November 14, 2000
The Working Group Report, submitted to the Advisory
Council on Employee Welfare and Pension Plans, known as the ERISA Advisory
Council, on November 14, 2000, was approved by the full body and
subsequently forwarded to the Secretary of Labor. The Advisory Council was
established by Section 512(a)(1) of the Employee Retirement Income
Security Act of 1974 to advise the Secretary with respect to carrying our
his/her duties under ERISA.
I. INTRODUCTION
"There seems to simply be an increased desire
among individuals to stay active and stay involved and do it through the
workplace to later years."
- Paul Yakoboski, Employee Benefit Research
Institute
What is Phased Retirement?
In the broadest sense, phased retirement means a
gradual change in a person's work arrangements as a transition toward full
retirement. This may involve a change of employers (including
self-employment), a change of career or a reduction in the number of hours
worked. As the focus is on how and on what terms people continue working
after they are eligible for retirement benefits, the re-employment of
retirees whether or not it was anticipated when they first retired
is also sometimes included in discussions of phased retirement.
This concept is not new. Paul Yakoboski of the Employee
Benefit Research Institute (EBRI) reported that the results of the most
recent annual Retirement Confidence Survey showed that 25% of those
currently "retired" have worked for pay in retirement, and that
67% of current workers expect to work for pay after retiring. A study by
Joseph Quinn of Boston College indicates that one-third to one-half of
American workers will work on a "bridge job" along the way to
total retirement.
For purposes of this report, however, we are focused
primarily on an arrangement where an employee reduces his work schedule
with the same employer as he/she approaches full retirement. It also
includes certain related programs or arrangements whereby employers may
encourage workers to continue working when their benefit programs might
otherwise encourage them to leave.
Interest in Phased Retirement
The combination of the baby boom generation approaching
retirement age and the tight labor market has increased the interest of
many employers in retaining their older, experienced workers. The fact
that more jobs are in the service industry compared with manufacturing
means that employees are physically able to work to later ages. Also, many
employees who want to continue working would also like to have a reduced
or more flexible work schedule, as they get older. One survey showed that
three-fourths of workers would prefer a reduced workload before full
retirement rather than to retire abruptly.
Obstacles to Phased Retirement
Plan design: One of the major obstacles to phased
retirement involves defined benefit pension plans, which were often
designed to encourage retirement at ages before an employee actually
wanted to retire. These plans may no longer serve the goals either of the
employer or of many of the participants. To maximize the value of their
pensions, many employees today choose to retire from their current
employer and seek employment elsewhere.
Loss of benefits: Health care coverage is another
concern for older workers. By moving from full-time employment to
part-time employment, an employee may lose access to company-subsidized
health care coverage.
Legal concerns: There are a few other miscellaneous
legal obstacles for employers. For example, phased retirement is a gray
area under the age discrimination laws.
Current Phased Retirement Programs
A Watson Wyatt survey of 586 large employers indicates
that about 16% currently have formal phased retirement programs and
another 28% are interested in implementing one in the next few years. Most
of the current programs cover academic professionals, where it is easier
to adjust teaching loads. For these employees, defined contribution plans
are prevalent and phased retirement may be offered to encourage the
retirement of tenured staff rather than to retain those who would
otherwise leave. They are also often found in the public sector, where
rich early retirement subsidies are common and the parties have more
freedom to redesign pension formulas than ERISA allows.
Among public sector employers, deferred retirement
option plans (DROPs) have become popular. Under the most common version of
this option, pension payments commence and are credited to an individual
account within the same plan while the employee continues working. After a
specified number of years (typically five), the employee retires and
receives both his pension plus the value of the individual account that
has accumulated (with earnings). This type of plan enables an employee to
continue working and still receive the full value of early retirement
subsidies in the pension plan.
Another example of a phased retirement program is the
National Rural Electric Cooperative Association (NRECA) plan. Under this
plan, participating employers may elect to have their plan's normal
retirement age set at age 60, 62 or 65 (with various service
requirements). When an employee reaches his/her normal retirement age, the
pension may start, even if the employee continues working on a full-time
or part-time schedule. Upon subsequent "retirement", the
employee receives an additional benefit from the additional years of
service he/she has worked since his/her normal retirement date. Other
benefits, including health insurance, remain in effect during the phased
retirement period.
Other phased retirement programs which do not involve
defined benefit pension plans may be less complicated and provide for
continuation of various benefits (perhaps on a reduced basis) for
employees who elect a reduced work schedule. A TIAA-CREF survey of 167
colleges and universities showed that 29 out of 66 who responded had
phased retirement programs and almost all allowed retired faculty to teach
part-time.
Testimony
We have received testimony from 11 witnesses, which
include representatives from employers and employer organizations,
retirement plans, researchers and research organizations, consulting
firms, the IRS and the legal profession. Although many employee
organizations were also contacted, most declined to testify because they
did not yet have a position on this relatively new topic. Summaries of all
the witness's testimony are included in this report.
II. ISSUES
It is possible that some people in pension plans, which
are based on the participant's final average pay, may lose pension
benefits if their final average pay goes down. This reduction in pay often
occurs when a person goes from full-time employment to part-time
employment. Although current law prohibits a pension from being decreased
because of increasing age or service, there is no specific rule which
stops a pension from being decreased if final average pay goes down.
Although this Working Group heard the IRS position on this issue is that
pensions may not be reduced if final average pay goes down, there appears
to be a great deal of uncertainty in this area. We heard testimony that
pensions have, in fact, been reduced and that court cases have supported
the reduction in pension when pay has been reduced. There are many ways a
pension plan can define final average pay and some definitions eliminate
this problem altogether.
Current regulations do not allow payment of defined
benefit pension benefits prior to a participant's normal retirement age
unless there is a complete severance from employment with the plan
sponsor. A plan may provide that pensions are payable on or after a
participant's normal retirement age, even if the participant continues to
work (altogether this type of provision is not that common). In
comparison, a 401(k) plan may provide for distributions on or after age
59½, even while a participant is employed.
Because of the nature of traditional defined benefit
plans, the value (not necessarily the amount) of a participant's pension
may actually decrease if he or she continues working past his or her
normal retirement age. For plans with subsidized early retirement
benefits, pensions may begin decreasing in value (not necessarily the
amount) after early retirement age. This provides a strong incentive
(which many employers may have originally intended) for participants to
retire before they are actually ready to retire, and possibly seek
employment elsewhere.
Although this Working Group recognizes the importance
of making sure retirement benefits are used for retirement, we see the
need for some flexibility in this area to enable employers and employees
to work out mutually-beneficial phased retirement programs.
Health care access is a major concern for workers. In
many situations, an employee, who goes from full-time employment to
part-time employment as part of a phased retirement plan, would lose
health care coverage, since most employers do not provide this benefit to
part-time employees. Although COBRA coverage is available for up to 18
months following loss of coverage, there is often a gap in coverage
between early or phased retirement and Medicare eligibility. Purchase of
health care coverage on an individual policy basis at older ages is often
very expensive or not available at all because of health conditions.
We have heard testimony that companies are concerned
that, if they offer payouts on a phased-retirement basis, they might have
trouble passing some of the mechanical income-based nondiscrimination
tests for retirement plans, even though the phased-retirement program is,
in principle, available to all participants who meet the age and service
requirements established for the program. This may occur because, as a
general rule, there is a higher concentration of highly compensated
employees in the older-age, longer-service categories. It may also be that
there are more highly compensated employees within the particular category
of workers whose skills an employer wants to retain by offering phased
retirement (e.g., engineers).
While this Working Group is concerned that retirement
plans operate in a nondiscriminatory manner so that there is no dilution
of coverage and benefits for the lower paid employees, we believe it is
worth considering whether a facts-and-circumstances safety valve, or some
other means of demonstrating compliance with the basic principles of
nondiscrimination in this context, would be beneficial. This might entail
enabling companies to seek specific IRS approval for their
phased-retirement programs, or the establishment of specially tailored
tests, like those already applicable to early retirement windows, to
accommodate the practicalities of phased retirement.
We have heard testimony that the age discrimination
rules are very broad and very general and that the uncertainty about their
application in phased retirement programs inhibits many companies from
pursuing phased retirement programs. For example, a recent Court of
Appeals decision, which the EEOC has endorsed, held that it is illegal for
an employer to provide lesser benefits to Medicare-eligible retirees than
it provides for early retirees. Given the overwhelming challenge of
comparing health benefit packages and depending on how the courts rule in
the aftermath to that decision this may mean that employers must provide
the same health coverage to over-65 retirees that they provide to younger
retirees. This could make it very difficult for an employer to structure
an appropriate and appealing health plan for phased early retirees.
While this Working Group does not want to dilute the
protections of older workers under the age discrimination laws, we feel
that a clarification of the law that accommodates phased retirement
programs would be beneficial. Any such clarification should, of course,
make sure that employers cannot use the notion of "phased
retirement" as a shield for constructively discharging older workers.
Although Deferred Retirement Option Plans (DROPs) have
become popular in the public sector, we are not aware of any in the
private sector. (See Background Information on Defined Benefit Plans for a
description of DROPs.) Part of the reason may be that pension plans in the
public sector are not covered by all of the ERISA rules and related laws
and regulations that cover pension plans in the private sector.
This Working Group feels that this type of plan is an
attractive way for an employer to retain its older employees who might
otherwise leave employment to take advantage of early retirement
incentives contained in the plan. The absence of these plans in the
private sector may be due to legal obstacles in ERISA or related laws.
This Working Group did not have the time to investigate the specific
obstacles that might exist for these plans, but we feel further study is
warranted.
III. RECOMMENDATIONS
To enhance phased retirement, the ERISA Advisory
Council recommends that the Secretary of Labor consult and work with the
appropriate government agencies and individuals to accomplish the
following:
To alleviate the potential problem of pension loss when
final average pay goes down, we recommend:
A change or clarification in pension law or regulations
so that a pension cannot be reduced if pay decreases due to phased
retirement.
Until the above recommendation is accomplished,
employees be notified if a change in their employment status may reduce
their pension.
To alleviate the problem of requiring employees to
completely sever their employment relationships with their current
employer to access their pension benefits prior to normal retirement age,
and to encourage employers to make the plan changes that would allow
employees to take advantage of phased retirement, we recommend:
Support of the Phased Retirement Act introduced by
Congressman Earl Pomeroy and Senator Charles Grassley which will allow
pension payments to be made, even while employed, after the earlier of:
a. Normal retirement age
b. Age 59½
c. 30 years of service
Allowing employers to adopt these new rules on a
temporary basis, i.e. with a sunset provision.
Clarification that benefits paid after 30 years of
service (but before age 59½) not be subject to the 10% additional tax on
premature distributions.
Clarification that the bill facilitates early access in
the event of phased retirement while restricting other options that might
allow voluntary access to funds prior to actual retirement.
To alleviate the health care access concerns of older
workers, we recommend consideration of one or both of the following:
Allowing individuals to purchase Medicare coverage
between age 55 and age 65 at a rate that is competitive with group
insurance policies that provide similar benefits, but without
consideration of insurability and pre-existing condition requirements.
Extending the total COBRA period for employees losing
coverage after age 55 to the lesser of:
a. Period of time to Medicare eligibility
b. Period of coverage with the employer prior to the
COBRA period.
To alleviate situations where the phased retirement
provisions in a pension plan cannot pass the mechanical income-based
nondiscrimination tests, but where the intent is clearly
nondiscriminatory, we recommend:
Permitting a facts and circumstances test for phased
retirement provisions in a pension plan, as an alternative to passing the
mechanical nondiscrimination test.
Developing safe harbors and/or special rules addressed
to phased retirement programs that accommodate their special
characteristics.
To alleviate some of the Age Discrimination in
Employment Act (ADEA) concerns employers and employees may have regarding
phased retirement programs, we recommend that:
The Secretary of Labor collaborate with the EEOC on a
review of the application of the ADEA in the context of phased retirement
programs, so that guidance can be issued that lets employers and employees
know what conditions and boundaries are required for an acceptable phased
retirement program. If, in consultation with interested stakeholders in
the private sector, they determine it is necessary to modify the law to
make such programs feasible and attractive, they should recommend
appropriate statutory amendments.
To evaluate the potential to provide private sector
employers with the same options and tools available to public sector
employers to design pension plans that enable employees to receive more
value from their pensions, while continuing to work, we recommend:
The Secretary of Labor organize a task force with other
appropriate government agencies and the general public to investigate and
study potential ERISA and related rules that may be obstacles to private
sector employers in designing Deferred Retirement Option Plans (DROPs) or
similar arrangements that protect the value of pensions when employees
work past their early retirement ages.
IV. BACKGROUND INFORMATION ON DEFINED BENEFIT PENSION
PLANS
The traditional defined benefit plan provides a monthly
income for the life of the participant (and spouse, unless the participant
and spouse elect some other form of benefit). The amount of a monthly
pension is determined by a formula which usually takes into account years
of service and often pay. An example would be 1% of final average pay for
each year of service.
Final Average Pay
Final average pay is often defined as the average over
the last 3 or 5 years, or the average pay over the 3 or 5 consecutive
years out of the last 10 which produces the highest average. Even in the
latter situation, someone's final average pay may decrease if they work
several years in a part-time position after working full-time. Current
pension law prohibits a pension from going down because of additional age
or service, but there is no specific rule that stops a pension from being
reduced because pay goes down. Although we have heard that the IRS
position on this issue is that pension benefits cannot go down if pay is
reduced, additional documentation would be beneficial. Many professionals
in the employee benefits community have differing views on the subject and
some court cases have supported a reduction in pensions when average pay
goes down.
Late Retirement
A participant works past normal retirement age still
earns additional pension benefits. However, the longer a person works and
delays his or her pension, the fewer years he/she will receive a pension.
Therefore, even though a participant's monthly pension benefit may
increase through additional years of service, the value of the pension may
actually decrease. Some plans provide that, at a minimum, a person who
works past his or her normal retirement age will receive a pension whose
value is equal to the value of the pension which would have been payable
at his or her normal retirement age. This really means that the person has
not earned any additional value in his or her pension. Current law permits
a pension plan to start paying out benefits at normal retirement age, even
if the participant continues working. This eliminates a large portion of
the problem of decreasing or non-increasing values in pension benefits
after normal retirement age. Both because of its cost and because
employers have historically used the pension plan to encourage retirement,
this provision is relatively rare.
Early Retirement
Most pension plans provide for early retirement after a
person meets a certain age and/or service requirement, e.g. age 55 and 10
years of service. Upon early retirement qualification, a participant may
defer distribution until normal retirement age or take a reduced pension
payment commencing earlier. The reduction in pension reflects the fact
that when a pension is payable early, it will be paid for more years. In
many plans, the reduction is smaller (or even zero) than it could be to
reflect the longer period of payment. In this situation, we say the plan
has a subsidized early retirement benefit. In some cases, the plan also
pays a supplemental benefit until age 62 to reflect the fact that Social
Security benefits are not payable until that age. At the point a person
becomes eligible for a subsidized early retirement benefit, the value of
his or her pension increases in value substantially.
After that point, if the person continues working, the
value of his or her pension may decrease even though the amount of monthly
pension he/she earns still increases. This is similar to the situation
where an employee works past his normal retirement date. Under current law
a participant must have a complete severance of employment with the plan
sponsor to start receiving his/her pension (prior to his/her normal
retirement date) and get the full value of the subsidized early
retirement. This creates an incentive for some employees to retire from
their current job, get their pension, and seek employment elsewhere. Of
course, other factors such as health insurance, 401(k) plans, and
financial security act to encourage an employee to stay employed.
It should be noted that while cash balance pension
plans are technically defined benefit pension plans; the benefit accrual
is more like a defined contribution plan. Therefore, much of the preceding
discussion does not apply to cash balance pension plans; except for those
employees who are grandfathered into the prior plan provisions.
Phased Retirement Liberalization Act
The Phased Retirement Liberalization Act has been
introduced by Congressman Pomeroy and Senator Grassley. It allows the
payment of pensions while the participant remains employed following the
earliest of:
Normal retirement age
Age 59½
Completion of 30 years of service
This would alleviate much of the pressure for an
employee to retire to take advantage of subsidized early retirement
benefits. It should be noted that this gives a participant the right to
receive his or her pension under the above circumstances, only if the
employer amends the pension plan to provide for such payment. Since this
will be relatively expensive for some employers who have very subsidized
early retirement benefits, many employers may not take advantage of this
change in law. Also, once an employer makes this change it is not
reversible due to the anti-cut back rules. Some employers could be
hesitant to make this change since they may want to encourage retirement
in the future and they will not have that option if they make this change
now. To address the hesitancy that employers might otherwise have to make
the change, the provision may be more narrowly defined to include only
employees who are currently over a certain age on a specified date.
The Working Group has a concern that the resulting
legislation must include provisions that specifically address abuses,
other uses, etc. to continue the goal that retirement benefits should, in
fact, be retained for retirement.
Under current law, 401(k) benefits may be distributed
after age 59½, if the plan so provides. The Phased Retirement
Liberalization Act would expand this to allow distributions after 30 years
of service.
Deferred Retirement Option Plan (DROP)
DROP is a feature of some public sector defined benefit
plans. Under this feature, an employee elects to have his/her pension
start on a particular date even though he/she continues to work. Instead
of having the pension paid out to the participant, the monthly pension
payment is paid to an individual account for the participant within the
pension plan. This technically complies with the rule that a pension
cannot be paid until the participant terminates employment, but allows the
employee to get the benefit of any early retirement subsidy in the plan.
The individual account is credited with investment return, and when the
participant actually retires, he/she receives the accumulated account
balance (in a lump sum or over a fixed period of time) in addition to the
ongoing pension.
Typically, the pension benefit, at the time the DROP
commences, is frozen and an additional benefit begins to accrue from that
time forward. The additional benefit is not paid until the participant
actually retires. Note that for final average pay plans, any increases in
final average pay after the DROP commences does not apply to the service
earned before the DROP commences.
It is also typical to have a fixed maximum period for
the DROP to operate (usually 5 years). After that time, the employee is
expected to retire. It is also possible to just have the pension payments
cease after the DROP period until the participant actually retires.
DROPs and other arrangements, which allow a participant
to be credited with or to access his/her pension while still employed,
remove one of the incentives for an employee to retire. Another view is
that DROPs and other similar arrangements merely put an employee on a
financial par with another employee who retires and goes to work for
another company which has the same benefit package.
V. SUMMARIES OF TESTIMONY
Meeting of May 8, 2000
Testimony of Paul J. Yakoboski, Ph.D
Senior Research Associate
Employee Benefit Research Institute
Notable Quotes:
"There seems to simply be an increased desire
among individuals to stay active and stay involved and do it through the
work place to later years."
"Because the labor market is very tight, older
workers are more in demand as are all workers. They are valuable
commodities, so their options are greater and they are able to demand
flexibility."
Summary:
Paul Yakoboski summarized the results of the annual
Retirement Confidence Survey, a telephone survey of about 1000
individuals, of whom about 250 were "retirees." The individuals
identified themselves as retirees (there was no specific definition).
Among current retirees, 25% have worked for pay in retirement. Of these
(multiple answers were allowed):
75% say the major reason is they enjoyed working and
wanted to stay involved.
30% stated having money to buy extras was an important
reason.
25% cited health insurance or other benefits.
21% needed to work to make ends meet.
For current workers, the expectations were:
47% expect to retire at age 65 or later.
22% expect to retire at age 60 to 64.
22% expect to retire before age 60.
4% expect to never retire.
67% expect to work for pay after retiring. Of these 64%
gave the primary reason as "enjoying work and wanting to stay
involved." About 30% to 37% (each) stated that "keeping health
insurance or other benefits," "having money to buy extras,"
and "having money to make ends meet" were reasons to keep
working.
In general today's workers plan on working longer than
today's retirees actually worked, although for many of those currently
retired, early retirement wasn't always by choice or design. It often
involved a company's downsizing, a health problem, or a family issue.
Mr. Yakoboski then summarized a study by Dr. Joe Quinn,
an EBRI Fellow of Boston College. It is based on "The Health and
Retirement Survey" which tracks older (starting in the 50's)
individuals over time. The main findings were:
From the end of WWII to the mid 1980's, men have been
retiring (leaving the workforce) at earlier and earlier ages. Since the
mid 1980's the trend has leveled off and may be increasing slightly. For
example, the labor force participation rate for 65 year old males was 72%
in 1950, 31% in 1985 and 32% in 1997. For 62 year old males, the figures
were 81% in 1950, 51% in 1985 and 53% in 1997.
Labor force participation rates for older women were
relatively stable from 1950 to 1985, and has increased significantly after
the mid 1980's. This is due to the general increase in the number of women
in the workforce.
Current estimates indicate that one-third to one-half
of American workers will work on a "bridge job" along the way to
total retirement. A bridge job is often part-time, often involves a change
of employer (or self employment) and may even involve a change in
line-of-work.
Other developments that encourage people to work longer
include:
-
Abolition of mandatory retirement
-
Changes in Social Security (larger
increases for late retirement and elimination of the earnings test
after age 65).
-
More retirement plans are defined
contribution plans which do not include age-specific retirement
incentives.
-
More jobs are in the service sector
and less in manufacturing, and so more people are able to work until
later ages.
-
Individuals want to stay active and
involved.
-
The labor market has been tight in
recent years.
Meeting of June 1, 2000
Testimony of Scott A. Morris
Vice President and Senior Economist
Working Group for Economic Development
Scott Morris presented the CED's research report
entitled "New Opportunities for Older Workers." Mr. Morris
pointed out that the aging of the baby boomer generation will have a
dramatic impact on the U.S. economy and that U.S. businesses and lawmakers
need to address many issues relating to older workers to encourage longer
employment.
Some of the findings of the CED include:
Americans are living longer and retiring earlier than
ever before. Since 1940 the life expectancy of a 65 year old has increased
by 4 to 6 years. The average retirement age has decreased over the past 30
years from age 65 to age 62.
America as a nation is growing older. 30 years from
now, 20% of the U.S. population will be age 65 or older, compared with
just 12% today.
The ratio of workers to retirees is dropping
dramatically: In 1950, there were seven working age persons for every
elderly person in the U.S. By 2030, the ratio will drop to less than 3 to
1. This will have a large impact on national savings and investment as
entitlement programs become more burdensome and retirees draw down their
retirement savings.
Current policies and practices create financial
disincentives to continued employment for older workers. These include
pension plans that penalize work after a certain age and Social Security
earning limits for beneficiaries.
Older Americans face non-financial obstacles to work,
including workplace discrimination and limited opportunities for
professional development.
More Americans will be willing and able to continue
working later in life. Many will work longer out of necessity, but many
others want to keep involved for personal fulfillment, or to maintain a
higher standard of living.
Older Americans represent a tremendous source of
experienced human capital. Employees report that older workers show more
judgment skills, demonstrate a greater flexibility in work arrangements,
and have a higher degree of loyalty to their employers than younger
workers.
Some recommendations presented in the CED report
include the following:
Remove public incentives for older Americans to work
Eliminate the Social Security earnings test.
Increase Social Security's normal and early retirement
ages to 70 and 65, respectively, over the next 30 years.
Eliminate the employer first-payer provision in
Medicare.
Reform Social Security Disability Insurance to promote
work by the disabled while maintaining an adequate safety net of benefits.
Amend current federal laws to allow greater flexibility
in hiring older workers for contingent and part-time work.
Reform workplace policies and practices to encourage
older workers to continue working.
Address ways to alleviate the problem of private plans
which penalize work after a certain age.
Consider greater use of cafeteria style benefits to
facilitate older workers in flexible work arrangements.
Pursue phased-retirement as an alternative to standard
retirement policies.
Combat negative stereotypes
Offer management training and employee workshops to
eliminate age related bias in the workplace and educate managers about the
value of older workers.
Ensure that age bias plays no part in hiring, training
or retention decisions.
Promote opportunities for older workers to update their
skills
Ensure that older workers receive the same access to
employer provided training as younger workers.
Encourage older workers to seek training to stay
competitive.
Urge educational institutions to offer expanded job
training programs for older Americans.
Create more recruitment strategies targeting older
workers.
The CED believes these recommendations can alleviate
the looming economic problems of an aging America, enhance the lives of
older Americans, and enable businesses to profit from the talent and
resources of their older employees.
Meeting of June 1, 2000
Testimony of Sylvester Schieber and Kyle Brown
Of Watson Wyatt Worldwide
"Phased Retirement: Reshaping the End of
Work"
Mssrs. Schieber and Brown discussed a 1999 Watson Wyatt
Survey and report entitled "Phased Retirement: Reshaping the End of
Work". They made the following points in their testimony:
The survey of 600 employers, which was conducted last
year, was prompted by the increased interest in the issue of phased
retirement on the part of both employers and employees. This increased
interest reflects to some extent the current tight labor markets, which
are projected to become even tighter in the next decade as the size of the
workforce continues to shrink.
Sixteen percent of the employers surveyed currently
have some form of phased retirement; three-fourths thought that phased
retirement could help ease the problems resulting from the tight labor
market; and the vast majority of employers surveyed thought that the
restrictions on phased retirement should be relaxed.
The two sectors currently using phased retirement most
extensively are education and public administration.
About three-fourths of those older workers surveyed
were interested in phased retirement, with different attitudes generally
related to the nature of the profession or the particular job. As a
general matter, there was greater interest in the arts, recreation and
finance than in the manufacturing sector.
Although some workers develop a new (shadow) career
after retirement, it is often difficult for a worker to get the same level
of pay in the new career that he or she was earning previously.
Although benefits provided to phased retirees are
stepped-down from their pre-retirement levels, they are typically more
generous than those made available to workers who have completely retired.
Most employers surveyed cited the current regulatory
restrictions and cost as the major deterrents to the increased use of
phased retirement. The major regulatory deterrent is the IRS regulation
prohibiting in-service withdrawals in qualified plans. The cost deterrents
cited are the salary premium for older workers and the cost of benefits
for these workers.
The survey indicated that 15% of men over the age of 65
are currently working, as compared to 8-9% of women over the age of 65.
However, workforce participation rates for women of all ages have been
increasing.
One trend noted in the report was the significant
disparity between phased retirement arrangements in the private and public
sectors. In the private sector, these arrangements tend to be ad hoc and
limited to selected management employees, while in the public sector,
these arrangements are more comprehensive and robust. Employers with
formal phased retirement arrangements have reported higher acceptance,
with one educational institution reporting a 25% participation rate.
It is in the public sector that the use of DROP plans
has become most prevalent. Under these "deferred retirement option
plans", a distribution from the employee's retirement plan is
credited to an individual account maintained for the employee within the
same plan. Interest is credited to the account and accruals under the
plan's benefit formula may continue as well. Drop plans are not used in
the private sector, possibly because of their expense.
Meeting of June 1, 2000
Testimony of Ted Kennedy
Senior Counsel For State Government Affairs,
American General Retirement Services
Of the many alternatives for phased retirement in the
public sector, most are compensation or benefit based.
Phased Retirement: Possibilities from the Public Sector
Compensation Based
Severance Package
Most of us are aware of the use of severance packages
to encourage early retirement, but these packages may also be used as an
incentive (bonus) to continue working for a period of time.
Salary Increase
Any increase in salary will provide the obvious
incentive to continue working.
Since most retirement benefits are in some way tied to
salary, increased retirement income is an additional incentive.
Conversion to Part-time Employee (e.g. job sharing,
work@home)
Within limits, the employer no longer pays FICA taxes.
These tax savings may be passed on to the employee in the form of a pay
increase.
Also within limits, and after age 65, the employee may
receive pension income from Social Security and other pension plans in
addition to salary.
Conversion to Consultant/Independent Contractor
The two points addressed for part-time employees apply
here as well. The employer may pay more for the service since they do not
have to fund other employee benefits, yet the employee maintains similar
benefits which were vested in prior employment.
Benefits Based
Social Security Limitations
One way to encourage retention of employees is to
continue increasing earnings limitations for those converting to part-time
or consultant status.
Separately, early payout penalties may be adjusted to
encourage or discourage employment.
Accumulated Sick Leave Plans (ASLP)
These plans reduce absences and encourage continued
employment by providing retirement income for un-used accumulated sick
days. Payment for these accumulations may be made pre-tax by the employer
up to sec. 415 limits and post-tax thereafter.
Employers may calculate and pay on an annual basis or
upon termination. Since payment is typically based on salary, the employer
may encourage continued employment by agreeing to calculate payment upon
termination thereby giving the employee the benefit of salary increases.
The caution for these plans is to ensure employer
funding to negate the possibility of unfunded accrued liabilities.
Deferred Retirement Option Plan (DROP)
(Began in Louisiana in 1982)
Similar to part-time and consulting arrangements, these
plans allow employees to begin payout of pension benefits while continuing
to work. The benefits are paid into an employee account until actual
retirement removing concerns regarding earnings limitations.
Upon retirement, the employee begins receiving their
pension annuity and is granted access to the lump sum accumulated in the
employee account together with earnings or interest.
These plans also help prevent inflation erosion of the
pension benefit possible in the years just prior to retirement.
Defined Contribution Pension and Voluntary Supplemental
Plans
Defined contribution plans (401(a), 403(a), 401(k), 457
and403(b)) by their nature provide incentive for employees to continue
working. Unlike defined benefit plans, defined contribution plans grow
exponentially in latter years due to the compounding effect of
contributions and earnings over time.
The portable aspect of these plans provide workers
flexibility in employment so job transfers may be facilitated without loss
to retirement accruals.
Employers may modify these plans to further encourage
employee retention.
Employers may provide matching dollars to voluntary
supplemental plans adding further to the corpus of retirement savings.
Employers may complement a defined benefit pension and
defined contribution voluntary supplemental plan with a defined
contribution supplemental pension. These supplemental pensions may be
applied throughout the career or after a period of years. In the latter
case, employers re-direct contributions from the defined benefit pension
plan at the point when additional contributions provide minimal increases
in retirement income, say 30 years. The vested interest in the DB is
frozen and all future contributions flow into a DC plan. The net result at
retirement is greater flexibility and income.
In instances where employers use DC plans as primary
pension vehicles, options are available.
Employers may allow employees phasing into retirement
to work and contribute to the DC pension, but begin withdrawing annual
earnings from the plan as well as salary. Upon retirement, the full corpus
of the plan is then made available.
In all examples illustrated above, the key to the
success of the phased retirement plan is employee education. Employees
must be fully informed of their options and educated as to which options
best meet and further their retirement goals. For this reason, employers
and the vendor community offering these plans must be prepared and
committed.
Education is Key!
Meeting of July 17, 2000
Testimony of Lana M. Keelty
Legislative Counsel,
National Rural Electric Cooperative Association
Ms. Keelty began her remarks by providing background on
the National Rural Electric Cooperative Association (NRECA). The NRECA is
an association of nearly 1,000 consumer-owned not for profit electric
cooperatives. It provides pension and welfare benefits to over 130,000
employees and dependents. The NRECA offers a very complex array of both
defined benefit and defined contribution plans which are viewed by its
member cooperative-employers as an important tool for attracting and
retaining employees. NRECA has defined phased retirement as a program of
incentives which target older workers to encourage them to remain actively
employed. Phased retirement has been offered by NRECA since 1983.
According to Ms. Keelty, phased retirement programs in
addition to offering a way to manage the problem of the diminishing pool
of new and younger skilled workers, phased retirement programs can reduce
and avoid the expense of recruiting and training new employees while
retaining the institutional memory of long-service employees. She stated
that phased retirement incentives address three specific issues in the
NRECA defined benefit plan.
Allows workers to lock in an advantageous interest rate
by transferring the lump sum distribution into NRECA's 401 (k) plan or
into an IRA
Provides income in order to maintain a comfortable
lifestyle while working a reduced schedule
Prevents the loss of the value of subsidized early
retirement benefits
Ms. Keelty described the NRECA's defined benefit plan
as a multiple employer plan which includes 850 cooperative employers which
in turn offer retirement benefits to 50,000 participants. The plan has in
excess of $3 billion in assets. Normal retirement age in the plan can be
60, 62, 65 or 30 years of service or age 62, whichever comes first. About
50% of the cooperatives have 62 as normal retirement age; 15%, age 65; and
35% have 30-year/age 62. Less than 1% have selected age 60 as the normal
retirement age. Participants may elect to receive benefits in the month in
which the employee reaches normal retirement age, while continuing to
work. Benefits may be received in a lump sum or as an annuity.
Participants in plans with the 60, 62 or 65 normal retirement ages may opt
for phased retirement once prior to reaching age 70-1/2 and may elect a
second phased retirement after reaching age 70-1/2. Benefit accruals
continue until actual retirement.
Ms. Keelty emphasized the need for legislation that
would allow defined benefit plans to make in service distributions to any
employee who has reached some combination of age and service and would
allow in-service distributions in the form of a lump sum as well as an
annuity.
She indicated the NRECA strongly supports the Phased
Retirement Liberalization Act introduced by Rep. Earl Pomeroy (D-ND) and
Sen. Charles Grassley (R-IA), which is aimed at the core problems of
implementing phased retirement programs.
Ms. Keelty concluded her remarks by offering the
thought that phased retirement is an option that will allow employers in a
tight and aging skilled labor market to attract and retain an increasingly
finite resource-workers.
Meeting of July 17, 2000
Testimony of James Klein
President
Association of Private Pension & Welfare Plans
James Klein is president of the Association of Private
Pension and Welfare Plans, an information exchange for benefits
professionals. Shortly after the passage of ERISA, they were refashioned
as a 501(c)(6) advocacy organization. Their main mission is to advocate on
behalf of their diverse membership, made up principally of large employer
plan sponsors, as well as service providers who help plan sponsors
administer their retirement and health plans. These benefit plans cover
more than 100 million Americans. Mr. Klein feels phased retirement is of
keen interest.
He stated that he realizes they're at the very
beginning stages of understanding the parameters in examining phased
retirement programs, how companies are dealing with them, and the
motivations of both the employers and the employees. He feels one of the
things that's obviously very important to them are the realities of the
labor force, the demographics that show falling fertility rates and
increasing life expectancies, all of which would seem to indicate a more
flexible policy toward how they define work in retirement.
One of the clear problems they see are these
impediments to both the company and the individual being able to have a
variety of different options as to how they want to deal with continued
work, depending on the nature of the retirement plan under which they may
be covered and their ability to get in-service distributions while
continuing to work on a full-time or part time basis; a variety of those
kinds of issues. Just the opportunity, to be able to balance work and
retain the kind of income that's necessary to pursue individuals'
interest.
One of the anomalies that their members frequently see
with regard to these impediments on the in-service distribution
restrictions, is that individuals can get around those rules by leaving
their company's employ, taking their distribution, and then go to work for
the competitor down the street. From the company's perspective, it's a
tough thing to see your most experienced, valued employees leave because
they want to avail themselves obviously of supplemental payments available
under the plan.
Often they end up working for a competitor when they
would just as soon prefer to continue working for their original company.
Mr. Klein states that is something that he thinks needs to recognized as a
real problem.
Their member companies have essentially looked at four
different approaches to attempt to design phased retirement programs, to
deal with the current legal constraints and some of the present barriers.
The first one relates to the in-service distributions
from a defined benefit plan. Companies have looked at the issue of simply
amending the normal retirement age to the earlier of age 65, or some
combination of the lower age and some period of employment service.
Needless to say, doing that can prove to be very costly
as all employees are eligible for the full benefits at this new lower age,
which then becomes adopted. It also can create issues, frankly, on the
nondiscrimination rules as well.
In-service distributions under 401(k) plans is sort of
a variation on this theme, with the employees over age 59½ 401(k) plan,
rules would permit withdrawals while the employee is still working, but
the law does not permit in-service withdrawals in the absence of a
hardship. That becomes a real question when the employee wishes to phase
down their employment at some age which is less than 59½.
Some companies have looked at the issue of simply
terminating and subsequent rehire, and determining whether a certain
period of time has to pass for this to be a bona fide retirement before
either the company approaching the individual or the individual
approaching the company about coming back to work.
That seems to be an overly cumbersome and not terribly
efficient way of trying to ensure that everyone is remaining on the right
side of various rules that currently are in place.
Then, of course, there are a whole host of issues about
part-time employment. Employers who wish to eliminate less favorable
treatment of part-time employees under the plans in the case of older
employees who are phasing down, could frankly inadvertently and sometimes
regrettably cause the affected plans to run afoul of various technical
rules if they try this.
For example, in a final average pay plan, if the
company would like to deem the individual to be earning at the full rate
so that their ultimate retirement benefit won't be lower, then you could
see where that might create some nondiscrimination rule of qualification
problems there, because those part-time employees would be deemed to be at
this higher rate.
Clearly, that's the kind of thing that is an impediment
to the company. It's not beneficial to the individual because no one is
trying to do the right thing for the individual.
According to Mr. Klein, in terms of their public policy
recommendations, a general principle they believe applies here, as they
think it applies throughout the voluntary employee sponsored benefit
system overall, is flexibility - flexibility on the part of the employer
to establish phased retirement plans, to modify these plans, and to
terminate them, if necessary. Voluntary participation on the part of the
employees in terms of their choice to avail themselves of a phased
retirement opportunity is also required.
Mr. Klein stated that he thought everyone was aware
that last week, Congressman Earl Pomeroy and Senator Charles Grassley
introduced some legislation called the PRLA legislation, the Phased
Retirement Liberalization Act. He said he commended them for what they're
doing for drawing attention to this issue. He supported this effort which
basically would allow employees, either upon reaching 30 years of service,
or age 59½, to be able to "set those new triggers", if you
will. He said they were still evaluating whether those numbers are the
appropriate triggers to have.
For example, is there a large group of individuals who
would want to avail themselves of phased retirement programs who are
somewhere between the age of 55 and 59½, just to pick a number.
Mr. Klein said another related issue is whether the 10
percent early distribution tax should apply to these newly permitted
in-service distributions. The Grassley-Pomeroy legislation does not really
address that issue. Also, whether or not these penalty-free distributions
should really be permitted from individual retirement accounts earlier
than under law, in order to conform with the new rule for qualified plans,
is also a related issue that he thinks would benefit from further
reflection.
Properly conceived, he says, a phased retirement
program should not favor either higher or lower paid employees.
Nonetheless, a program could violate certain mechanical nondiscrimination
rules that are applicable under the Internal Revenue Code. On the other
hand, facts and circumstances, not a discrimination rule, would permit a
phased retirement program while, in his view, prohibiting any abusive
programs that primarily benefit the highly-compensated employees.
The addition of a facts and circumstances standard to a
nondiscrimination rule is part of the bipartisan pension legislation that
has now passed Congress a few times in various iterations. Mr. Klein says
they recommend its enactment as a means of facilitating phased retirement
as well.
Mr. Klein stated that they do commend the Advisory
Council for holding this set of hearings. If the Labor Department is able
to explain for the benefit of all who listen the importance of encouraging
phased retirement as something that is very positive for employers, for
the workers, and then it turns out that the main legal impediments are the
ones that enshrined in the Internal Revenue code, then political process
will simply have to do its will. But, he concluded, the Advisory Council
has made a valuable contribution to a better understanding of it without
stepping over a jurisdictional line.
Meeting of August 15, 2000
Testimony of Lawrence Lorber,
Esq., Partner
Proskauer Rose, LLP,
Attorneys at Law
Mr. Lorber made the following significant points in his
oral testimony:
He is an expert on employment law issues, particularly
the Age Discrimination in Employment Act (ADEA).
Our Nation's employment policies and law are heavily
influenced by tax considerations.
Many of our basic employment law principles are based
on outdated assumptions about how the workplace operates and a narrow view
of the employment relationship.
For example, the age 65 normal retirement age reflected
in the Social Security program and in private pension plans is a throw
back to an age when few people lived to that age. In contrast, the ADEA
prohibits discrimination based on age at any age above 40 without a cap.
For example, telecommuting and home-work are increasing
alternatives to the traditional workplace.
The law should reflect the economic realities of new
employment structures. The law is somewhat hostile to phased retirement
programs. The law should allow employers and pension plans the flexibility
to design and operate effective phased retirement programs that make
economic sense to the employer and the employee.
An important issue for phased retirement is the
continued availability of health insurance. Employees will be very
reluctant to engage in a phased retirement if it means loss of health
insurance. Yet, there are issues about whether employees who work
part-time under a phased retirement program would be eligible for coverage
under the employer's health plan. COBRA coverage, which is limited to 18
months, might not be sufficient and is costly. The Medicare Secondary
Payor requirements should also be taken into account in designing a phased
retirement program. The employer's health plan will be the primary
coverage, and Medicare secondary coverage, for employees who continue to
work beyond age 64.
Another important issue is income maintenance. Can an
employee in phased retirement receive compensation and pension benefits at
the same time?
Most employment law practitioners would discourage
their employer-clients from using targeted incentives that tend to favor
one group of older employees over other older employees or younger
employees because of uncertainty over application of the ADEA.
"In many respects [phased retirement] is a safety
valve. If in fact it were possible, if an employer could make a rational
employment decision that it needed somebody's technical skills, but
perhaps not their full time effort, for whatever reason, can they use
those people in that regard? Can the benefit structure be at a point where
they can still be productively utilized and employed, but employed and
utilized at a lower level? Certainly conceptually it can be done. I think
as a practical matter, any employment lawyer will tell an employer don't
do it."
There is also an issue under the Older Workers Benefits
Protection Act whether a phased retirement program would have to comply
with the notice requirements of that Act.
A phased retirement program must take into account the
effect, if any, of a lower salary on the pension benefits of the employee.
Where pension benefits earned over a career are based on the employee's
final salary or final average salary, a reduction in salary under a phased
retirement program could cause the employee to lose pension benefits.
Meeting of August 18, 2000
Testimony of Norman Stein
Professor, University of Alabama
Professor Stein teaches employee benefits and federal
tax law at the University of Alabama (UA). UA's retirement program matches
employee contributions up to 5% of compensation to TIAA-CREF. UA employees
also participate in the Alabama Teachers Retirement System's (TRS) defined
benefit plan. It credits employees with 2% of final pay per year of
service. Retirement age is 65, but employees working 25 years can retire
at any age with full benefits.
Pension payments stop for retirees earning over $17,000
annually from a university, college or state agency. This prohibits moving
from full time employment to substantial part-time employment, because
neither reduced University pay nor early retirement benefits are
sufficient to support the workers. Because TRS is a final pay plan, moving
to part-time employment reduces future retirement benefits. Phased
retirement is effectively prohibited. Because it is a state pension
system, this plan is not governed by ERISA. Plans of this type have the
following disadvantages:
They discourage phased retirement by prohibiting
receipt retirement pay while working part-time. Phased retirement would
allow younger employees to advance. Plans like UA's limit employees to
choosing full-time employment or full-time retirement a stark choice of
complete and sudden retirement or working fulltime.
These plans allow employees to retire at any age after
working 25 years. It is poor tax policy for the government to provide
tax-subsidizes for retirement systems that begin paying benefits so early.
It is poor retirement policy to allow retirees in their
50's to switch to full-time work for a new employer thus reducing
resources earmaked for supporting people after they leave the job market.
It is poor labor policy to encourage those who truly
retire at an early age to exit the job market so young, especially given
the currently tight labor market.
Professor Stein favors phased retirement. Both
employers and older employees contemplating retirement would gain if
employees began receiving retirement benefits while continuing work on a
reduced, but substantial, basis. Phased retirees would be shortchanged if
they didn't continue accruing additional retirement benefits so transition
from phased retirement to complete retirement was not financially
dramatic.
Some fear this proposal because of the potential drain
on retirement plan assets. Stein, however, believes it can be designed to
be revenue neutral.
Professor Stein's Principles for Phased Retirement are:
To be tax-subsidized, retirement systems should support
people whether in full or phased retirement.
Employers should end accelerated early retirement
programs on a prospective basis, except for people unable to work, due to
disability or otherwise.
Despite point #2, it is unfair to eliminate early
retirement programs for current employees who have relied on them in
retirement planning.
Employers should permit employees who reach a genuine
retirement age such as 60 to draw retirement benefits and work part-time.
Employees who elect phased retirement should continue
to earn additional retirement accruals.
Employees who elect phased retirement should receive
detailed disclosure comparing the value of their phased retirement
benefits with benefits they would receive (i) if they retired immediately,
and (ii) if they continued to work full-time.
Employers should not be able to pay retirement benefits
periodic or lump sum to employees who continue to work full-time,
except employees who reach social security's retirement age.
Employers should boost the ultimate benefits at normal
retirement age of employees who forgo early retirement, but those benefits
should not start until employees actually retire or begin phased
retirement.
Professor Stein listed bad ideas from some pension
consultants. They would:
Let business use retirement plan assets for
non-retirement purposes.
Undermine the important reliance protections of
Internal Revenue Code section 411(d)(6).
Weaken solvency of the social security trust fund.
One industry idea would permit employers to pay lump
sums from pension plans to induce employees not to take a subsidized early
retirement benefit to which they are entitled. This is bad because lump
sums aren't treated as retirement savings by the employees, but as bonuses
to employees the employer wants to retain. They are likely to be consumed
prior to retirement age. Employers want the ability to use pension funds
to pay cash bonuses to favored employees, but this abuses the central idea
of tax-subsidized retirement systems, which are designed to help employees
build security for when they leave the workforce.
A better approach would permit employers to increase
benefits at normal retirement age if the employee forgoes early
retirement, so the benefit at normal retirement age would become the most
valuable benefit under the plan. If employers want to pay immediate cash
bonuses, they can but with after-tax dollars.
If this bad industry concept became law, top-heavy
pension plans of many small businesses would turn into revolving
tax-deferred savings accounts to be drawn on whenever business wanted
to and for any purpose, thus changing these plans into naked tax shelters
and drains on the US Treasury.
The consulting industry wants to end Social Security's
earnings test for employees under 65. Actuarially, reduced age-62 social
security benefits have a higher value than age-65 social security
benefits. This bad idea would increase the expense of the Social Security
system. Workers should not be encouraged to take pre-age 62 benefits.
Those benefits are not necessary for employees to take phased retirement.
Phased retirees should derive adequate income from the combination of
retirement benefits and current compensation. Social Security benefits
should be saved until employees actually retire or reach Social Security
retirement age. Current law permits an employee to earn $10,500 before
benefits are reduced. This adequately aides low income employees who want
to take phased retirement.
Professor Stein opposes the consulting industry
proposal that employers are allowed to offer benefits, then retract them
even after employees have earned them, in order to permit
"experimentation" in "phased retirement" benefit
programs.
Professor Stein proposes these law changes:
The law should prohibit major reductions in pension
benefits already earned for employees in their 50's who cut their working
hours due to health reasons.
The law should mandate an employer's affirmative duty
of complete disclosure to avoid the situation where GTE tricked employees
into taking lump sum benefits less valuable than normal benefits.
Meeting of September 11, 2000
Testimony of Pamela C. Scott
On behalf of the U.S. Chamber of Commerce
Pamela Scott is an attorney with the benefits
consulting firm Towers Perrin, but testified on behalf of the U.S. Chamber
of Commerce.
Ms. Scott noted that phased retirement is not a
technical term. For her presentation, she focused on situations where an
employee voluntarily reduces the amount of hours worked in anticipation of
full retirement. Most of the issues addressed involve private sector,
single employer plans under section 401(a) of the Internal Revenue Code.
Some practical problems associated with phased
retirement include:
Existing defined benefit plan designs may encourage
workers to retire fully to receive subsidized early retirement benefits.
Existing plan designs do not allow flexible draw-downs
of retirement plan benefits. For example, an employee may wish to receive
a smaller benefit while working part-time and then a larger benefit after
full retirement.
After normal retirement age, employees may lose some of
the economic value of their defined benefit plan by not retiring, and
often do not earn meaningful additional benefits if they continue working.
The legal issues associated with addressing these
problems include:
Distributions from qualified defined benefit plans are
not permitted prior to the earlier of termination of employment or the
attainment of normal retirement age under the plan. The IRS has ruled that
if in-service withdrawals (prior to normal retirement age) are permitted,
then benefits are not considered "definitely determinable" and
therefore the plan is not a pension plan. Reduction of hours worked does
not constitute a severance of employment. It may be possible for an
employee to terminate employment, receive his/her pension and then be
rehired as a part-time employee or a contract employee, but the plan risks
disqualification if the IRS rules there was no bona fide termination of
employment. Under profit sharing plans, distributions may be made (if the
plan allows it) after contributions have been in the plan at least two
years or the employee has been a participant for five years. 401(k)
contributions cannot be withdrawn until age 59½, except in the case of
hardship.
There are problems with reducing the normal retirement
age in an ongoing plan (to permit earlier distribution of benefits while
still working). These involve benefit accrual rules, nondiscrimination
tests and higher plan costs. Legislation introduced by Senator Grassley
(S.2853) and Representative Pomeroy (H.R. 4837) on July 12, 2000 would
allow in-service distributions from defined benefit plans at the earliest
of (a) the attainment of age 59½, (b) completion of 30 years of service,
or (c) attainment of normal retirement age. This would put defined benefit
plans on a par with 401(k) plans where in-service distributions may be
allowed at age 59½, and would alleviate some of the problems associated
with phased retirement.
There is a 10% additional tax on distributions before
age 59½ which may be a barrier to some phased retirement plans. This tax
does not apply if the employee has separated from employment after age 55,
if the distribution is rolled over to another qualified plan or IRA, or if
the distribution is part of a distribution over the participant's life
expectancy (or joint life expectancy) provided that the participant has
separated from service when any of the annuity payments are made. Note
that these exceptions do not allow any participant to access his
retirement funds (without paying the 10% additional tax) before the age of
59½ if he/she is still working for the same employer.
Plan rules on forms of distribution often limit the
flexibility of an employee to tailor his/her retirement income to his/her
needs during phased retirement. Typically a single election as to the form
and timing of the benefit payment applies to the total benefit and is
irrevocable. Under a defined contribution plan (including a cash balance
pension plan) more flexibility is often available, subject to spousal
consent rules and minimum distribution requirements under code section
401(a)(9). There are ways for defined benefit plans to provide more
flexibility, but it is very rare, probably because of difficulties in
administration and communication.
Pension plans that provide special options for phased
retirement programs must pass various nondiscrimination tests. Also, if
special options are only available for employees under a phased retirement
program, there cannot be too much employer discretion in determining the
eligibility for the program. Also, under a phased retirement program, an
employer may not offer a choice between additional cash and a benefit
under a qualified defined benefit plan.
If an employee continues working past the normal
retirement age, the plan may allow payment of pensions (which eliminates
the problem of a participant losing economic value if he/she continues
working). However, many plans do not pay benefits until actual retirement.
Under these circumstances various suspension of benefit rules come into
play.
Some employers try to avoid some of these phased
retirement problems by rehiring a retiree as an independent contractor (or
consultant). However, there are specific rules to determine a bona fide
independent contractor status. One of these rules is that the employer
must no longer have the right to control and direct the details of the
work performed. Except for some professional or technical employees, this
type of arrangement is very difficult to structure.
In a question and answer session, the following issues
were discussed:
To Ms. Scott's knowledge, the U.S. Chamber of Commerce
has not taken a position on the legislation proposed by Senator Grassley
and Representative Pomeroy.
Phased retirement programs may be easier to design
around cash balance pension plans than traditional defined benefit pension
plans since the benefit accrual is more similar to a defined contribution
plan.
How a pension plan defines final average pay may be a
problem for phased retirement programs if a reduction in pay reduces a
participant's pension.
Meeting of September 11, 2000
Testimony of Paul Shultz
Internal Revenue Service,
Director of Employee Benefit Plans, Rulings and
Agreements
Mr. Shultz testified before the Phased Retirement
Working Group on September 11, 2000. He was accompanied by his associate
from IRS, Roger Kuehnle. Mr. Shultz raised the point that he was before
the Council to provide information regarding existing laws and
interpretations and that neither he nor the Internal Revenue Service has
yet taken any position on phased retirement issues. He characterized the
title of "Barriers to Phased Retirement" concerning which he had
been asked to testify as presuming implicitly that barriers might be
undesirable.
Barriers to phased retirement exist primarily under
defined benefit plans, but not defined contribution plans.
Mr. Shultz explained the Internal Revenue Code and
ERISA statutes overlap in many but not all instances, there being analogs
in ERISA to IRC provisions. He noted that the enforcement under
reorganization for these matters is exclusively with the Internal Revenue
Service. Hence, in a practical matter the Internal Revenue Service is the
leader or primary agency on this issue.
Mr. Shultz pointed out that the "barriers" to
phased retirement, included concerns arising from the lack of further or
adequate future retirement benefits, and the restraints on in-service
distributions, arise not directly from the Internal Revenue Code or ERISA,
but rather from long-standing IRS interpretations of the Internal Revenue
Code to the effect that pension requires "retirement" and you
can't work and collect retirement benefits, etc.
Questions from the Working Group members suggested that
barriers to phased retirement should consider not only partial
retirement/partial work, but even continuing to work full-time and
receiving pension benefits.
This would be particularly applicable to early
retirement subsidies, which are very common under defined benefit plans.
Mr. Shultz pointed out that the problems of phased retirement conflicting
with the IRS's view of in-service distributions at least below
"normal" (usually age 65) retirement age, may be viewed as
having an adverse impact on the societal desire to obtain on a full-time
or on a part-time basis the continued productivity of mature workers.
Interestingly, the Phased Retirement Liberalization Act
introduced in Congress accepts the basic premise of the IRS that
"pensions" requires retirement and cessation of same employment
with only specific exceptions to it, rather than re-evaluating the
non-statutory bar to in-service distributions.
Working Group members raised questions, namely the
common 1,000 hour per year for pension credit requirement in contrast with
the IRS's view that working even 500 hours still disqualifies one from the
receipt of benefits before plan defined normal retirement age and concerns
regarding the health insurance coverage for persons working under phased
retirement and their dependents.
Meeting of September 11, 2000
Testimony of Diane Oakley
Vice President, TIAA-CREF
Phased Retirement Arrangements at
Colleges and Universities
Normal retirement age in the defined contribution plans
that colleges and universities provide for their faculty and staff
employees functions more as a target age. Most plan documents specify age
65 as the normal retirement age and colleges select plan contribution
rates to provide an adequate pension income at age 65. In 1979, 42% of
TIAA-CREF participants starting to draw their lifetime income benefits did
so at age 65. Twenty years later in 1999, the percent of those starting
income payments at age 65 dropped to 12% while those starting income at
age 70 or later jumped to 38%. Retirement rates for faculty dropped with
the elimination of mandatory retirement and that today about 50% of the
faculty who choose to work beyond age 70 are still employed three years
later. This figure increased from 10% in the years before 1994.
Over the past several decades, the administration and
faculty at major research universities as well as smaller colleges
utilized both voluntary retirement incentive plans and phased retirement
options to help balance faculty positions with student enrollment. A study
prepared for the National Center for Educational Statistics (NCES),
indicated that the opportunity to continue working part time at a college
or university was an important consideration in a professor's willingness
to retire. While 27.7% of all faculty surveyed were willing to take an
early retirement incentive, 46.0% were willing to consider a phased
retirement arrangement. Phased retirement has an increasing appeal among
the older cohorts: 52.6% of faculty 55-64 and 61.4% of faculty over 65
would consider phased work arrangements.
According to a TIAA-CREF survey of 167 colleges and
universities, conducted in 1998, almost all of the 66 colleges responding
reported that they allow retired faculty to teach part time. The survey
also noted twenty-five colleges and universities with phased retirement
arrangements and four more with a combination of an incentive plan with
phased retirement. While the length of the phased period varied, three to
five years was the most popular duration. Eligibility provisions required
faculty to be at least age 50 or 55 or have worked 10, 15 or 20 years
before they can take advantage of the phased retirement option. Salaries
paid for part-time teaching reflected a pro rata amount of full-time
earnings, but some colleges added incentives such as added salary and the
continuation of benefits based on the former full-time salary. In certain
states, public retirement systems contained restrictions on the level of
part-time employment that were incorporated into the phased agreements.
When colleges and universities decide to offer faculty
phased retirement arrangements, they can amend their plan documents to
allow participants in the phased program to start income benefits from
their 403(b) pension plan while they continue to teach part time. Starting
to draw pension income at an earlier age under a defined contribution plan
means a lower level of income benefits. The phased retirement program
often includes continuing pension contributions while employees draw a
portion of their benefits to supplement part-time earnings. Starting
retirement income from only part of a TIAA-CREF account has grown in
popularity; 30.5% of participants who started an income stream for the
first time in 1999 did so.
TIAA-CREF supports the legislation introduced by
Senator Grassley and Representative Pomeroy would allow certain
participants in qualified money purchase plans and retirement plans to
draw benefits from their pensions without requiring that they terminate
employment. We encourage them to expand the eligibility criteria, since
many colleges and universities offer phased retirement opportunities to
faculty members once they attain age 50 or 55 and complete as few as 10 or
15 years of service.
Furthermore, individuals age 55 and over who draw their
pensions as a series of income payments are not subject to the 10% early
withdrawal tax penalty only if they have separated from service. Amending
this section of the tax code to not penalize younger participants in
phased retirement arrangements would enable these individuals to draw less
in monthly income from their pension plan, since the 10% excise tax would
no longer apply. TIAA-CREF also supports the proposal in the Grassley/Graham
and Portman/Cardin pension bills that would raise the Section 415
percentage of compensation limit to 100%. Enacting this could help enable
employers to make pension contributions on full salary to participants in
pension phased arrangements.
TIAA-CREF, through its Institute, is working with the
higher education community to obtain more comprehensive data on phased
retirement arrangements. A survey of 1,300 colleges and universities is in
the field and will be finalized in early 2001.
VI. EXHIBITS AND WRITTEN MATERIALS RECEIVED
2000 Index
Advisory Council on Benefit Implications of Phased
Retirement
(Actual Transcripts/Executive Summaries for the
Council's full meetings and working group sessions are available at a
cost through the Department of Labor's contracted court reporting
service, which is Executive Court Reporters at
301-565-0064/301-589-4280FAX.)
For the Advisory Council's 2000 Term:
May 8, 2000: Benefit Implications of Phased Retirement
Agenda
Official Transcript
Executive Summary of Transcript
Strawman Discussion Paper/Scope Outline
Packet of testimony from the April 3, 2000 Hearing of
the Senate Committee on Aging.
Several news stories including "Older Workers
Should Be Encouraged to Remain, Panel Told" by Ismail Turay, Jr., for
the April 3, 2000 Cox News Service; "Congress Looks to Help Older
Workers" by Alice Ann Love, Associated Press.
"Retirement Patterns and Bridge Jobs in the
1990s", by Joseph F. Quinn, Boston College and a Fellow of the
Employee Benefits Research Institute, February 1999, an issue brief for
EBRI. (Remarks from the study were contained in Dr. Paul J. Yakoboski's
appearance before the working group).
June 1, 2000: Benefit Implications of Phased Retirement
Agenda
Official Transcript
Executive Summary of Transcript
May 8, 2000 Follow up Letter from Dr. Paul Yakoboski,
EBRI, regarding tabulations from the Retirement Confidence Survey, 1999,
which he referenced in his May appearance.
"Empty Pipeline: The Federal Employment Crisis,
Retirement Wave Creates Vacuum" by Stephen Barr, Washington Post, May
7, 2000.
"New Opportunities for Older Workers"
executive summary prepared by the Committee for Economic Development.
"Phased Retirement and 401(K) Plans", by
Martha Priddy Patterson, from the 401(K) Handbook, Thompson Publishing
Group, May 29, 2000.
"Phased Retirement: Possibilities from the Public
Sector", Outline Prepared by Ted Kennedy, Senior Counsel for State
Government Affairs, American General Retirement Services, for his
presentation at the working group session.
"Phased Retirement: Reshaping the End of
Work" a 1999 survey report prepared by Watson Wyatt Worldwide.
July 17, 2000: Benefit Implications of Phased
Retirement
Agenda
Official Transcript
Executive Summary of Transcript
Written Testimony of Lana Keelty, National Rural
Electric Cooperative Association.
Written Testimony of James A. Klein, President of the
Association of Private Pension and Welfare Plans, as well as a news
release issued by APPWP about his testimony before the working group.
A copy of the Phased Retirement Liberalization Act,
introduced by Sen. Charles Grassley in the Senate and by Rep. Earl Pomeroy
in the House of Representatives as well as news releases about the bill by
both of their offices and others issued by the National Committee to
Preserve Social Security and Medicare and by the APPWP on July 12. Also
included are the remarks made by Rep. Pomeroy as he introduced the bill in
the House as well as a BNA Pension and Benefits Daily news story,
"Rep. Pomeroy, Sen. Grassley Set to Introduce Phased Retirement
Legislation, Aides Say," July 10, 2000.
Written Testimony by Jonathan Barry Forman, a law
professor the University of Oklahoma, "Making Federal Pension Policy
Work" which is to be published in a forthcoming North American
Actuarial Journal.
"Firms Find More Profit From Retirement
Funds" by Ellen E. Schultz, Wall Street Journal, June 20, 2000.
"A New Generation Redefines Retirement" a
feature from Workforce Online, May 5, 2000.
August 15, 2000: Benefit Implications of Phased
Retirement
Agenda
Official Transcript
Executive Summary of Transcript
Written Testimony of Norman P. Stein, Professor of Law,
University of Alabama, Tuscaloosa.
Written Testimony of Jack McCarthy, Vice President of
Human Resources, Varian Medical Systems, Palo Alto, California submitted
August 2, 2000.
Two Wall Street Journal articles written by Ellen
Schultz on July 27, 2000, entitled "Companies Find Host of Subtle
Ways to Pare Retirement Payouts" and "Phased Retirement - Option
for Workers Is Mainly Boon For Their Employers".
"Phased Retirement Gains in Workplace
Popularity" by Diana Kunde, Dallas Morning News, February 4, 2000.
"Employers Turn to Phased Retirement As Workers
Age and Labor Shortages Increase: Trend Predicted to Intensify Over
Time", from www.watsonwyatt.com/homepage/us/new/pre dated March 29,
2000 as well as "Responding (Again) to the Hype: Phased
Retirement", July 7, 2000; "Phased Retirement: Reshaping the End
of Work", September 9, 1999; "Choosing Retiree Benefit Options:
What Constitutes Informed Choice?" July 1, 2000; "Taking the
Subsidy Out of Early Retirement: One Story Behind the Conversion to Hybrid
Pensions", July 2, 2000, and "Don't Miss the Forest for the
Trees", June 2, 2000.
September 11, 2000: Benefit Implications of Phased
Retirement
Agenda
Official Transcript
Written Testimony of Diane Oakley, Vice President
TIAA-CREF as well as a survey of Changes in Faculty Retirement Policies.
"Technical Barriers Under the Internal Revenue
Code to Implementing Phased Retirement Programs" by Pamela C. Scott
(written testimony of her appearance).
"Labor Day 2000: EPF Predicts Size of Labor
Shortage, How to Prevent It", a news release issued by the Employment
Policy Foundation.
1) Watson Wyatt's Reshaping the End of Work overhead
slides.
"Older Workers: Trends in Employment and
Retirement", July 26, 2000, by Patrick J. Purcell, specialist in
Social Legislation, Domestic
October 12, 2000 Benefit Implications of Phased
Retirement
Agenda
Official Transcript
Summary of Transcript
VII. MEMBERS OF THE WORKING GROUP
CARL T. CAMDEN
Chair of the Working Group
Kelly Services, Inc.
RICHARD TANI
Vice Chair of the Working Group
William M. Mercer (retired)
ROSE MARY ABELSON
Vice Chair of the Advisory Council
Northrup Grumman Corp.
EVELYN ADAMS
IBM Global Services
EDDIE C. BROWN
Brown Capital Management
JUDITH CALDER
Abacus Financial Group, Inc.
JANIE GREENWOOD HARRIS
Firstar Corporation
MICHAEL J. GULOTTA
Chair of the Advisory Council
Actuarial Sciences Associates, Inc.
CATHERINE HERON
Capital Group Companies (CGC)
TIMOTHY MAHOTA
Integral Development
JUDITH MAZO
The Segal Company
PATRICK MCTEAGUE
McTeague, Higbee, Case, Cohen, Whitney & Toker
REBECCA MILLER
McGladrey & Pullen, LLP
JAMES S. RAY
The Law Offices of James S. Ray
MICHAEL J. STAPLEY
Deseret Mutual Benefit Association
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