The Internal Revenue Service ("IRS") recently released additional guidance concerning the new age 70-1/2 minimum required distribution rules. The Small Business Job Protection Act of 1996 (the "SBJPA") eliminated the requirement that employees (except for 5% or more owners) begin receiving plan distributions at age 70-1/2. Implementation of the new law has given rise to a number of questions, including the following:

• whether the benefits of plan participants whose distributions do not have to begin until termination of employment under the new law must be actuarially increased
• whether the Internal Revenue Code’s (the "Code") nondiscrimination requirements would be violated by eliminating the age 70-1/2 distribution option for employees who are not 5% or more owners
• whether a plan can continue to require that distributions to active employees begin upon reaching age 70-1/2
• whether age 70-1/2 distributions to employees who are not 5% or more owners are subject to the rollover and 20% mandatory withholding requirements
• whether employees who are currently receiving pre-SBJPA age 70-1/2 minimum required distributions can be offered the opportunity to stop distributions until termination of employment

The IRS has recently issued guidance (Notice 97-75) which provides answers to these questions. A summary of this new guidance is provided below.

Prior to the SBJPA, tax qualified plans generally were obligated to begin making distributions to plan participants no later than April 1 of the calendar year following the year in which a participant turned age 70-1/2, even if the participant was still employed. With the enactment of the SBJPA, tax qualified plans are no longer required under the minimum distribution rules to begin making distributions to participants (other than 5% or more owners) until April 1 of the calendar year following the later of the calendar year in which the participant:

• turns age 70-1/2; or
• retires or otherwise terminates employment.

Participants who are 5% or more owners are still subject to the pre-SBJPA rules described above.

In earlier guidance, the IRS provided guidance on the role of the Code’s "anti-cutback" rules in implementing the SBJPA changes. Notice 97-75 provides important guidance on a number of other issues arising under the new rules.

The SBJPA generally requires that any plan which delays the commencement of benefits to employees under the new law must actuarially increase the benefits of those employees. The effect of this requirement is that distribution to employees must still begin at age 70-1/2 (despite the SBJPA) unless the plan benefits are actuarially increased to compensate these employees for the delayed commencement in their benefits. Notice 97-75, however, clarifies that this requirement only applies to defined benefit plans and, therefore, is not applicable to defined contribution (individual account) plans.

Notice 97-75 also explains how this actuarial increase is to be calculated. In general, the adjustment is to be made for the period beginning on the required starting date under pre-SBJPA law – that is, April 1st following the year in which the employee reached age 70-1/2 – and ending on the employee’s date of termination. At the same time, the Notice provides that the amount of the actuarial increased benefit must be no less than the following –

• the actuarial equivalent (using the plan’s assumptions) of the benefit that the employee would have received under prior law at age 70-1/2 and any additional benefits the employee accrues by working past age 70-1/2, and
• reduced by the actuarial equivalent of any distributions made to the employee after age 70-1/2.

Notice 97-75 clarifies that the elimination of the age 70-1/2 minimum distribution requirements for all employees (other than 5% or more owners) will not be treated as a violation of the rules prohibiting tax qualified plans from discriminating in favor of high paid employees. At the same time, the Notice offers automatic relief for this potential problem by providing that employers generally will not run afoul of the nondiscrimination requirements simply by amending their plans to comply with the new law.

Although the IRS permits the complete elimination of the required age 70-1/2 in-service distributions after 1998, some employers may want to either (1) continue requiring that distributions begin at age 70-1/2, or (2) make age 70-1/2 in-service distributions optional. The Notice makes clear that employers are not required to eliminate the age 70-1/2 distribution option and, therefore, may continue age 70-1/2 in-service distributions on either a mandatory or optional basis. However, as discussed below, such age 70-1/2 distributions will be treated differently for purposes of the rollover and the mandatory 20% withholding requirements. Moreover, the distribution amount will ultimately have to meet the minimum distribution requirements at the time of the employee’s subsequent retirement (which is not likely to be a problem).

In general, all minimum required distributions are ineligible for rollover and are not subject to the mandatory 20% withholding requirements. Notice 97-75 clarifies that any age 70-1/2 distribution made to an active employee (other than a 5% or more owner) after 1996 is not a minimum required distribution under the new law. Consequently, any such distribution is eligible for rollover treatment (if it otherwise satisfies the rollover rules), and is subject to the 20% mandatory withholding rule.

The Notice also provides relief for plans which made optional age 70-1/2 distributions during 1997 without offering the direct rollover option (if applicable) or applying the mandatory withholding requirements. Under this relief, any age 70-1/2 distributions made during 1997 to employees (other than 5% or more owners) will be deemed to comply with the rollover and withholding requirements.

Notice 97-75 permits plans to offer employees (other than 5% or more owners) the option of suspending ongoing age 70-1/2 distributions until termination of employment. However, plans offering such an option must comply with any applicable spousal consent requirements. For those plans requiring spousal consent for distributions, the Notice provides the following two alternatives:

1. Suspend Benefit Payments – A plan may offer employees the option of suspending benefit payments until retirement. Spousal consent will ordinarily not be needed to stop or resume benefit payments under this alternative as benefit payments are merely suspended until retirement.
1. Stop Payments and Make a New Benefit Election – A plan may give employees the option to stop benefit payments altogether, and make new benefit elections when they later retire. Spousal consent will ordinarily not be required to stop benefit payments unless the participant is receiving a joint and surviving spouse annuity, but any applicable spousal consent requirements must be followed when payments begin at retirement as the benefit election and payment process is effectively begun anew.

The Notice provides that whichever option is used, it must be spelled out in the plan document and applied uniformly to all affected employees.

Notice 97-75 reiterates that employers may begin to operate their plans in accordance with this guidance without first amending their plans so long as the operational changes are ultimately reflected in amendments and are adopted by the regulatory deadline for adopting the SBJPA amendments (generally, that deadline is currently the last day of the plan year beginning on or after January 1, 1999).