Developments on Normal Retirement Age Regulations for Governmental Plans Developments on Normal Retirement Age Regulations for Governmental Plans

Developments on Normal Retirement Age Regulations for Governmental Plans

The long awaited proposed regulations regarding normal retirement age applicable to governmental pension plans were announced by the IRS and Treasury Department on January 27, 2016 with the issuance of a Notice of Proposed Rulemaking. This is the latest in a string of developments involving regulations related to normal retirement age for governmental pension plans. The process began in 2007 when the IRS issued final regulations defining normal retirement age. The final regulations generally provided that a private sector pension plan's normal retirement age 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 (the "reasonably representative requirement"). A retirement age of 62 or later is deemed to meet the reasonably representative requirement, while a retirement age of age 55 to 61 would need to meet the reasonably representative requirement based on a facts and circumstances analysis. A normal retirement age under age 55 is presumed not to meet the reasonably representative requirement, unless the Commissioner determines otherwise based on the facts and circumstances. The final regulations also allowed a normal retirement age of age 50 or above for public safety employees. Under Notices 2008-98, 2009-86 and 2012-29, these regulations were delayed for governmental plans.

With this Notice of Proposed Rulemaking, the IRS has attempted to address concerns and comments submitted with regard to the applicability of the normal retirement age regulations to governmental plans and to establish certain safe harbors by which the normal retirement age under a governmental plan would satisfy the requirements of Code § 401(a).

General Rules

The Notice of Proposed Rulemaking makes clear that a normal retirement age under a governmental plan must satisfy the pre-ERISA vesting rules. In this regard, use of a period of service to determine normal retirement age under a governmental plan would be permissible if the period of service used is reasonable and uniformly applicable and the other pre-ERISA rules related to normal retirement age are satisfied. One of the pre-ERISA rules allows a governmental plan to specify a normal retirement age that is lower than age 65 if that age represents the age at which employees customarily retire in the industry.
The Notice of Proposed Rulemaking distinguishes between governmental plans that allow in-service distributions and those that do not.

  • In the case of a governmental plan that permits in-service distributions before retirement, normal retirement age must meet the reasonably representative requirement. This requirement may be satisfied under several different safe harbors, described below.
  • In the case of a governmental plan that does not permit in-service distributions before retirement, the plan's normal retirement age is not required to comply with the reasonably representative requirement or the safe harbors. However, the normal retirement age under such a plan must satisfy the pre-ERISA vesting rules.
    • The Preamble to the Notice of Proposed Rulemaking notes that, under the pre-ERISA rules, a governmental plan is not required to include an explicit definition of the term normal retirement age. However, the terms of the plan must specify the earliest age at which a participant has the right to retire and receive retirement benefits based upon the amount of the participant's service on the date of retirement at the full rate set forth in the plan (without actuarial or similar reduction). This age will be considered the plan's normal retirement age.  
  • The Preamble to the Notice of Proposed Rulemaking indicates that a normal retirement age under a governmental plan that is consistent with the safe harbors would not fail to satisfy the pre-ERISA vesting rules.

Safe Harbors

The Notice of Proposed Rulemaking proposes establishment of the following safe harbors for a normal retirement age for governmental plans:

1) General Safe Harbor: A governmental plan satisfies this safe harbor if the normal retirement age under the plan is at least age 62 or if the normal retirement age is the later of age 62 or another specified date (such as the fifth anniversary of plan participation).

2) Safe Harbors Specific to Governmental Plans: The following additional safe harbors for governmental plans were developed based upon feedback provided and comments received in response to Notices 2007-69 and 2012-29:

(a) Age 60 and Five Years of Service: With the proposed regulations, a normal retirement age under a governmental plan that is the later of age 60 or the age at which the participant has been credited with at least five years of service will be deemed to satisfy the reasonably representative requirement.

(b) Age 55 and 10 Years of Service: Similarly, a governmental plan which has a normal retirement age that is the later of age 55 or the age at which the participant has been credited with at least 10 years of service will be another safe harbor of the proposed regulations.

(c) Combined Age and Years of Service of 80 or More: A governmental plan which has a normal retirement age in which the sum of the participant's age plus the number of years of service credited to the participant under the plan equals 80 or more would satisfy this safe harbor of the proposed regulations.

(d) Any Age with 25 Years of Service (in combination with a safe harbor that includes an age): Under the proposed regulations a governmental plan would be permitted to combine any of the other safe harbors (except for the qualified public safety employee safe harbors) with 25 years of service, so that a participant's normal retirement age would be the participant's age when the number of years of service that have been credited to the participant under the plan equals 25 if that age is earlier than what the participant's normal retirement age would be under the other safe harbor(s). For instance, a governmental plan would satisfy the reasonably representative requirements of the proposed regulations if the normal retirement age is the earlier of (1) the participant's age when the participant has been credited with 25 years of service under the plan and (2) the later of age 60 or the age when the participant has been credited with five years of service under the plan. For purposes of this safe harbor, the proposed regulations specifically state that the use of 25 years of service by a governmental plan generally does not satisfy the pre-ERISA vesting requirement related to normal retirement age, unless it is used in conjunction with an alternative normal retirement age that includes an age component and otherwise satisfies the pre-ERISA rules.

Public Safety Safe Harbor Rules

Qualified Public Safety Employees: The proposed regulations include three safe harbors specifically for qualified public safety employees. The governmental plan is allowed to use one or more of the safe harbors for qualified public safety employees in order to satisfy the reasonably representative requirement for those employees, even if a different normal retirement age (or ages) is used under the plan for one or more other categories of participants who are not qualified public safety employees. For purposes of the proposed regulations, the term qualified public safety employee is defined by reference to Code § 72(t)(10)(B), under which any employee of the State or political subdivision of a state who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision. The Notice of Proposed Rulemaking points out that the definition of qualified public safety employee under Code § 72(t)(10)(B) recently was amended by the Defending Public Safety Employees' Retirement Act in 2015 and the Protecting Americans from Tax Hikes Act of 2015, enacted as part of the Consolidated Appropriations Act of 2016. These amendments establish that, for distributions made after December 31, 2015, the term qualified public safety employee includes certain federal law enforcement officers, police and firefighters. The qualified public safety employee safe harbors are as follows:

1) Age 50: The proposed regulations make clear that a governmental plan is permitted to use the safe harbor of a normal retirement age of 50 or later (alone or together with one or both of the other safe harbors for qualified public safety employees described in the proposed regulations).

2) Combined Age and Years of Service of 70 or More: The proposed regulations establish a safe harbor under which a normal retirement age for qualified public safety employees under a governmental plan that is the participant's age when the sum of the participant's age plus the number of years of service under the plan equal 70 or more would satisfy the reasonably representative requirement.

3) Any Age with 20 Years of Service: The proposed regulations also establish a safe harbor under which a normal retirement age for qualified public safety employees that is the participant's age when the number of years of service that have been credited to the participant under the plan equals 20 or more would be deemed to satisfy a reasonably representative requirement. The proposed regulations specifically state that a normal retirement age for qualified public safety employees under a plan that is 25 years of service would satisfy this safe harbor.

Multiple NRAs

Multiple Normal Retirement Ages in a Governmental Plan: The Notice of Proposed Rulemaking states that a normal retirement age that is a combination of age and years of service and is consistent with the safe harbors set forth in the proposed regulations would satisfy the pre-ERISA requirements, including the requirement that any period of service required for vesting at normal retirement age be uniformly applicable to all employees in a plan. Further, the Notice of Proposed Rulemaking notes that use of one normal retirement age for one classification of employees (such as qualified public safety employees) and one or more other normal retirement ages for one or more different classifications of other employees would not be inconsistent with the proposed regulations and generally would not be inconsistent with the applicable pre-ERISA requirements. Similarly, the use of one normal retirement age under a governmental plan for employees hired before a certain date and another normal retirement age under the plan for employees hired on or after that date generally would not fail to satisfy the applicable pre-ERISA requirements.

Other NRAs

Other Normal Retirement Ages: Finally, the proposed regulations establish that a normal retirement age which does not satisfy any of the governmental plan safe harbors could still satisfy the reasonably representative requirement based on all of the relevant facts and circumstances. The normal retirement age must be evaluated and shown to satisfy a good faith determination of the typical retirement age for the industry in which the covered workforce is employed and that the normal retirement age is otherwise consistent with the pre-ERISA vesting requirements.

Effective Date

Based upon the Notice of Proposed Rulemaking, the proposed regulations will be effective for employees hired during plan years beginning on or after the later of (1) January 1, 2017 or (2) the close of the first regular legislative session of the legislative body with the authority to amend the plan that begins on or after the date that is three months after the final regulations are published. In the meantime, governmental plan sponsors may rely on these proposed regulations prior to the effective date and pending the issuance of final regulations.

Comments

The IRS and Treasury request that comments and any request for a public hearing must be submitted to the following address:

CC:PA:LPD:PR (REG-147310-12)
Room 5205
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington D.C. 20044

Comments and requests for public hearing also may be hand-delivered to the following address:

CC:PA:LPD:PR (REG-147310-12)
Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Finally, comments and requests for public hearing may be submitted electronically via the Federal eRulemaking Portal at: www.regulations.gov (IRS REG-147310-12).
The deadline to submit comments and requests for public hearing is April 26, 2016.

Ice Miller Comments

We think it will be particularly helpful to comment on the following issues/concerns:

1. If your plan uses a different criteria for normal retirement age, you should consider asking for it to be added as a safe harbor.

2. What should a plan with no in-service distributions do to meet the pre-ERISA vesting rules? In particular, will the Service formally adopt the safe harbor vesting schedules (15 year cliff vesting, 20 year graded vesting and 20 year cliff vesting for qualified public safety employees) recognized by Mr. Mark O'Donnell, Acting Director of EP Rulings and Agreements, in his Memorandum for Manager, EP Determinations dated April 30,2012.

We think that the prior comments submitted by plans and by your plans' associations (NASRA, NCPERS, NCTR) have been incredibly helpful in getting these regulations to their current workable stage.
If you have any questions or need additional information regarding the Notice of Proposed Rulemaking or how it might impact your governmental plan, please contact Mary Beth Braitman (317-236-2413), Malaika Caldwell (317-236-5975), Robert L. Gauss (317-236-2133), Lisa Harrison (317-236-5806), Tara Schulstad Sciscoe (317-236-5888), or any member of the Ice Miller Employee Benefits group.

This publication is intended for general information purposes only and does not and is not intended 
to constitute legal advice. The reader should consult with legal counsel to determine how laws or 
decisions discussed herein apply to the reader's specific circumstances.
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