The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.
A recent call with a financial advisor in Pennsylvania is representative of a common question related to a early distributions from retirement accounts. The advisor asked:
“Are the rules for plan distributions made to qualified public safety employees changing in 2016?”
Highlights of Discussion
- Yes, beginning in 2016, the exception to the early distribution penalty tax under IRC §72(t)(10) for distributions to certain public safety employees is expanding. As a result, more public safety employees will be eligible for penalty-free early distributions from their retirement plans.
- This expansion comes as a result of the Defending Public Safety Employees Retirement Act (P.L. 114-26). There are two key changes.
- First, effective for distributions after Dec. 31, 2015, the exception to the penalty for pubic safety employees who are age 50 or over and separated from service is expanded to include not only police, firefighters or emergency medical employees of a CAP state or political subdivision, CAP but also specified CAP federal CAP law enforcement officers, customs and border protection officers, federal firefighters and air traffic controllers.
- Second, the restriction that only distributions from defined benefit plans qualify for the exception is eliminated. Therefore, an exception is allowed for distributions from defined contribution plans or other types of governmental plans, such as the Thrift Savings Plan, in addition to defined benefit plans.
- Of course, the recipients of such distributions must include the taxable portion of the amounts they receive in their income unless they roll over the amounts.
Conclusion
More public safety employees will be eligible for penalty-free early distributions from their retirement plans beginning in 2016. Financial advisors can alert their clients who qualify for the change. Governmental plan sponsors will want to review their plan documents and administrative procedures to ensure they can accommodate this expanded exception to the penalty tax on early distributions.
The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.
Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.
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©2015 Columbia Management Investment Advisers, LLC. Used with permission.
