There seems to be some confusion regarding changes in the law concerning participants who have turned age 70-1/2 in 1996 or earlier years. Since April 1 is rapidly approaching, this will clarify the requirements for both defined benefit and defined contribution plans.

There are four different categories of participants to be concerned about as follows:

Active participants (other than 5% owners) who turned age 70-1/2 on or after January 1, 1989 and before January 1, 1996. Under prior law they were required to commence payments by April 1 of the year following attainment of age 70-1/2 even if still working and therefore would be currently receiving payments. Under current law payments can continue as is. It is unclear whether these participants can be permitted to cease payments.

Participants (other than 5% owners) who turned age 70-1/2 on or after January 1, 1996. Under current law these participants are not required to begin payments, but may be required to be permitted to elect to begin payments, by April 1 of the year following attainment of age 70-1/2.

Participants who are 5% owners and under prior and current law are required to commence payments by April 1 of the year following attainment of age 70-1/2 even if still working.

Participants (other than 5% owners) who turned age 70-1/2 prior to January 1, 1988. Under prior and current law these participants need not commence payments prior to April 1 of the year following the year of retirement.

The new law does not change the requirements for categories 3 and 4 above, but you need to be aware that these categories continue to exist. In regard to categories 1 and 2, however, our interpretation of the law and regulations in their present state is based on an IRS Announcement issued on February 28, 1997, but there is expected to be more guidance forthcoming which may affect this interpretation.

First some background. The issue arises due to a provision of the Small Business and Job Protection Act which, effective as of January 1, 1997, eliminates the requirement that participants (other than 5% owners) who continue to work after age 70-1/2 be required to begin to receive a minimum distribution by the following April 1. Instead, payments can be delayed until after retirement, which was the original ERISA requirement. In other words, the law has made full circle back to its original requirement. A literal reading of the new law has led employers to believe that they no longer need to track those employees who continue to work after age 70-1/2 (other than 5% owners) because their pensions can be delayed until retirement.

It may not be that simple because the right to begin payments at age 70-1/2 is a protected feature of a plan. The IRS, however, has the discretion to allow plans to eliminate this otherwise protected feature, but it has not made any definitive announcement of its position. The problem is that employers must make a decision soon with respect to category 2 participants; i.e., those employees who turned age 70-1/2 last year, because the deadline for beginning required payments is April 1.

While taking its time, the IRS has indicated that so far it views age 70-1/2 distributions as a protected right. Therefore, even though commencing the payments is not mandatory, you may have to offer participants the right to begin the payments if they would like to do so.

The question is what to do with April 1 just around the corner, while awaiting an announcement from the IRS?

Determine whether there are any Category 1 participants (i.e., those, other than 5% owners, who previously turned age 70-1/2 and are receiving minimum distributions under any plan). If there are any, distributions should continue until the IRS issues further guidance regarding providing an option to participants to stop payments. Many employers are not even interested in offering an option and intend to continue the prior payments.

With respect to category 2 participants in defined benefit pension plans, the most prudent course of action is to offer an option to the participant to begin receiving a minimum distribution by April 1, 1997; otherwise there is a risk that the IRS will say an option was required, one won’t have been offered and the Plan is then in violation of the law, which gives rise to numerous adverse consequences. Since there is still a chance that the IRS will issue regulations or other guidance allowing employers to eliminate the provision and not offer an option, it makes sense to put a restriction on the effectiveness of any option election so that payment would not be made by April 1 if the IRS says it is okay not to pay it. Therefore, until additional guidance is issued, a conservative alternative for the defined benefit plans would be to provide the participant with the option to begin payments as of April 1, 1997, but indicate that the option to receive the payments will be void and of no effect if the IRS issues guidance prior to April 1, 1997 which confirm that an option election is not required. This way it is clear that you intend to eliminate the 70-1/2 distribution provisions, but are not at risk of not being permitted to do so. If the participant elects to receive the distribution, but favorable regulations are issued before the check is distributed to the participant at the end of March, the check can be voided.

We have drafted and can provide a sample election form to be used for this purpose. The form is designed for a defined benefit plan which distributes only the minimum required amount and does not give option elections.

If a participant who turned 70-1/2 last year has a defined contribution account also, you need to determine whether the amount that could be voluntarily withdrawn under any in-service withdrawal provisions would be equal to or greater than the distribution required or permitted by the plan at age 70-1/2. If the amount available for withdrawal is sufficient, then it would be permissible to eliminate the age 70-1/2 distribution provisions for active participants in the defined contribution plan because the withdrawal option is already provided by the plan.

One concern has been whether a plan must to be amended in order to offer the age 70-1/2 distribution option since most plans presently provide that distribution is automatic after age 70-1/2. The recent IRS Announcement indicated that a plan amendment is not required earlier than January 1, 1998.

Until the IRS clarifies the rules, you should keep track of participants who are at least age 70-1/2.