Update on IRS Rule on Normal Retirement Age for Governmental Plans

Department of Employee Trust Funds
April 11, 2012

The Department of Employee Trust Funds (ETF), which administers the Wisconsin Retirement System (WRS), continues to track an Internal Revenue Service (IRS) regulation regarding the definition of “normal retirement age” (the age at which one can retire with an unreduced benefit) for governmental plans. The regulation is effective January 1, 2013. There has been widespread concern that this rule would raise the normal retirement age for police officers, firefighters, and other protective-class employees in the WRS. Currently, the normal retirement age requirements for these protective-class employees are 54 years with less than 25 years of service, or 53 with 25 years or more of service.

Based upon additional research and a recent analysis conducted by ETF’s tax counsel, ETF’s position is that the current regulation DOES NOT affect the normal retirement age levels for any WRS participants. Although the regulation would benefit from clarification, analysis of the regulation, the underlying federal law and informal information from IRS representatives indicates that in regard to normal retirement age, the current rule only applies to governmental plans that make in-service pension distributions (payment of pension amounts while the person is still employed). The WRS does not permit in-service distributions, so the rule would not apply in regard to WRS normal retirement age levels.

ETF contacted Senator Kohl’s office expressing concern about the IRS rule in early 2011. Senator Kohl sent a letter to the U.S. Treasury asking that the matter be addressed. The Treasury’s reply indicated that they would be clarifying the matter in the near future, but they have not issued any guidance on the rule so far. On March 28, 2012, Senator Kohl and Representative Baldwin sent a joint letter to the Treasury strongly urging the IRS to take prompt action on this matter. In addition, on April 6, 2012, Governor Walker, Senator Johnson, and Representatives Sensenbrenner, Petri, Ryan, Duffy, and Ribble sent a joint letter to the Treasury strongly urging the IRS to promptly address this concern. We are hopeful that the IRS will clarify the regulation soon.

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