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IRS FAQs: Pension plan sponsors can rehire retirees

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Tax Hot Topics newsletter The IRS recently released two new FAQs reminding employers that they generally will not jeopardize the tax status of their pension plans if they rehire retirees or permit distributions of retirement benefits to current employees who have reached age 59½ or the plan’s normal retirement age.

The IRS noted that many employers are looking for ways to encourage retirees to return to the workforce to fill open positions and experienced employees to stay on the job. The FAQs highlight existing ways that employers can meet their employment objectives and still comply with the plan qualification rules.

Under the first FAQ, the IRS explains that an employer can generally choose to address unforeseen hiring needs by rehiring former employees, even if those employees have already retired and begun receiving pension benefit payments—provided certain conditions are met including, but not limited to, that the original retirement was bona fide (generally, a facts-and-circumstances analysis, e.g., no prearrangement to rehire an individual).

Under the second FAQ, the IRS notes that an employer can generally choose to make in-service retirement distributions available to existing employees who have reached age 59½ or the plan’s normal retirement age.

While these FAQs are helpful, they are not precedential. Nevertheless, the IRS announced earlier this month that, if taxpayers rely on an FAQ in good faith and that reliance is reasonable, the taxpayer has a "reasonable cause" defense against any negligence penalty or other accuracy-related penalty if it turns out the FAQ is not a correct statement of the law as applied to the taxpayer's particular facts.

Contact:
Jeffrey Martin
Partner, Human Capital Services
Washington National Tax Office
T +1 202 521 1526

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