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Regulatory Affairs

Phased Retirement Becomes a Reality

Phased Retirement rules have arrived! The Internal Revenue Service (IRS) has issued final rules on flexible retirement arrangements that permit employees approaching normal retirement age to reduce the number of hours worked or work in a different capacity. SHRM submitted advice to the IRS in February 2005 and April 2007 on how Phased Retirement should be implemented.

The final rules clarify that a pension plan is permitted to pay retirement benefits to a participant who has reached normal retirement age, even if the participant has not severed employment with the employer. The rules also provide guidance on how low a plan may set its normal retirement age based on the typical retirement age for the industry in which the covered workforce is employed.

The IRS adopted SHRM's recommendation to delete the 59 and one-half age requirement for phased retirement participants. The final rule states that a plan satisfies the "safe harbor" if the normal retirement age is age 62. The rule also provides guidance where a plan's normal retirement age is between the ages 55 and 62, and age 50 for qualified public safety employees. Finally, a narrow exception to the anti-cutback rules of the tax code is provided to allow plan sponsors to amend their plans during a transitional period.

The regulations became effective May 22, 2007. The IRS plans to issue a proposed rule on in-service distributions pursuant to a phased retirement program.

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