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Long-Awaited IRS Rules Simplify Age 70½ Distribution Requirements

Summer 1997

Last year, the Small Business Job Protection Act (SBJPA) repealed the rule that a retirement plan participant had to begin receiving minimum required distributions on the April 1 following the date he reached age 70½, even if he is still working. Under the new SBJPA rule, a participant may delay distributions until the April 1 following the date he reaches age 70½ or retires, whichever is later. However, until the IRS recently issued long-awaited guidance, employers could not let participants take advantage of the new liberalized distribution rule because of an apparent conflict with the so-called "anti-cutback" provisions of the Internal Revenue Code.

The anti-cutback rules prohibit an employer from amending its plan to remove a form of benefit payment unless the amendment affects future benefit accruals only. Unless the IRS agreed to soften the impact of the anti-cutback rules in light of the SBJPA's new minimum distribution requirements, plan administrators would be left to cope with the almost unbearable complexity of having to distribute pre-amendment benefit accruals in one way, and post-amendment benefit accruals in another.

Initially, the IRS announced that it would give an employer two ways to resolve the apparent conflict between the SBJPA's new minimum required distribution rules and the anti-cutback rules. First, the employer could let participants choose between beginning distributions at age 70½ or at actual retirement. Alternatively, the employer could amend its plan to eliminate the pre-retirement distribution option- but, only on benefits accrued after the date of the amendment. The second alternative would greatly complicate plan administration.

Recognizing this, the IRS recently issued proposed regulations that allow an employer to eliminate age 70½ pre-retirement distributions. Specifically, those employers may eliminate age 70½ pre-retirement distributions of a participant's entire accrued benefit (not just on benefits that accrue after the amendment is adopted), provided the amendment does not take effect until after 1998.

Why the delay? The IRS wanted to protect participants who were near age 70½ when SBJPA was passed, and who might have to begin receiving retirement distributions in the near future.

In previous, related guidance, the IRS ruled that plans did not have to make minimum distributions this year for employees who turned age 70½ in 1996, provided the employee so elected.

Please note: The change in the age 70½ distribution rules described above does not apply to employees who are five percent or more owners of the sponsor. A five percent or more owner remains subject to the rule that distributions must begin on April 1 of the calendar year following the year he reaches age 70½, even if he is still working.

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