On October 22, 2021, the IRS provided COVID-19-related guidance regarding qualified pension plan distributions. The guidance, in the form of two new frequently asked questions (FAQs), addresses the rehiring of retirees and in-service distributions.
The first FAQ focuses upon the situation in which an individual retires and then commences benefit distributions from a qualified pension plan. The plan does not provide for in-service distributions to active employees, and due to unforeseen COVID-19 related hiring needs, the employer (and plan sponsor) rehires the individual.
The specific question posed is whether the individual’s prior retirement will no longer be considered a “bona fide retirement” because of the rehiring. For plans that do not permit in-service distributions, IRS rules for plan qualification to include a bona fide retirement requirement for the individual to receive retirement benefits. Neither the Code nor the IRS defines bona fide retirement, so the determination would typically be based on the facts and the circumstances surrounding the employment termination (and whether it was potentially designed to circumvent the distribution rules).
The IRS answer indicates that a rehire due to unforeseen circumstances that do not reflect any prearrangement will not cause the individual's prior retirement to no longer be considered a bona fide retirement under the plan. Therefore, if the plan terms permit, benefit distributions could continue after the rehire. However, the guidance advises employers to review any plan terms that may prohibit the rehire of a retiree within a specified timeframe, suspend distributions upon rehire, or otherwise impact the pension benefit of a rehire.
The second FAQ asks whether a qualified pension plan can allow a working individual to commence in-service distributions. The IRS response explains that the plan terms may generally allow an individual to commence in-service distributions upon attainment of either age 59½ or the plan's normal retirement age. However, distributions commencing before age 59½ may be subject to a 10% additional premature withdrawal tax, unless an exception to the tax applies.
Retirement plan sponsors, particularly those facing unanticipated pandemic-related labor shortages, may find this guidance helpful.
Coronavirus-Related Relief for Retirement Plans and IRAs Questions and Answers »
PPI Benefit Solutions does not provide legal or tax advice. Compliance, regulatory and related content is for general informational purposes and is not guaranteed to be accurate or complete. You should consult an attorney or tax professional regarding the application or potential implications of laws, regulations or policies to your specific circumstances.
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