The Internal Revenue Service has issued proposed regulations that would permit distributions to be made from a pension plan under a "bona fide phased retirement program." It also would set forth requirements for the program.

Such a program generally provides employees who are at or near eligibility for retirement with the opportunity for a reduced schedule or workload to provide a smoother transition from full-time employment to retirement.

Under the proposed regs, a "bona fide phased retirement program" is limited to employees who have reached age 59 1/2; employee participation must be voluntary; and the reduction must be at least 20 percent. Phased retirement benefits aren't permitted for a key employee as described in Section 416(i)(1)(A)(ii) or (iii).

The proposed regulations would permit a pro rata share of an employee's accrued benefit to be paid under a phased retirement program. The pro rata share is based on the extent to which the employee has reduced hours under the program. The employee would maintain a dual status (i.e., partially retired and partially in service) during the phased retirement period.

If adopted, the proposed regulations would apply to plan years beginning on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register. The IRS noted that the proposed regulations can't be relied on before they are adopted as final regulations.

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