By Jane Meacham
The IRS on June 15 released guidance on paying employees from a defined benefit (DB) plan once the participant has entered phased retirement and whether the distributions should be taxed.
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The agency issued the guidance, in Notice 2016-39, to answer questions posed about whether such distributions are taxable as DB annuity payments under Section 72 of the Internal Revenue Code.
When it’s not an annuity
The notice explained that payments for an employee from a qualified plan during phased retirement are not received as an annuity for purposes of Section 72 if all three of the following apply:
- The employee begins to receive a portion of his or her retirement benefits when entering phased retirement and starting part-time employment and will not begin receiving his or her entire plan benefits until he or she ceases employment and commences full retirement at an indeterminate future time (even if a full retirement date is agreed upon at commencement of phased retirement, the employee’s date of full retirement is indeterminate as long as it is possible that date could change);
- The plan’s obligations to the employee are based in part on the employee’s continued part-time employment (which affects both the duration of the payment of phased retirement benefits and the amount of additional retirement benefits the employee accrues during that period of part-time employment); and
- Under the plan terms, the employee does not have an election as to the form of the phased retirement benefit to be paid during phased retirement but elects a distribution option at full retirement that applies to his or her entire retirement benefit, including the portion that started as phased retirement benefits.