IRS Adds FAQs on In-Service Distributions, Rehiring Retirees

The IRS has shed light on whether rehiring a retiree causes that retirement to not be considered a bona fide retirement and on in-service distributions to people who are still working. 

The IRS provided this information by adding frequently asked questions (FAQs) to those it provides concerning Coronavirus-related relief for retirement plans and IRAs. They arise concerning the application of Section 2202 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provides for special distribution options and rollover rules for retirement plans and IRAs and expands permissible loans from certain retirement plans. In-service distributions figure in both scenarios address in the new FAQs.

Consequences of Rehiring a Retired Employee

In one FAQ, a qualified pension plan that does not provide for in-service distributions starts making distributions to an individual who applies for retirement benefits and experiences a bona fide retirement. But what happens if the plan sponsor rehires the individual due to unforeseen hiring needs related to the COVID-19 pandemic? Will that result in that individual's prior retirement no longer being considered a bona fide retirement? 

The IRS says that generally, it will not have that result. 

Treasury regulations generally require a qualified pension plan to be maintained primarily to provide systematically 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 notes. Accordingly, it says, a plan that does not permit in-service distributions may commence benefit distributions to an individual only when he or she has a bona fide retirement. 

Although the determination of whether an individual's retirement under a plan is bona fide is based on a facts and circumstances analysis if there are no plan terms specifying the conditions under which a retirement will be considered bona fide, a rehire due to unforeseen circumstances that do not reflect any prearrangement to rehire the individual will not cause that person’s prior retirement to no longer be considered a bona fide retirement under the plan. The IRS provides an example: 

If a public school district sponsoring a qualified pension plan experiences a critical labor shortage due to the COVID-19 pandemic that was unforeseen at the time of an individual’s prior bona fide retirement, the public school district rehires the individual to help ease the labor shortage, and the plan terms do not define a bona fide retirement in a way that prevents the rehire, the individual’s reemployment would not cause the prior retirement to fail to be a bona fide retirement. Consequently, if plan terms permit, benefit distributions could continue after the rehire.

In addition, says the IRS, if the plan sponsor wishes to rehire a retired employee to fill an unforeseen hiring need related to the pandemic, the sponsor should analyze the impact of the rehire under the plan by taking into account any plan terms, including any need for plan amendments, relating to rehires. 

In-Service Distributions to Current Employees

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 the they have attained either age 59½ or the plan's normal retirement age. However, says the IRS, distributions that begin before an individual reaches age 59½ may be subject to a 10% additional tax under Code Section 72(t), unless the exceptions to that tax apply.