The Internal Revenue Service’s regulatory backlog got a little thinner in late January with the agency’s release of proposed rules concerning governmental plans and closed defined benefit plans.
Government plans would get guidance on establishing a “normal retirement age” under the set of proposed rules issued Jan. 26, while closed defined benefit plans would get relief from the tax code’s nondiscrimination rules under proposed rules issued Jan. 28.
The IRS included both of these retirement-plan related topics in its 2015 third quarter update to the 2014-2015 Priority Guidance Plan.
The sticking point for some normal retirement ages in governmental plans is whether they are reasonably representative of the typical retirement age for the industry in which the covered workforce is employed, a requirement under IRS regulations issued in 2007.
The proposed rules would grant the sponsors of these plans—federal, state and local government employers—several potential safe harbors allowing them to meet that regulatory requirement.
For example, the IRS said that government plans could qualify for a general safe harbor that a retirement age of 62 is reasonably representative of the typical retirement age for that industry.
Depending on the facts and circumstances, a retirement age that is not earlier than age 55 but is below age 62 also might be considered reasonably representative, the proposed rules said.
Additional safe harbors would be available based on certain age and service parameters--age 60 and five years of service; age 55 and 10 years of service; combined age and years of service of 80 or more; and 25 years of service in combination with any of the other safe harbors that includes an age, expect for those designed for public safety employees.
Plans also would be granted safe harbors in establishing the normal retirement age for police, firefighters and emergency medical services personnel, the proposed rules said.
Furthermore, it said, a governmental plan could use one or more of these safe harbors to show that the normal retirement age was reasonably representative for those employees even if a different normal retirement age is used under the plan for one or more other categories of participants.
Comments on the governmental plan proposed rules are due April 26.
Defined Benefit Plans
The defined benefit plan IRS proposed rules would make it easier for plans closed to new participants to meet the nondiscrimination requirements.
Tax qualified plans cannot discriminate in favor of highly compensated employees. In a closed plan, the proportion of highly compensated employees may be greater over time, making it difficult for plans to pass the nondiscrimination tests.
Under current tax rules, when a closed plan can no longer meet the nondiscrimination requirements on a stand-alone basis because of these demographic changes, it can demonstrate compliance by aggregating contributions to the employer’s defined contribution plan.
The proposed rules would allow more defined contribution plan allocations to fit within the plan aggregation rules. Allocations could be reasonably designed to replace some or all of the benefits that would have been provided under the closed plan, subject to a requirement that the allocations be provided in a consistent manner to all similarly situated employees.
This rule, however, would apply only for the first five years after the plan closure date. In addition, to qualify for this relief, the closed plan would have to be in effect for five years before the closure date, with no substantial change to the closed plan during that time except for certain permitted amendments.
Comments on the proposed rules are due April 28 and a hearing is scheduled at IRS headquarters May 19.
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