Many pension plan sponsors were quite concerned with the recent IRS regulations on normal retirement age (“NRA”). The regulations focus on the rule that a pension plan (e.g., defined benefit or money purchase) cannot make in-service distributions before the earlier of normal retirement age or age 62. The new rules could potentially affect profit sharing or 401(k) plans into which a money purchase plan was merged and restricted balances transferred.

The final rules prohibit a pension plan from adopting an NRA before age 62 if the NRA is earlier than is typical for the sponsor’s industry. The regulations presume that an NRA earlier than 55 is too young unless the sponsor proves otherwise to the IRS, and NRAs between 55 and 62 are subject to a facts and circumstances test. The regulations are effective May 22, 2007, and there is a limited anti-cutback protection for eliminating certain in-service distributions following a mandatory NRA increase.

Practitioners expressed many reservations about the regulations. The rules don’t provide adequate time to demonstrate compliance for plans with NRAs earlier than 55, and provide great uncertainty, even for plans with NRAs between 55 and 62.

In response, the IRS has issued Notice 2007-69, which brings welcome relief to pension plans subject to the new rules. The relief applies to most plans with an NRA of at least 40. Those plans which require a corrective amendment can delay the effective date of the amendment until the first day of the plan year beginning after June 30, 2008. For an employer with a calendar plan and tax year, this would mean the amendment would be effective January 1, 2009, and could be adopted as late as the extended due date of the employer’s 2009 return.

If the NRA is at least 55, and the employer determines in good faith that the NRA is appropriate under the new regulations, the Notice effectively protects that decision if the employer timely files with the IRS for a determination letter by the next restatement deadline. (For prototype and volume submitter plans, that deadline will likely be in early 2010.) Pension plan sponsors with an NRA between 55 and 62 should breathe much easier with the Notice, although they should plan to file for a determination letter rather than rely on a prototype opinion letter.

If the NRA is less than 55 and the employer contends that the NRA is appropriate, the Notice provides a procedure to obtain an IRS ruling. However, the cost of that ruling will be $9,000. If the NRA is at least 40, the employer must file the ruling request by June 30, 2008. If the IRS rules against the employer, any required change will be prospective only.

Our September 25 Web seminar, Retirement, Termination, and Change will discuss the NRA regulations and Notice 2007-69 in depth. The seminar will also address new IRS guidance on partial terminations.