3737 / What special qualification requirements regarding retirement age apply to pension plans but not to profit sharing plans?

Pension and annuity plans are retirement plans; thus, they must be established primarily to provide definitely determinable benefits at normal retirement age.

The normal retirement age in a pension or annuity plan is the lowest age specified in the plan at which the employee has the right to retire without the consent of the employer and receive retirement benefits based on service to date at the full rate set forth in the plan (i.e., without actuarial or similar reduction because of retirement before some later specified age). Normal retirement age must be an age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed.¹ The following table describes the standard by which the IRS will determine whether a normal retirement age is reasonable:²

Normal Retirement Age	Standard Applied
62 or above	Deemed reasonable
Between ages 55 and 62	Depends on facts and circumstances or workforce
Under age 55	Deemed unreasonable unless Commissioner determines otherwise
Age 50 and later	Reasonable, if substantially all of participants are public safety workers3

The IRS has announced its intention to modify this rule to eliminate the requirement that substantially all of the public safety workers be covered by a separate plan.³

The IRS has issued proposed regulations that modify the normal retirement regulations to clarify that governmental plans that do not permit in-service distributions before age 62 are not required to meet a standard that otherwise requires that the normal retirement age be reasonably representative of the retirement age that is typical in the industry in question.⁴ Further, if a plan covers both public safety and nonpublic safety employees, it is acceptable for the plan to have different normal retirement ages for each group. The regulations, as proposed, became effective January 1, 2017, and apply only for covered employees hired after the effective date.

If normal retirement age is less than age 62 and benefits begin before that age, the defined benefit dollar limit must be actuarially reduced for purposes of the Section 415 limits on benefits ( Q 3728, Q 3868).⁵

The IRC also requires that the accrued benefit of an employee who retires after age 70½ be actuarially increased to take into account any period after age 70½ in which the employee was not receiving any benefits under the plan.⁶ Guidance for implementing this requirement is set forth in regulations finalized in 2004 ( Q 3896).⁷

An actuarial assumption that employees will retire at a normal retirement age specified in the plan that is a lower age than they normally retire could result in computation of amounts that are not currently deductible if the assumption causes the actuarial assumptions in the aggregate to be unreasonable.⁸ The IRS has challenged the use of normal retirement ages under age 65 in small defined benefit plans (i.e., plans covering from one to five employees) ( Q 3735). A pension plan may permit early retirement, and any reasonable optional early retirement age generally will be acceptable.