Recently, there has been much concern over new Department of Treasury regulations promulgated by the Internal Revenue Service (“IRS”) and their effect upon State legislated pension systems for public employees. This entry summarizes the new regulations and their potential impact on the members of the Police and Firemen’s Retirement System (“PFRS”). After conducting research and for the reasons set forth in detail below, it our belief the new Treasury Regulations will not alter the ability of a PFRS member to retire under any existing PFRS law, including the special retirement provision allowing retirement prior to attaining the age of 50.
By way of background, the New Jersey State PBA reported that the IRS adopted regulations that would prohibit any public safety officer in a state legislated pension system from retiring before the age of 50. As most public safety officers are aware, there is currently no minimum retirement age for a member of PFRS to qualify for a pension. In fact, all that is needed to qualify for a PFRS pension is twenty-five (25) years of service and retirement credits paid into the system. Specifically, N.J.S.A. 43:16A-11.1, entitled “Special Retirement; resignation with 25 years of creditable service; allowance; death benefit”, provides in pertinent part:
Should a member resign after having established 25 years of creditable service, he may elect “special retirement,” provided, that such election is communicated by such member to the retirement system by filing a written application, duly attested, stating at what time subsequent
to the execution and filing thereof he desires to be retired…
[N.J.S.A. 43:16A-11.1(a).]
Treasury Regulation §1.401(a)-1 was recently modified. The modifications require qualified pension plans to revise the definition of normal retirement age to an age that is not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. In addition, the regulations provide that a normal retirement age of at least 62 is deemed to be not earlier than the typical retirement age for the industry in which the covered workforce is employed. Thus, a plan satisfies this provision if its normal retirement age is age 62, or if its normal retirement age is the later than age 62 or another specified date, such as the later of age 62 or the fifth anniversary of plan participation. This is known as the “safe harbor” provision.
For retirement plans that set a retirement age between age 55 and 62, it is generally expected that the employer will make a good faith determination of the typical retirement age for the industry in which the covered workforce is employed. In most instances, the employer will be given deference in setting the retirement age. However, this assumes that the determination is reasonable under the facts and circumstances of the particular situation.
Alternatively, a normal retirement age that is lower than age 55 is presumed to be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry of the relevant covered workforce absent facts and circumstances that demonstrate otherwise.
Significantly, for our purposes, in the case of a retirement plan where substantially all of the participants in the plan are qualified public safety officers, a normal retirement age of age 50 or later is deemed not to be earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed. Specifically, the new regulation will provide the following once in effect:
Age 50 safe harbor for qualified public safety employees. A normal retirement age under a plan that is age 50 or later is deemed to be not earlier than the earliest age that is reasonably representative of the typical retirement age for the industry in which the covered workforce is employed if substantially all of the participants in the plan are qualified public safety employees (within the meaning of section 72(t)(10)(B)).
Under §72(t)(10)(B), a qualified public safety employee means any employee of a State or political subdivision of a State who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such State or political subdivision. The definition clearly encompasses the members of PFRS.
Non-government plans are required to adopt these modifications for the first plan year beginning after June 30, 2008. Government plans, such as PFRS, are not subject to the new regulation until plan years beginning on or after January 1, 2009. For PFRS and other State plans, this would mean the regulation would not take effect until July 1, 2009. Consequently, members retiring in the short-term need not be concerned.
It has become the concern of many labor organizations that these new regulations will preempt the “special retirement” provision of PFRS, which allows members to conceivably retire prior to attaining the age of 50. At this juncture, I am of the opinion that the regulations will not preempt the “special retirement” provision of the PFRS. Moreover, I do not believe these regulations will affect a PFRS member’s ability to retire after establishing twenty-five (25) years of creditable service, even though the member may not have reached the age of 50.
Under the wording of the regulations, a normal retirement age of 50 or above is required for a plan in which substantially all of the participants are qualified public safety officers/employees. In addition to the “special retirement” provision, N.J.S.A. 43:16A-5 states in pertinent part:
Any member in service who has attained age 55 years may retire on a service retirement allowance upon filing a written and duly executed application to the retirement system, setting forth at what time, not less than one month subsequent to the filing thereof, he desires to be retired. Any member in service who attains age 65 years shall be retired on a service retirement allowance forthwith on the first day of the next calendar month, except that a member hired prior to January 1, 1987 may remain a member of the system until the member attains age 68 years or 25 years of creditable service, whichever comes first.
[N.J.S.A. 43:16A-5(1).]
It is our position that N.J.S.A. 43:16A-5 sets the normal retirement age for PFRS at 55 because this is when a member can apply and receive retirement benefits. In addition, the statute sets the mandatory retirement age at 65. Since the normal retirement age is 55, which satisfies the regulations requirements for plans covering qualified public safety officers, PFRS would remain unaffected by the new regulations because it is compliant with same. Furthermore, I believe the “special retirement” provision, which allows members to retire prior to attaining the age of 50 after obtaining twenty-five (25) years of service, is indeed just that, a “special” provision that falls outside of the purview of these regulations. These regulations address the normal retirement ages, whereas N.J.S.A. 43:16A-11.1 specifically deals with the special situation of a member establishing twenty-five (25) years of service.
Undoubtedly, many labor organizations across the State will be keeping a close watch upon these regulations. In fact, a letter authored by Frederick Beaver, Director of the State Department of Treasury, has been posted on the State PBA website. In this letter Mr. Beaver concurs with our conclusion that the regulations will not affect PFRS members’ retirement ability upon completion of twenty-five (25) years of service.
Our office will be keeping you up to date on this important topic. Periodic updates will be posted regarding the various issues surrounding these regulations as more information becomes available.
