IRS Regulation Regarding Normal Retirement Age

The Internal Revenue Service (IRS) issued final regulations related to in-service distributions after normal retirement age for governmental plans. The new regulations permit a governmental pension plan to pay benefits upon an employee’s attainment of “normal retirement age,” and sets specific requirements for the defining of the term in a governmental plan. The requirements of the regulations do not allow service-based retirement eligibility, such as 30 years of service at any age. Virtually all public pension plans in the country use some type of service based formula for retirement eligibility. Nevada PERS is one such plan.

The extension of the regulation to governmental plans has been opposed by a broad coalition of national organizations including the National Association of State Retirement Administrators (NASRA), National Council on Teacher Retirement (NCTR), National Conference on Public Employee Retirement Systems (NCPERS), National Council of State Legislatures (NCSL), the National Association of Counties (NACo), the United States Conference of Mayors (USCM), the National League of Cities (NLC), the International City/County Management Association (ICMA), the Government Finance Officers Association (GFOA), the Fraternal Order of Police (FOP), American Federation of State, County and Municipal Employees (AFSCME), American Federation of Teachers (AFT), International Association of Fire Fighters (IAFF), and the National Education Association (NEA).


Nevada PERS has sought the advice of our national tax counsel on this issue:

At this time, they advise that public pension systems not make a change to retirement eligibility yet. Counsel anticipates that the IRS may push back their effective date for governmental plans before year end (2008) so they can study it further, and counsel continues to believe it is premature to act until the IRS has responded on the issue.
Here is what the IRS website currently says (the applicable interim amendment deadline, barring the IRS change, would be the last day of the plan year beginning in 2009):

"8. Does a governmental plan submitting for a determination letter under Cycle C need to contain provisions to comply with the final regulations under section 401(a) of the Code, published in the Federal Register on May 22, 2007 (T.D. 9325, 72 F.R. 28604) regarding permissible normal retirement ages?

No. Even though this item is listed on the 2007 Cumulative List, it is not applicable for governmental plans until plan years beginning on or after January 1, 2009. Thus, pursuant to section 4.03(3) of Rev. Proc. 2007-44 (regarding the review of requirements that are prospectively effective for a plan) the Service will not review a submission for a governmental plan for the current Cycle C period ending on 1/31/09 regarding language to comply with these regulations. However, governmental plans must comply with these regulations by the effective date and must be timely amended for these changes by the applicable interim amendment deadline."