West Virginia Consolidated Public Retirement Board

NEWS

IRS Normal Retirement Age Regulations Fact Sheet

Current as of May 2016

PROPOSED REGULATIONS FINALLY ISSUED

On January 27, 2016, the IRS issued long-awaited proposed regulations providing additional guidance on what constitutes a normal retirement age for a governmental pension plan. These proposed regulations specify that final regulations, once issued, will become effective for employees hired during plan years beginning on or after the later of: January 1, 2017, or the close of the first regular legislative session beginning on or after three months after the date final regulations are published. This means that the earliest they could become effective in West Virginia would be for plan years beginning on or after the end of the 2017 West Virginia regular legislative session, but only if final regulations are published by early November 2016. (See Effect on Current Employees, below.)

The IRS initially issued regulations on this topic in 2007 for private sector plans, with a delayed effective date for governmental plans, which raised many concerns for governmental plans and their participants. (See Background Leading Up to the Proposed Regulations, below.) These 2016 proposed regulations attempt to address and resolve many of those concerns.

The proposed regulations recognize that many governmental plans do not explicitly define the term normal retirement age, and in those instances provide that the normal retirement age shall be the earliest age under the plan at which a participant has the right to retire without employer consent and receive retirement benefits based on the amount of the participant's service on the date of retirement at the full rate set forth in the plan (meaning, without actuarial or similar reduction because of retirement before some later specified age). The proposed regulations also recognize that, under the pre-ERISA vesting rules applicable to governmental plans, normal retirement age in a governmental plan is permitted to include a factor relating to the participant's period of service, as long as the period of service used is reasonable and uniformly applicable. Normal retirement age under all pension plans – both private sector and governmental plans – 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 original 2007 normal retirement age regulations state that a normal retirement age of 62 or greater (50 or greater for qualified public safety employees, described below) will always be deemed to satisfy this "reasonably representative" requirement (this is called a safe harbor rule); this safe harbor is available to all plans, both private sector and governmental plans. In recognition of the rules described above that apply to governmental plans, and in response to comments from governmental plan sponsors, the proposed regulations create several additional safe harbors just for governmental plans, which are deemed to satisfy the normal retirement age and "reasonably representative" requirements. These include the following:

Age 60 and 5 Years of Service. The later of age 60 or the age at which the participant has been credited with at least 5 years of service under the plan.
Age 55 and 10 Years of Service. The later of age 55 or the age at which the participant has been credited with at least 10 years of service under the plan.
Sum of 80. The participant's age at which the sum of the participant's age plus the number of years of service that have been credited to the participant under the plan equals 80 or more.
Earlier of any of above three, or 25 Years of Service. The earlier of the participant's age at which the participant has been credited with at least 25 years of service under the plan and an age that satisfies any of the three safe harbors described immediately above. For example, the earlier of (i) the participant's age at which the participant has been credited with 25 years of service under the plan and (ii) the later of age 60 or the age at which the participant has been credited with 5 years of service under the plan, would satisfy this safe harbor.

In addition to these governmental plan safe harbors which are available for all employees, the proposed regulations provide three additional governmental plan safe harbors only for qualified public safety employees, or QPSEs, which is defined to mean any employee of a 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. These safe harbors may be applied to QPSEs (but only to QPSEs) even if they participate in a plan which also covers non-QPSEs. The QPSE safe harbors are:

Age 50. Attainment of age 50 or later.
Sum of 70. The participant's age at which the sum of the participant's age plus the number of years of service that have been credited to the participant under the plan equals 70 or more.
20 Years of Service. The age at which the participant has been credited with at least 20 years of service under the plan. (Since this safe harbor requires "at least" 20 years of service, a normal retirement age of 25 years of service falls within this safe harbor also.)

It is important to note that, if a governmental plan does not provide for distributions before retirement, it does not need to satisfy any of the normal retirement age regulatory requirements, whether under the general definition or by satisfying one of the available safe harbors.
Now that the IRS has finally issued proposed regulations on which governmental plans may rely, the CPRB is evaluating all of the plans it administers, with assistance from legal counsel, to see whether the plans must satisfy the normal requirement age regulations at all, and if so whether their normal retirement ages fall within one of the safe harbors.

EFFECT ON CURRENT EMPLOYEES

These regulations will apply only to employees hired in plan years beginning on or after the effective date of final regulations. The earliest these regulations could become effective for the CPRB-administered plans is for employees hired in plan years beginning on or after the end of the 2017 West Virginia legislative session, if final regulations are published by early November 2016. If the IRS publishes final regulations later than this, the effective date will be even later.
Therefore, unless the West Virginia legislature determines that some sort of amendment to one or more provisions of the CPRB-administered plans is required or advisable, employees with a date of hire before the start of the first plan year that begins on or after the effective date of final regulations will not be impacted by these regulations at all.

BACKGROUND LEADING UP TO THE PROPOSED REGULATIONS

In 2007, the IRS issued final regulations which set rules for the earliest age at which a participant in a qualified retirement plan could retire (known as the "normal retirement age"). Prior to these final regulations, there was no specific definition of normal retirement age in the Internal Revenue Code that qualified plans had to use. In general, under the final regulations, a plan's normal retirement age cannot be earlier than "the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed." Treas. Reg. § 1.401(a)-1(b)(2)(i). A normal retirement age of 62 or greater is always acceptable under the regulations; in addition, for plans in which substantially all of the participants are qualified public safety employees, a normal retirement age of 50 or greater is always acceptable under the regulations. Qualified public safety employees are employees of a State or political subdivision who provide police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision. Later in 2007, the IRS issued additional guidance stating that under the final regulations, retirement plans generally could not use normal retirement ages based on the completion of a stated number of years of service.

Many governmental pension plans, including CPRB-administered plans, allow retirement before age 62 (and before 50 for plans in which substantially all of the participants are qualified public safety employees), and/or allow retirement eligibility to be reached by completing a stated number of years of service. It was possible that the regulations, if they applied to governmental plans, would have required changes to the retirement eligibility provisions of some or all of the nine plans administered by the CPRB. While the 2007 regulations do not absolutely prohibit retirement before age 62 (or age 50, for plans in which substantially all of the participants are qualified public safety employees), it was impossible to tell what sort of retirement age before 62 (or 50) under the 2007 regulations might have been acceptable in the CPRB-administered plans, since this was to be determined based on the relevant facts and circumstances in each case. Each plan administered by the CPRB has different retirement eligibility requirements, and some plans may qualify for the special rules for qualified public safety employees, so the impact of these regulations could have been different for each plan.

Although the 2007 regulations became effective for retirement plans in the private sector some time ago, the IRS granted successive delays of their effective date for governmental plans; they never became effective for governmental plans.

On April 18, 2012, the IRS and the Treasury Department issued Notice 2012-29 stating that they anticipated modifying the way the 2007 regulations would apply to governmental plans. Specifically, the agencies were considering issuing regulations clarifying that for governmental plans, the 2007 definitions of normal retirement age (described in the first paragraph, above) would only apply to plans that allow participants to receive distributions from the plan while still working (such distributions are known as "in-service distributions").
The Notice also indicated that the agencies were considering a modification to the rules that would allow an earlier normal retirement age for qualified public safety employees even if they participated in the same plan as non-public safety employees. Previously, the rules allowed this only for plans made up substantially of qualified public safety employees.

Finally, the Notice again delayed the effective date of the 2007 Normal Retirement Age regulations for governmental plans, so that they would not begin applying to governmental plans until the later of: (1) plan years beginning on or after January 1, 2015, or (2) the close of the first regular legislative session beginning on or after three months after the final regulations are published in the Federal Register (which still has not happened, as the regulations just issued are proposed regulations, not final). So, as noted above, the normal retirement age regulations have never yet been applicable to governmental plans, and will not be applicable until a specified period of time after final regulations have been published.