The Small Business Job Protection Act of 1996 ("SBJPA") made significant changes to pension and benefits law. Prior to the SBJPA, pension plan participants were generally required to begin taking distributions from qualified plans by the April 1 of the calendar year following the calendar year in which the participant attained age 70½. Distributions taken on or after age 70½ generally were not eligible for "rollover" treatment, and therefore were not subject to mandatory Federal Income Tax withholding by the plan sponsor.
Effective for plan years beginning on or after January 1, 1996, the SBJPA changes this rule by requiring participants (other than 5% owners of a company) to begin taking distributions from qualified plans at the later of the April 1 following the calendar year in which the employee (1) attains age 70½ or (2) the employee "actually retires." However, participants beyond age 70½ who decide to continue to receive in-service distributions may rollover the distributions into an Individual Retirement Account ("IRA"). If the distribution is not rolled over, it will be subject to a 20% Federal Income Tax withholding. We caution plan administrators to take steps to ensure that proper withholdings are retained for these distributions.