Sponsors of such plans would find it very difficult to select a single age to be the plan’s normal retirement age. Selecting an age that is higher than the lowest age would likely impair the constitutionally protected rights of the participants to any benefit conditioned on normal retirement. Selecting an age that is lower than the highest age could impact the actuarial cost of the plan.
3. Governmental pension plans often provide multiple benefit structures and cover multiple employee groups. The use of the term “plan” under the Final Regulations makes it unclear whether such governmental plans will be required to engage in the enormous undertaking of going through state and local governing bodies to unnecessarily fracture governmental pension systems into several smaller “plans” in order to have multiple normal retirement ages or take advantage of the safe harbor relief provided under the final regulations. It is also unclear how “the typical retirement age for the industry in which the covered workforce is employed” would be applied in the diverse public sector setting.

Accordingly, NCTR and NASRA have proposed that governmental plans should not be required to define normal retirement age. For those, however, that do define a normal retirement age or date, such normal retirement age or date should be permitted to be based on age, service, or a combination of age and service. Finally, whether or not normal retirement age or date is specifically defined for a governmental plan, in-service distributions should be permitted when made on or after the earlier of age 62 or the date on which the participant is permitted to receive unreduced benefits under the plan.

Current Status

There have been several meetings with the Treasury Department over the last three years to discuss these regulations and the serious problems they would present for governmental plans. However, there has been little progress to date.

One reason for the delay is that the IRS views the definition of normal retirement age for purposes of governmental plans as “not just [an] issue of application of final regulations” to governmental plans, but also as implicating what they view as pre-ERISA vesting standards (that do apply to governmental plans) that require full vesting upon attainment of normal retirement age.

Therefore, they appear to believe that governmental plans have always been required to specify a definitive age – despite the fact that many governmental pension plans (including those whose sponsors have relied for decades on favorable determination letters) have never defined normal retirement age. As George Bostick , Treasury’s Benefits Tax Counsel, explained to the NCTR/NASRA workshop attendees, there is therefore much research being done currently to better understand how such governmental pension plans, or those with a normal retirement age conditioned on the completion of a stated number of years of service , were initially seen as satisfying the pre-ERISA vesting rules.

Finally, the decision with regard to the NRA also affects the current processing of determination letters from Cycles C and E, which is why some plans that have applied have yet to receive a response. Therefore, the resolution of this issue is highly complex and has implications in a number of areas. It is still unclear at this stage whether an answer will be forthcoming soon, or if there will be yet another extension of the application of the regulations. It may well be that a legislative clarification will ultimately be necessary.