by Laura A. Weizeorick (Spring 2017)
After a decade of forums and finetuning, the IRS and the Treasury have finally issued favorable regulations governing “normal retirement age” (“NRA”) for qualified governmental retirement plans, 81 FR 4599 (Jan. 27, 2016).
The IRS requires that at NRA a plan’s benefits must be fully vested and definitely determinable, i.e., subject to calculation and not an employer’s discretion. According to the regulations issued in 2007, the NRA should be reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. Although the 2007 regulations provided that 62 years of age was the NRA for private sector pension plans, specific regulations for the public plan community were promised at a later date. Five years later, Treasury Notice 2012-29 provided that public safety plans would have a safe harbor with a NRA of 50 years old or later. However, no safe harbor was provided for years of service or years of service in combination with age.
In response to the shortcomings of Notice 2012-29, the public plan community submitted formal comments, attended forums and conferences, and maintained steady pressure upon the IRS and the Treasury Department for the inclusion of years of service in the definition of NRA. Their persistent efforts have been rewarded. The new regulations reflect many of the considerations advocated by public pension plans over the past ten years, including provisions that allow NRA to be based on years of service and years of service in combination with age. The proposed regulations include three safe harbors for qualified public safety employees:
A NRA of 50 years old or later;
A combined age and years of service of 70 or more; and
Any age with at least 20 years of service.
The term “qualified public safety employee” includes any employee of the State or political subdivision of the State who provides police protection, firefighting services, or emergency medical services.
If a pension plan’s NRA is outside of the above safe harbors, then the plan will be required to show that the NRA it uses is a good faith determination of the typical retirement age for the industry in which the covered workforce is employed. The plan’s determination will generally be given deference as long as it is reasonable under the facts and circumstances available. However, it is unclear what procedures would be required to make such a determination.
Two other provisions in the proposed regulations are also worth noting. First, the new regulations do not require plan documents to provide a specific definition of normal retirement age as previously proposed. Instead, the new regulations state that the NRA is the lowest age specified in the plan at which the employee has the right to retire without the consent of the employer and receive retirement benefits based on the employee’s years of service. This is consistent with existing rules for governmental plans.
Second, the proposed rulemaking states unequivocally that the use of one NRA for one classification of employees, i.e., employees hired before a certain date, and another NRA for employees hired on or after that date is consistent with the regulations. Accordingly, pension plans with Tier I and Tier II designations that contain such classifications are compliant.
Finally, the regulations are effective for employees hired during plan years beginning on or after January 1, 2017. If later regulations are more restrictive, then they will apply without retroactive effect. Governmental employees hired during plan years before January 1, 2017 are grandfathered under the previous rules, commonly referred to as the pre-ERISA vesting rules.