How to Handle Clients' DB Taxes During Phased Retirement

The Internal Revenue Service (IRS) has issued guidance on payments issued to employees from a qualified defined benefit (DB) plan during phased retirement, explaining when they are to be considered as taxable DB annuity payments.

The notice was published in response to inquiries as to whether payments received by an employee from a qualified defined benefit plan during phased retirement are amounts received as an annuity under § 72 of the Internal Revenue Code.

For purposes of the notice, phased retirement is “an arrangement under which a participant in a qualified defined benefit plan commences the distribution of a portion of his or her retirement benefits from the plan while continuing to work on a part-time basis.” The notice also “provides guidance regarding the appropriate present value factors to be used for purposes of determining the basis recovery fraction of each payment received during phased retirement, and provides guidance regarding the time for determining the basis recovery fraction for these phased retirement payments.”

The full IRS guidance can be downloaded here.