IRS Defines Normal Retirement Age - Buckconsultants.com

Volume 30 | Issue 37 | June 6, 2007
IRS Defines Normal Retirement Age
The IRS recently issued final regulations defining normal retirement age for defined benefit or money purchase
pension plan purposes, including benefit accrual and minimum vesting rules under Section 411. These
regulations, which are generally effective May 22, 2007, finalize one aspect of proposed regulations issued in
2004 that were designed to sanction certain phased-retirement programs.
Background
It has been a long-standing precept that for a pension plan to be qualified, it must provide benefits primarily after
retirement. The Pension Protection Act of 2006 includes a provision allowing in-service distributions from a
pension plan to an employee who is still working after reaching age 62.
Internal Revenue Code Section 411 defines normal retirement age (NRA) for minimum vesting purposes as the
earlier of the NRA under the plan or the later of age 65 or the 5 th anniversary of commencement of plan
participation. Under IRS guidance issued in 1971, NRA could be lower than age 65 if the age represented the age
at which employees customarily retired in the particular company or industry. However, the IRS ruled in 1978 that
a lower NRA was permitted regardless of the company or industry custom.
In 2004, the IRS proposed regulations that would sanction “bona fide phased-retirement programs” under which
in-service distributions could be made before the plan’s NRA as long as the employee had reached age 59½.
They also provided a new definition for NRA – i.e., NRA could not be set so low “as to be a subterfuge to avoid
qualification requirements.” Although there were many adverse comments to this NRA provision, the IRS has
nonetheless finalized this portion of the 2004 proposed regulations (but not the provisions relating to phased
retirement).
The Final Regulations
The final regulations provide that to be qualified, a pension plan must provide benefits after retirement or
attainment of NRA, but that it will not fail to be qualified if it allows distributions to be made to an employee who is
still working after attaining age 62 (reflecting the PPA change). The regulations specify that retirement does not
include a mere reduction of work hours.
The final regulations define NRA as 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.”
BUCK COMMENT. In defining NRA, the IRS changed the “not a subterfuge” language in the proposed
regulations to language relating to the typical industry retirement age. However, in practice this industry
standard could be just as difficult to interpret. It is unclear how the industry standard will be determined

Volume 30 | Issue 37 | June 6, 2007
and what kind of proof employers will need to maintain to justify an age. It is interesting that this standard
was adopted considering that the IRS eliminated it from its 1978 guidance.
The regulations also provide specific guidelines for NRA as follows –
• An NRA of age 62 is deemed to meet the above definition.
• If an employer uses an NRA of age 55 to 62, the employer’s determination that it meets the industry
standard will be given deference, as long as it is borne out by the facts and circumstances.
• An NRA below age 55 is presumed not to be acceptable, but a case can be made to the IRS and a
determination made that it meets the industry standard.
• An NRA of age 50 for qualified public safety employees is deemed to meet the definition.
BUCK COMMENT. Thus, if a plan’s NRA does not qualify under the above guidelines, it will be a
disqualifying provision, which will need to be changed retroactively by the end of the plan’s remedial
amendment period (e.g., by January 31, 2008 for Cycle B filers).
Effective Dates
The regulations are generally effective May 22, 2007, with later dates applying for governmental and collectively
bargained plans.
Transition Rule for Purposes of Section 411(d)(6)
Compliance with the final regulations may require a plan to provide a later NRA than it currently provides, which
would eliminate a participant’s right to an in-service distribution before reaching the revised NRA in violation of the
Section 411(d)(6) anti-cutback rules. The regulations therefore amend current regulations under Section 411 to
provide that such a plan amendment will not be a violation of Section 411(d)(6), but only for a plan amendment
adopted after May 22, 2007 and on or before the last day of the applicable remedial amendment period.
However, there is no relief with respect to other Section 411 rules.
Conclusion
Most plan sponsors will find that they are in compliance with the new NRA standards. However, some plan
sponsors, particularly those of certain cash balance and hybrid plans, will have to work quickly to redefine their
NRA to avoid plan disqualification.
Buck’s consultants are available to discuss your options under these new rules.
This FYI is intended to provide general information. It does not offer legal advice or purport to treat all the issues surrounding
any one topic.
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