On June 30, 2015, Defending Public Safety Employees’ Retirement Act (P.L. 114-26) was enacted, which applies a lower age threshold for early distributions without penalty for certain plans.
General Rule On Early Distributions
Generally, an employee who participates in a qualified retirement plan will incur Internal Revenue Code Section 72(t)’s 10 percent additional income tax on early distributions if funds are withdrawn before reaching age 59 ½. But, the penalty won’t apply to an employee participating in an employer-sponsored retirement plan if the withdrawal occurs upon separation from service at age 55 or older.
State Employees
Before the law change, a threshold of age 50 applied to distributions from defined benefit plans to certain public safety employees of a state. Public safety employee are individuals employed by a state or a political subdivision of a state who provide police protection services, firefighting services or emergency medical services for any area within the jurisdiction of the employer. The lower age-threshold provision didn’t apply to distributions from defined contribution plans.
The lower age 50 threshold will, beginning on Jan. 1, 2016, extend to include both defined contribution and defined benefit plans in which state employees participate. Until the change takes effect, the rule applies only to distributions from defined benefit plans to state public safety employees.
Federal Employees
Before the law change, no federal employees could qualify for the reduced age provisions enjoyed by state public safety employees.
The law change added a provision, effective Jan. 1, 2016, allowing certain federal public safety employees participating in governmental plans to also withdraw retirement savings upon separation from service at age 50 or older without incurring the 10 percent additional tax. The new rule applies to any governmental plan (within the meaning of IRC Section 414(d)).
The classes of federal public safety employees will include federal law enforcement officers, any federal customs and border protection officers, federal firefighters and air traffic controllers. These classes are in addition to those who provide police protection, firefighting services or emergency medical services.
For all other employees who participate in all other types of qualified retirement plans, age 55 remains as the age when they can make withdrawals upon separation from service that are free of the 10 percent tax.
Substantially Equal Periodic Payments
Another exception to the 10 percent tax permits payments over a participant’s life expectancy or over the joint life expectancies of the participant and the participant’s spouse. A change in the amount of those payments can trigger the 10 percent tax.
Neither state nor federal employees has ever been granted any special rules about taking substantially equal periodic payments from governmental retirement plans that qualify for avoiding the 10 percent tax on early distributions. Now they have. Beginning in 2016, both federal and state public employees who are taking such payments from governmental retirement plans will be able to alter the pattern of payments after reaching age 50 without incurring the 10 percent tax.