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Guidance On Age 70 1/2 Distributions

By Bruce H. Schwartz
  • February 1, 2000

Pension simplification legislation eliminated the requirement for most qualified plan active participants to begin receiving distribution of benefits by April 1 following the calendar year in which they attain age 70 1/2. The IRS recently provided guidance on how to implement this new rule. All plan sponsors need to assess this guidance and take immediate action where necessary.

Until 1999, plan sponsors must elect one of two options for active participants who attain age 70 1/2 in 1996, 1997 and 1998. Sponsors can continue to mandate that payments begin under the old rules, or alternatively allow participants to choose for themselves whether to begin payments or defer them until actual retirement.

Under the old rules, if you had employees who attained age 70 1/2 during 1996 and payments did not begin by April 1, 1997, IRS required employers to decide either to apply the old rules and require retroactive retirement to April 1, 1997 with interest on back payments, or allow affected employees to choose in writing before December 31, 1997 to either defer payments or retroactively retire.

Most defined contribution plans will likely adopt option 2 because the option to take an in-service distribution after age 65 is already in the plan. If that is the case, no notice or retroactive payment is required. Defined benefit plans normally don't permit employees to elect in-service distributions and one of the above options must be adopted.

The good news from the IRS is that after 1998, employers can elect either option above or eliminate (without participant consent) age 70 1/2 in-service distributions for all but certain 5% business owners who are not covered by the legislative change.

Editor's Note: This summary highlights the important issues that plan sponsors will need to address as they prepare for final document updates. 

©2000 Jackson Lewis P.C. This material is provided for informational purposes only. It is not intended to constitute legal advice nor does it create a client-lawyer relationship between Jackson Lewis and any recipient. Recipients should consult with counsel before taking any actions based on the information contained within this material. This material may be considered attorney advertising in some jurisdictions. Prior results do not guarantee a similar outcome.

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