The Internal Revenue Service has surprised defined benefit pension plan sponsors by adopting strict new guidelines for establishing a plan’s “normal retirement age.” Officials now say a safe harbor normal retirement age should usually be somewhere between 62 and the later of 65 or the fifth anniversary of the date on which a participant joined the pension plan.

Plan administrators can set the normal retirement age as low as 50 for public safety employees, such as firefighters.

Administrators who want to set a normal retirement age between 55 and 62 for most other plans have to be able to show that age is the typical retirement age for employees in the plan’s industry, and administrators who want to let employees retire before age 55 will have to provide even more evidence that that age really is the normal retirement age for the plan’s industry, officials write in a preamble to the final rule.

A normal retirement age that is earlier 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 to the [IRS] commissioner,” officials write.

The final rule has its roots in proposed regulations published in November 2004, which were supposed to encourage employers to ease older employees into retirement by setting up “phased retirement programs.”

Phased retirement programs permit older employees to shift to part-time work or loosely scheduled work.

Large employers and benefits consultants have been lobbying for years for pension plans to get the ability to make pension payments to phased retirement program participants.

IRS officials mentioned the definition of normal retirement age only in passing in the November 2004 proposed regulations, according to Jan Jacobson, retirement policy director at the American Benefits Council, Washington, a group that represents many large employers.

“We’re a little disappointed” to see the IRS publish a final normal retirement age rule in a stand-alone regulation without providing a separate comment period for that rule, Jacobson says. The normal retirement age definition affects many different aspects of running a pension plan, not simply design of phased retirement plans, and analyzing the possible effects of the new final rule will take time, she says.

But Jacobson says one immediate effect may be to take flexibility away from sponsors of plans in industries that require hard physical labor, which often let employees retire after 30 years on the job, even if that means some employees will retire at relatively young ages.

Although the new final rule permits employers to set normal retirement ages at ages earlier than 62, “it might be difficult to get the statistics to back up that kind of decision,” Jacobson says.

Instead of trying to come up with the statistics, sponsors of plans with 30-year retirement rules may decide to go with the new safe harbor and increase the normal retirement age to 62, even for employees who are doing hard physical labor, she says.

Another section of the new final rule clearly states that a pension plan cannot begin making benefit payments to an older participant simply because the participant is working fewer hours.

It is not yet clear whether an employer can create a more elaborate phased retirement program that would do more than reduce an employee’s hours and would permit the employee to begin collecting pension benefits, Jacobson says.

A phased retirement provision in the Pension Protection Act of 2006 appears to permit 62-year-olds in phased retirement programs to collect pension benefits, Jacobson says.

Another section of the new final rule states that the rule will not give employers the relief necessary to make changes in plans other than changes in the normal retirement age.

If, for example, an employer has set the normal plan retirement age at age 55 and the benefits vesting age at 55, the employer can raise the normal retirement age to 62, but the vesting age will still be 55, Jacobson says.