The IRS added answers to some frequently asked questions (FAQs) on whether rehiring a retiree causes the employee to lose bona fide retirement status. It also issued some FAQs on in-service distributions to individuals who continue to work.
The IRS provided this information by adding FAQs concerning Coronavirus-related relief for retirement plans and IRAs. The FAQs cover the application of Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides special distribution options and rollover rules for retirement plans and IRAs.
Treasury regulations generally require a qualified pension plan to provide for the payment of definitely determinable benefits over a period of years, usually for life, after retirement, or attainment of normal retirement age. The IRS takes the position that a plan that does not permit in-service distributions may commence benefit distributions to an individual only when there is a bona fide retirement.
One FAQ addresses a qualified pension plan that does not provide in-service distributions, yet, begins to make distributions to an individual who applies for retirement benefits, after a bona fide retirement. Consider what would happen if the plan sponsor rehired an individual due to unforeseen hiring needs, such as a COVID-19-related event. Would the IRS no longer consider that individual’s prior retirement a bona fide retirement? The IRS states, generally, no.
One FAQ addresses a qualified pension plan that does not provide in-service distributions after a bona fide retirement., yet, begins to make distributions to an individual who applies for retirement benefits. Consider what would happen if the plan sponsor rehired an individual due to unforeseen hiring needs, such as a COVID-19-related event. Would the IRS no longer consider that individual’s prior retirement a bona fide retirement? The IRS states, generally, no. A rehire due to unforeseen circumstances, that is not the result of any prearrangement to rehire the individual, will not cause that person to lose their bona fide retirement status under the plan. Typically, the determination of whether an individual’s retirement, under a certain plan, is bona fide based on circumstantial analysis, if there are no plan terms specifying the conditions under which retirement will be considered bona fide.
The IRS provides the following example:
If a public school district sponsoring a qualified pension plan experiences a critical labor shortage due to the COVID-19 pandemic unforeseen at the time of an individual’s prior bona fide retirement, the public school district may rehire the individual to help ease the labor shortage. If the plan terms do not define a bona fide retirement in a way that prevents the rehire, the individual’s reemployment will not cause the prior retirement to fail to be a bona fide retirement. Consequently, if plan terms permit, benefit distributions could continue after the retiree is rehired.
The other FAQ concerns whether a qualified pension plan may permit individuals who are still working to begin receiving in-service distributions.
The IRS says that a qualified pension plan generally may allow individuals to begin receiving in-service distributions if they have attained either age 59½ or the plan’s normal retirement age. However, distributions that begin before an individual reaches age 59½ may be subject to a 10% additional tax under Code Section 72(t) unless an exception applies.
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