Background: IRS and Normal Retirement Age
The new rules on Normal Retirement Age, currently scheduled to apply to plan years beginning on or after January 1, 2009, would require that governmental pension plans specifically define or redefine normal retirement age so that it is not based wholly or partly on years of service. Because of this new imposition on public plans, and other issues with the regulations, one of NEA’s priorities is to delay the implementation of and seek major modifications to the new regulations.
In the spring of 2007, the IRS issued final regulations that would take effect beginning January 1, 2009, dealing with in-service distributions after normal retirement age. The regulations would allow payment of benefits to an employee upon attainment of normal retirement age, whether or not the employee has stopped working for the employer maintaining the plan. Subsequently, the IRS issued Notice 2007-69, which emphasized that the new regulations dealing with in-service distributions do not also provide a safe harbor for retirement plans that use a retirement age as a condition on the completion of a stated number of years of service. In so doing, the IRS raised the issue of normal retirement age in a broader context, and requested comments from sponsors of governmental plans.
For the purposes of in-service distributions, the new regulations indicate that normal retirement age under a plan must be “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 would 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.”
For a normal retirement age lower than age 55, there is a presumption that it does not meet the new standard “absent facts and circumstances that demonstrate otherwise.” However, 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 would be qualified under the new standard.
These regulations raise a number of troubling issues for governmental plans. Prior to promulgation of the final regulations, there was no authority that prohibited governmental pension plans from determining and setting an appropriate normal retirement rate. Moreover, the IRS has routinely approved service-based normal retirement ages through the determination letter process.
Good News on Regulatory Deadlines
On September 19, 2008, the House Ways and Means Committee brought together officials from state and local government, the IRS, and the Treasury Department, to have a roundtable discussion on establishing a federal tax compliance structure for state and local government employee pension plans. Representative Earl Pomeroy (D-ND), a long time supporter of public plans and member of the Ways and Means Committee, chaired the roundtable. Chairman Charles Rangel (D-NY) joined via conference call to commend Representative Pomeroy for bringing together such an impressive group of experts on the very important issue of public employee pensions for what he hoped would be a constructive dialogue. Staffs from numerous Ways and Means member offices were also in attendance.
The primary goal of the roundtable was to discuss the IRS’ initiative to gather information on, and significantly increase its audits of, governmental pension plans. Moreover, the discussion also included news on pending regulations concerning the IRS definition of “normal retirement age.”
During the meeting on September 19, the Treasury/IRS gave assurances that the normal retirement age regulations will be postponed for further review. The IRS also stated it made some sense to consider delaying the determination letter deadline for governmental plans or move them to a different cycle all together.
The National Education Association and its coalition allies continue to work with the Treasury/IRS and the House Ways and Means Committee as well as the Senate Committee on Finance on the normal retirement age issue.
