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Separation From Service Rule 55: Explained for Fox Employees

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It is essential for Fox employees who are thinking about early retirement to find out more about the specifics of the Separation from Service exception in order to make the best financial decision. As Tyson Mavar from The Retirement Group, a division of Wealth Enhancement Group, recommends, workers should take these rules into consideration and meet with a qualified advisor to ensure that their finances are well positioned,” suggests Patrick Ray, Financial Advisor.

“Understanding the basics of early retirement options like the Separation from Service exception is crucial for Fox employees. Patrick Ray from The Retirement Group, a division of Wealth Enhancement Group, explains the significance of consulting with a qualified professional in order to ensure that these financial strategies are implemented correctly in order to achieve the best results,” says Michael Corgiat, Retirement Specialist.

In this article, we will discuss:

1. The specifics of the Separation from Service rule, also known as the Rule of 55, which allows employees to take penalty-free withdrawals from their 401(k) plans starting at age 55 under certain conditions.
2. The key differences between the Separation from Service rule and the standard age 59½ rule, including the restrictions and limitations of each.
3. Practical considerations and examples that illustrate how the Separation from Service exception can be used to plan for early retirement or to meet certain financial needs if one loses a job.
The separation of service rule 55 is not fully discussed in the qualified retirement planning. Most people are probably aware of the age 59½ provision that permits a person to receive distributions from a retirement plan or an IRA account without incurring a 10 percent early withdrawal penalty.

The separation of service rule states that if an employee, who is participating in a company retirement plan such as a 401(k) plan, leaves the employer during the year in which they turn age 55 or older, distributions from the retirement plan are not subject to the additional 10 percent tax penalty.

The Separation from Service exception can help workers who have a Fox-sponsored retirement account, such as a 401(k), and want to retire early or need to withdraw funds if they have lost their job towards the end of their career. It can be a lifeline for Fox workers who require cash flow and have no other good alternatives.

Here’s how the Separation from Service exception works and whether you should consider using it.

What is the Separation from Service exception (55 Rule)?

The Separation from Service exception sometimes called “Rule of 55” or “55 Rule” is an IRS provision that allows workers who leave their job for any reason to start taking penalty-free distributions from their current employer’s retirement plan once they’ve reached age 55. It offers Fox employees, who are interested in retiring earlier than the usual age or who need the funds, a way to take distributions from their retirement plans before the age of 59½.

Taking a distribution from a tax-qualified retirement plan, such as a 401(k), before the age of 59½ is generally subject to a 10 percent early withdrawal tax penalty. However, the IRS Separation from Service exception may permit you to receive a distribution after reaching age 55 (and before age 59½) without triggering the early penalty if your Fox sponsored plan permits such distributions.

However, any distribution would still be subject to an income tax withholding rate of 20 percent. If it turns out that 20 percent is more than you owe based on your total taxable income, you’ll get a refund after filing your yearly tax return.

For example: In one Tax Court case, a taxpayer, whom we will call Nancy, left her job when she was 53 years old. Under the terms of her company plan, Nancy was eligible to take a distribution upon separation from service. The plan also allowed distributions to terminated employees, age 55 and above. Nancy declined to take the distribution when she left her job but elected to begin distributions once she turned 55. Undoubtedly, Nancy was under the mistaken impression that once she turned age 55, she was exempt from the 10% early withdrawal penalty.

The IRS disagreed and imposed the penalty since she was not age 55 when she was terminated from service. The Tax Court sided with the IRS and ruled that what matters is the age of the taxpayer when they separated from service, not when they took the distribution. Therefore, the 10% penalty was upheld.

The main difference between the separation of service exception and the age 59½ rule is that the separation of service exception only applies to qualified retirement plans and not IRA accounts.

In another court case, a taxpayer, Robert, left his job at age 55 and rolled over his balance from a qualified plan to his IRA. Robert then began taking distributions from the IRA. At trial, the Court sided with the IRS and held that the subsequent distribution did not fall under the Separation from service exception and was subject to the early withdrawal penalty. Therefore, if you leave a job after turning age 55 and need all, or a portion, of your retirement funds immediately, you should be careful about rolling over funds into an IRA. Once you roll over qualified plan assets into an IRA, the Rule of 55 exception is lost. Any subsequent distributions from the IRA before age 59½ will be subject to the 10% early withdrawal penalty unless another exception applies.

How to use the rule of 55 to retire early

Many companies have retirement plans that enable employees to take advantage of the Separation from Service exception, but Fox may not offer the option.

401(k) and 403(b) plans are not required to provide for Separation from Service exception withdrawals, so you shouldn’t be surprised if your Fox-sponsored plan doesn’t allow for this exception. Many companies see the rule as an incentive for employees to resign in order to get a penalty-free distribution, with the unintended consequence of prematurely depleting their retirement savings.

Here are the conditions that must be met and other things to consider before taking a Separation from Service exception withdrawal.

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Retirement plan offers. If the Fox plan offers a 401(k) or 403(a) or (b), the Separation from Service exception withdrawals are allowed. Some plans prohibit withdrawals prior to age 59½ or even 62.

Age 55 or older. You leave your position (voluntarily or involuntarily) at Fox in or after the year you turn 55 years old.

Money must remain in the plan. You fully understand that your funds must be kept in the Fox plan before withdrawing them and you can only withdraw from the Fox plan. If you roll them over to an IRA, you lose the rule of 55 tax protection.

Potential lost gains. You understand that taking early withdrawals means you will be giving up any gains you might have been able to make on your investments.

Reduce taxes. You can wait until the start of the next calendar year to begin rule of 55 withdrawals when your taxable income should be lower if you are not working.

Public safety worker. If you are a qualified public safety worker (police officer, firefighter, EMT, correctional officer or air traffic controller), you might be able to start five years early. Ensure that you have a qualified plan that allows withdrawals in or after the year you turn 50 years old.

However, as with any financial decision, be sure to check with a trusted advisor or tax professional first to avoid any unforeseen consequences.

Should you use the Separation from Service exception?

Whether or not to take early withdrawals under the Separation from Service exception will depend on your financial situation. You’ll want to know your plan’s rules, how much you’d need to withdraw, and what your annual expenses are likely to be in the early years of your early retirement after leaving Fox. Solving those issues should help you know if taking an early withdrawal is the right decision for you.

Here are some situations where it’s likely that taking early withdrawals would not be the right move.

If it would push you to a higher tax bracket. The amount of your income for the year in which you begin the withdrawal plus the early withdrawal might put you into a higher marginal tax bracket.

If you’re required to take a lump sum. The Fox plan may require a one time lump sum withdrawal and this may force you to take more money than you want and be subject to ordinary income tax liability. These funds will no longer be available as a source of tax advantaged retirement income.

If you’re younger than 55 years old. You might want to leave Fox before you turn 55 and start taking withdrawals at age 55. Note this is NOT allowed and you will be assessed the 10 percent early withdrawal penalty.

Other important considerations

If you’re thinking of taking a Separation from Service exception withdrawal, you’ll also want to consider a few other things:

If you have funds in multiple former employer plans, the rule only applies to the plan of your current/most recent employer. If you have funds in multiple plans that you want to access using the Separation from Service exception, be sure to roll over those funds into your Fox plan (if it accepts rollovers) BEFORE you leave the company.

Funds from IRA plans that you might want to access early can also be rolled into your current plan (while still employed) and accessed that way.

If you so choose, you can continue to make withdrawals from your former employer’s plan even if you get another job before turning age 59½.

Be sure to time your withdrawals carefully to create a strategy that makes sense for your financial situation. Withdrawing from a taxable retirement account during a low-income year could save you in taxes, particularly if you believe your tax rate may be higher in the future.

Bear in mind that the only real advantage of the Separation from Service exception is avoiding the 10 percent penalty. Meanwhile, the tax deferral is sacrificed, which may turn out to be more valuable if other financial resources that are not tax-qualified can cover expenses for the coming years and you are able to save the 401(k)/403(b) distribution until later years.

Other Exceptions

You may be able to access the funds in your retirement plan with Fox without a tax penalty in a few other ways, depending on your circumstances.

There is an exception called the 72(t) option which allows withdrawals from your 401(k) or IRA at any age without any penalty. This option is called SEPP (Substantially Equal Periodic Payments), and these payments are not subject to the 10 percent early withdrawal penalty. Once these distributions begin, they must continue for a period of five years or until you reach age 59½, whichever comes later. 72(t) payments have suddenly become a better deal for IRA owners and company plan participants.

Also known as “substantially equal periodic payments,” 72(t) payments are advantageous because they are exempt from the 10% early distribution penalty that usually applies to withdrawals before age 59½. You can take them from an IRA at any time, but only from a workplace plan after leaving Fox.

There are several downsides to 72(t) payments.

First, they must remain in place for at least 5 years or until age 59½, whichever comes later. This means a 45-year old IRA owner must maintain her payments for almost 15 years.

Second, if the payments are modified before the end of the 5-year/age 59½ duration, you are subject to a 10% penalty (plus interest) on all payments made before 59½. Modification will normally occur if you change the payment schedule (e.g., stop payments), change the balance of the account from which payments are being made (e.g., a rollover to the account), or change the method used to calculate the payment schedule (except for a one-time switch to the RMD method – see below).

There are three(3) acceptable ways to calculate 72(t) payments:

The required minimum distribution (RMD) method. Payments are calculated like lifetime RMDs. Therefore, they fluctuate each year. The RMD method normally produces the smallest payout among the three methods. Once you use the RMD method, you can’t switch out of it.

The fixed amortization method. Payments are calculated like fixed mortgage payments. After using this method for at least one year, you can switch to the RMD method without penalty.

The fixed annuitization method. Payments are calculated by dividing the account balance by an annuity factor. Like the amortization method, they remain fixed, and you can switch to the RMD method after the first year.

However, on January 18, the IRS released Notice 2022-6, which said that 72(t) payment schedules starting in 2022 or later can use an interest rate as high as 5%. (And, if 120% of the Federal mid-term rate rises above 5%, you can use a rate as high as the 120% rate.) This is still the updated rate in 2024. This is great news because the higher the interest rate, the higher the payments will be. This change allows you to squeeze higher payments out of the same IRA balance. (Note that you can’t change interest rates for a series of 72(t) payments already in place.)

Other circumstances that exempt you from the early withdrawal penalty include:

1. Total and permanent disability

2. Distributions made due to qualified disasters

3. Certain distributions to qualified reservists on active duty

4. Medical expenses exceeding 10 percent of adjusted gross income

5. Withdrawals made to satisfy IRS obligations

But the IRS offers other exceptions to the early withdrawal penalty.

Bottom line

If you can wait until you turn 59½, withdrawals after that age are not typically subject to the 10 percent IRS tax penalty. However, if you are in a financially safe position to retire early, the Separation from Service exception may be an appropriate course of action for you.

Sources:

1. Brenner, Sarah. '5 Things You Must Know about the Age-55 Rule.' Ed Slott and Company, LLC , 23 June 2021, irahelp.com.

2. 'Understanding the Age 55 Exception to the 10% Early Withdrawal Penalty.' The Money Know How , themoneyknowhow.com.

3. 'Retiring Early? 5 Key Points about the Rule of 55.' Charles Schwab , 12 March 2024, schwab.com.

4. 'Retirement Plan: Separation from Service Rule & Tax Penalty.' Cherry Bekaert , cbh.com.

5. Liang, Eddie. 'Retirement Planning Between Ages 55 & 59.5: The Rule of 55.' Downshift Financial , 21 September 2021, downshiftfinancial.com.

How does 21st Century Fox America Inc. determine the funding status of its pension plan, and what key metrics are utilized in evaluating its financial health? Employees may want to understand the significance of the Funding Target Attainment Percentage and how it influences their retirement benefits, especially as it pertains to both the general and specific circumstances affecting funding levels.

Funding Status and Metrics: 21st Century Fox America Inc. determines the funding status of its pension plan by calculating the Funding Target Attainment Percentage (FTAP), which divides the plan’s net assets by its liabilities. For the 2022 plan year, the FTAP was 125.79%. This metric is crucial because it indicates how well the plan is funded. A high FTAP suggests that the plan is well-funded and capable of meeting its obligations, which directly influences employees' retirement security(21st Century Fox Americ…).

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Investment Strategy Considerations: The company follows specific investment policies that establish guidelines for asset allocation within the pension plan. These policies ensure that assets are allocated among major categories like equities, fixed income, and cash. The fiduciaries of the plan determine the target ranges for each category, aiming for stable returns and long-term viability(21st Century Fox Americ…).

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Rights and Pension Termination: Should the pension plan terminate, federal law requires 21st Century Fox America Inc. to follow certain procedures. If fully funded, the plan would undergo a standard termination, where an insurance company provides annuities, or a lump sum may be offered. In underfunded cases, a distress termination could occur, where the Pension Benefit Guaranty Corporation (PBGC) takes over(21st Century Fox Americ…).

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Role of PBGC: The PBGC provides a guarantee for vested pension benefits in the event of plan termination. The guarantee is subject to legal limits, which vary depending on the participant’s age and the plan’s termination date. For 2023, the maximum annual benefit for a 65-year-old retiree was $81,000(21st Century Fox Americ…).

What steps can employees take to access information related to their pension plan from 21st Century Fox America Inc., and how can they ensure they receive timely updates regarding their benefits? Details about the channels available for inquiries and the importance of keeping informed about funding levels and benefits are crucial.

Accessing Pension Information: Employees can access information about their pension plan through the Disney Benefits Center by calling (800) 354-3970. Staying informed about the plan’s funding levels and benefits is essential, and employees are encouraged to review the annual funding notice for updates(21st Century Fox Americ…).

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With the current political climate we are in it is important to keep up with current news and remain knowledgeable about your benefits.

Fox Corporation offers a 401(k) plan and a pension plan to its employees. The 401(k) plan includes a company match, typically up to 4-6% of the employee's salary, with a partial match beyond that percentage. The company also offers a defined benefit pension plan, although specific details like the pension formula, years of service, or age qualifications were not detailed in the sources reviewed. However, Fox emphasizes comprehensive benefits, including financial security through retirement plans.

In 2023, Fox News underwent significant layoffs as part of a broader restructuring effort, largely driven by the financial strain following the $787.5 million lawsuit settlement with Dominion Voting Systems. These layoffs, including those from the investigative unit, are believed to be part of cost-cutting measures. This is critical to address due to the current economic and political environment, where the company must adjust to financial pressures while maintaining investor confidence and adapting to changing tax regulations.

Stock Options: Fox Corporation offers stock options that allow employees to purchase company stock at a predetermined price, known as the exercise or strike price, after the options have vested. Vesting periods for these options vary, typically ranging from 1 to 5 years. Once vested, employees can exercise their options within a specified period, generally up to 10 years from the grant date. The value of the stock options depends on the market price of Fox Corporation’s stock at the time of exercise; if the market price is higher than the exercise price, the options are "in the money" and can be profitable. Stock options at Fox are primarily available to executives and senior management, although some plans extend to other key employees depending on their role within the company. Restricted Stock Units (RSUs): Fox Corporation also provides RSUs, which represent a grant of company stock that is transferred to employees once the RSUs vest. Unlike stock options, RSUs do not require the employee to purchase the stock; instead, the shares are automatically granted at no cost upon vesting. The value of RSUs is more predictable, as it is tied directly to the market value of Fox Corporation’s stock at the time of vesting. The vested shares are considered taxable income and are typically subject to withholding for taxes. RSUs at Fox are usually granted to a broader group of employees, including executives, senior management, and other employees as part of their annual performance reviews or hiring packages.

Fox Corporation offers a comprehensive range of health benefits to its employees, which are designed to support their well-being from the first day of employment. The health benefits package includes medical, dental, and vision coverage, which are available without any waiting period for many positions. In addition to these core health benefits, Fox also provides flexible spending accounts (FSAs), life insurance, business travel insurance, and long-term disability insurance. Fox places a strong emphasis on whole-person health, including not just physical but also mental health support through their Employee Assistance Program (EAP). This reflects broader trends in employee health benefits, where companies are increasingly focusing on holistic wellness programs that address both physical and mental well-being, especially given the rising costs of healthcare and pharmaceuticals.

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For more information you can reach the plan administrator for Fox at , ; or by calling them at .

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