Over the past twenty years, many Florida cities permitted police officers and/or firefighters to retire from their pension plans at normal retirement age and then immediately rehired these individuals in the same or related capacity pursuant to a pre-arranged mutual agreement. This practice increased significantly when the utilization of police as “school resource officers” (“SROs”) became widespread. This approach permits the affected officer to receive retirement distributions as well as his/her part-time salary as a SRO. Unfortunately, this practice violates the so-called “qualification” requirements of the Internal Revenue Code, potentially subjecting all plan members to severe federal tax consequences. However, last week the author received a ruling from the IRS resolving this problem which avoids this negative effect!
In order to correct this defect, we proposed the retroactive adoption of a plan amendment permitting “in-service” pension distributions after normal retirement age and the IRS accepted this methodology. Resolving this type of qualification defect via a plan amendment is only permitted if the plan sponsor submits the problem to the IRS pursuant to its “Voluntary Correction Program” (“VCP”).
The other permissible way of correcting this defect is to cease retirement payments to the affected plan members and have the pension board “recoup” the previously made “improper” distributions. This is a horrific result that would likely cause an incredible hardship on these individuals and could potentially result in litigation against the plan sponsor and/or the pension board. Thus, the retroactive plan amendment correction methodology avoids this result and prevents the possibility of plan disqualification.
As indicated above, this IRS ruling permits the correction of this defect and avoids the adverse effect of the other permissible correction method. However, this methodology may only be available for a limited time with respect to plans utilizing a normal retirement age less than fifty (which is virtually all police and fire plans). Thus, we believe this approach provides a window of opportunity to resolve the qualification issues associated with this widespread practice.