Compliance News | November 3, 2021
The IRS has clarified that if a retirement under a qualified pension plan was bona fide, the employer may later rehire the retiree without causing the retirement to be considered not bona fide. The IRS has also reminded plans that in-service distributions made before age 59½ may be subject to a 10 percent early distribution excise tax.
The first FAQ provides that whether a retirement is bona fide retirement (and not an in-service distribution) is based on the facts and circumstances of the employee’s retirement. A later rehire of the retired employee does not affect whether the retirement was bona fide if the rehire is due to unforeseen circumstances that do not reflect any prearrangement to rehire the individual. This analysis applies equally to a bona fide retirement pursuant to the special COVID-19 distribution requirements. See our discussion of earlier IRS FAQs on COVID-19 distributions.
The key qualifier is that the original retirement was bona fide. If it had not been, the original distribution would have violated the prohibition on in-service distributions regardless of whether the retiree was rehired.
The IRS also makes clear that the plan’s provisions (such as suspension of benefits) apply to rehires unless changed by plan amendment.
In the second FAQ, the IRS notes that a distributee who receives a distribution before age 59½ (whether or not permissible) is still subject to the 10 percent premature distribution tax unless the distribution falls under one of the exceptions to the tax. One of those exceptions is for coronavirus distributions (which are distributions made between January 1, 2020 and December 30, 2020 on account of COVID-19).
This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
Don't miss out. Join 16,000 others who already get the latest insights from Segal.