IRS Provides Guidance on Phased Retirement

The Internal Revenue Service has issued guidance on whether payments from a qualified retirement plan during a phased retirement are considered an annuity.

Notice 2016-39 provides guidance as to whether payments received by an employee from a qualified retirement plan during phased retirement are amounts received as an annuity under section 72 of the Tax Code.

A phased retirement is an arrangement in which participants in a qualified defined benefit plan begins the distribution of a portion of their retirement benefits from the plan while continuing to work on a part-time basis. The notice also provides guidance on the appropriate present value factors to be used for determining the basis recovery fraction of each payment received during phased retirement. It also offers guidance regarding the time for determining the basis recovery fraction for these phased retirement payments.

The notice does not apply to amounts received from non-qualified contracts. However, in addition to the notice, the IRS also issued Revenue Procedure 2016-36, which provides that recovery of investment in the contract from payments received from a retirement plan by an employee during phased retirement does not apply to amounts that are received from a non-qualified contract. 

The revenue procedure concludes that in applying the Section 72 regulations cited in the notice to a non-qualified contract, the possibility of further contributions to the contract or a subsequent election under the contract to receive the benefit payable under the contract in a different manner generally will not affect the determination of whether distributions are amounts received as an annuity.