November 10, 2004
BB 04—114

Treasury Issues Phased Retirement Plan Distribution Regulations

Late on November 9 the Treasury Department (Treasury) and the Internal Revenue Service (IRS) released proposed regulations under section 401(a) of the Internal Revenue Code that allow distributions to be made from a pension plan (i.e., a defined benefit or money purchase pension plan) under a phased retirement program, subject to meeting the requirements set forth in the proposed regulations. Very generally, the proposed regulations permit an employee to receive a "pro rata share" of the employee's accrued benefit under a "bona fide phased retirement program" after attaining age 59 1/2. In other words, an employee who reduces his or her work hours by 20 percent would be considered "20 percent retired" and thus entitled to 20 percent of his or her retirement benefits.

Phased retirement benefit distributions are permitted so long as the benefit payable is limited to the employee's pro rata share, certain early retirement benefits remain available (e.g., early retirement subsidies), the form in which payments may be made is limited, and the employee, prior to entering phased retirement, was a full-time employee. In addition, distributions may only be made to an employee who is partially retired under a bona fide phased retirement program.

The proposed regulations define a phased retirement program as "a written, employer-adopted program pursuant to which employees may reduce the number of hours they customarily work beginning on or after a date specified under the program and commence phased retirement benefits during the phased retirement period, as provided under the plan." A phased retirement program is bona fide if it meets certain additional requirements, such as limiting eligibility to participate to employees who have attained age 59 1/2 and prohibiting key employees from participating. Participation in a bona fide phased retirement program must also be voluntary, and any employee who chooses to participate must reasonably expect to reduce his or her working hours by 20 percent or more.

The proposed regulations are not effective until Treasury adopts them as final regulations, and cannot be relied on before such time. Comments on the proposed regulations are requested and are due in February 2005.

For more information on this issue, please contact Jan Jacobson, Council director, retirement policy, at (202) 289-6700.

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The American Benefits Council is the national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. The Council's members represent the entire spectrum of the private employee benefits community and either sponsor directly or administer retirement and health plans covering more than 100 million Americans.