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Proposed Regulations Allow Pension Plan Distributions During Phased Retirement

November 18, 2004

A notice of proposed rulemaking published in the November 10 Federal Register  sets forth rules permitting distributions to be made from a pension plan under a phased retirement program.

The proposed regulations permit a pro-rata share of an employee's accrued benefit to be paid under a bona fide phased retirement program. Under such a program, an employee maintains a dual status: partially retired and partially in service. The pro-rata share paid is based on the extent to which the employee has reduced his or her hours under the program. However, payment of phased retirement benefits is permitted only if the program meets certain requirements, including that employee participation is voluntary and that the employer expects the employee to reduce by at least 20 percent the number of hours worked during the phased retirement period.

Generally, all early retirement benefits that would be available upon full retirement must be made available with respect to the phased retirement accrued benefit. However, payment may not be made in the form of a single-sum distribution or other eligible rollover distribution, in order to prevent the premature distribution of retirement benefits. Phased retirement benefits may not be paid before an employee reaches age 59- 1/2. A pension plan is permitted to pay benefits upon an employee's attainment of normal retirement age; however, that age cannot be earlier than the earliest age that is reasonably representative of a typical retirement age for the covered workforce.

The IRS is seeking comments on the proposed rules. Written or electronic comments and requests for a public hearing must be received by February 8, 2005.