Diane Goulder Cohen, Esq.

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• Phased Retirement Programs
• Exploring the Issues

• Diane Goulder Cohen, Esq.

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• BACKGROUND

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What is Phased Retirement?

• There is no statutory or agreed upon legal
  definition of Phased Retirement.
• Generally, Phased Retirement is a program that
  enables an employee at or near retirement to
  gradually work less than full-time. 
• The issues involved in Phased Retirement cross
  various areas of regulation and concern for
  employers benefits, employment law, age
  discrimination, employer/employee needs.
• Typically, an older employee may want to work
  less but cannot afford to lose his or her salary.
  Thus, creative ways to keep an older employee on
  salary while able to receive pension benefits is
  a goal.

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What is Phased Retirement?

• The issue affects employees who are not yet
  eligible for full retirement and may want to work
  part-time, as well as employees who have reached
  retirement age but would like to continue
  working, just not full-time.
• Phased Retirement also includes rehiring retired
  employees.
•  
• Different issues apply to each of the categories
  described above from both employer and employee
  perspectives as well as from a regulatory
  viewpoint.
•  
• Lets unpack the term and discuss different
  workplace options for each of these groups.
• But first

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• Per a 2014 survey by the Transamerica Center for
  Retirement Study almost two-thirds of those
  surveyed would like a Phased Retirement work
  environment less hours, less stress, and a
  different position of responsibility.
• The same survey noted only 21 of employees
  worked for companies that allowed flexible hours
  generally.
•  

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• June 29, 2012 Congress passed legislation
  allowing Federal government employees to have
  Phased Retirement Programs.
• Office of Personnel management (OPM) finalized
  rule on August 7, 2014.
• OPM authorized eligible employees to apply
  starting November 6, 2014.
• To date, agencies have not implemented due to
  vagueness in the OPM guidance and hesitancy by
  the agencies, despite the recognized need by
  federal agencies and their older employees.

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Why Would an Employee Want Phased Retirement?

• Per a recent AARP survey
• Health benefits
• Income
• To stay mentally active

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Why Would an Employer Want Phased Retirement?

• Significant population of Baby Boomers in the
  workplace continuity
• Cost Savings re retention and training

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What Laws Apply and Which Regulatory Agencies
Have Overview?

• Internal Revenue Service (IRS)
•  
• ERISA and the Code
• The Employee Retirement Income Security Act of
  1974, as amended, (ERISA) and the Internal
  Revenue Code of 1986, as amended, (the Code)
  are applicable. Certain provisions, specifically
  regarding benefits, are in both ERISA and the
  Code. Thus, violations can be duly regulated by
  both the IRS and the DOL.

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. What Laws Apply and Which Regulatory Agencies
Have Overview?

• Pension Protection Act (PPA)
• Prior to PPA, a defined benefit pension plan
  could not distribute pension benefits prior to
  the participants normal retirement age (NRA)
  or other termination of employment. Under PPA,
  distributions from these plans can be made when a
  participant reaches age 62 even if he or she has
  not yet terminated employment.
• Defined contribution plans such as profit sharing
  and 401(k) plans are unaffected by this provision
  of PPA. Typically, profit sharing plans provide
  for in-service distributions and 401(k) plans
  allow for in-service distributions at age 59½.

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What Laws Apply and Which Regulatory Agencies
Have Overview?

• Nondiscrimination
• Qualified plans such as pension, profit sharing,
  and 401(k) plans cannot provide benefits which
  disproportionately favor the highly compensated
  employees.
• Running afoul of these rules can disqualify the
  plans and create adverse tax consequences.

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• What are the ramifications of a wrongful
  in-service distribution to a qualified plan?
• Loss of tax deduction to the employer of
  contributions to the plan.
• Earnings of the plans investments become
  taxable.
• Potential tax on the individuals vested benefits
  - income and/or excise taxes.

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What Laws Apply and Which Regulatory Agencies
Have Overview?

• The type of retirement plan matters vis-à-vis
  Phased Retirement issues.
• Profit sharing
• 401(k)
• Defined benefit pension

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What Laws Apply and Which Regulatory Agencies
Have Overview?

• Employee vs. Independent Contractor
• Misclassifying a worker as an independent
  contractor when he or she is an employee can have
  serious tax and benefits ramifications.
•  
• Unfortunately there are not clear guidelines
  concerning how much time constitutes a bona fide
  separation of service.
• What functions will a rehired retiree perform?
  Different than pre-retirement? Different than
  another employee?

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What Laws Apply and Which Regulatory Agencies
Have Overview?

• Equal Employment Opportunity Commission (EEOC)
•  
• Is a rehired worker an employee?
• Department of Labor (DOL)
• The DOL has overview of employment issues and is
  looked to for guidance in this area. The Age
  Discrimination in Employment Act (ADEA) is
  applicable.

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What Laws Apply and Which Regulatory Agencies
Have Overview?

• Social Security Administration (SSA)
• Working past NRA can impact a retirees Social
  Security benefits.
• If a retirees provisional income is more than
  25,000 for a single or 32,000 joint, Social
  Security benefits (SS) become taxable.
  Provisional Income is adjusted income (wages,
  self-employment income, interest, dividends, and
  other taxable income excluding Social Security
  income) plus 50 of these benefits, and also
  includes tax-free municipal bond income. If
  Provisional Income exceeds certain limits, 50 -
  85 of the Social Security benefits are taxable.

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What Laws Apply and Which Regulatory Agencies
Have Overview? (continued)

• A Phased Retiree may earn a small enough income
  so not to become subject to certain SS limits.
  Employees who begin to receive Social Security
  benefits before their Social Security retirement
  age (65, 66, or 67) can earn up to (15,720) per
  year without penalty. For every 1.00 in excess
  of 15,720 the SSA withholds .50 in SS benefits
  which amounts are repaid monthly after actual
  retirement. Phased Retirees have a greater
  likelihood of earning less than 15,720 when
  planning their retirement income options, and
  thus, not running afoul of this SS limit.
• State taxes may also apply.

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Where Do We Stand Today And What Can We Expect?

• Many if not most companies have informal programs
  but formal Phased Retirement Programs are just
  developing.
• Various advisory committees and lobbying groups
  have been working to provide input to the DOL and
  other regulatory agencies concerning
  recommendations for guidance on the many
  outstanding Phased Retirement issues. The ERISA
  Advisory Council has been working with the DOL
  concerning many of the issues raised in this
  presentation.

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Where Do We Stand Today And What Can We Expect?

• Joint action by the DOL and IRS is necessary to
  provide agreed upon guidance to employers and
  employees regarding retirement and health and
  welfare plan benefits.
• To remove impediments to Phased Retirement as a
  clear option, Congress would need to enact
  legislation allowing defined benefit pension
  plans to make in-service distributions at early
  retirement age as well as allowing profit
  sharing/401(k) plans to make in-service
  distributions beginning at early retirement age
  or age 55.
• Clarity via legislation is needed to define a
  bona fide separation of service vis-à-vis these
  issues.

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Ambiguities in Phased Retirement

• Is the returning employee, or reduced hour
  employee, an employee or an independent
  contractor?
• Complexities if in a defined benefit pension
  plan
• Computation of final benefit could be affected
• Depending on his or her age, are in-service
  distributions allowed?
• Is the benefit recalculated based on this
  service?
• Will the returning employee be eligible for other
  qualified plans and fringe benefits?

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Ambiguities in Phased Retirement

• Health care issues
• If the returning employee is eligible for the
  employers health care plan, and also eligible
  for Medicare, the employees plan will be
  primary, Medicare secondary.
• Will COBRA bridge any gap in coverage?
• Will the returning employee work enough hours to
  be eligible for the employers health care plan?

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• PHASED RETIREMENT OPTIONS

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What are Employer Choices for Creative Phased
Retirement?

• Special Projects
• Short Term Assignments
• Floaters
• Consultant
• On call/Part-time
• Retirement pool

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Special Projects

• Client requested or employer initiated projects
  with specific goals and/or defined beginning and
  end dates.
• Especially beneficial to employer who may not
  otherwise have Special Project staffing.
• Need-based situations.
• Health care workers during medical emergencies.
• Long-term electrical workers during power outages
  or construction projects

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Special Projects

• Long-term or specific programs.
• Research
• Design

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Short-Term Assignments

• Flexibility
• Often need-based
• Training and seminars
• Coverage for times of more work
• Seasonal
• Coverage during leaves

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Floaters

• Maximum flexibility
• Typically less highly skilled
• Coverage during leaves

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Consultant

• Typically not an employee
• Sometimes provided through third parties

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On call/Part-time

• As needed
• Other than in certain industries, typically less
  highly skilled
• Similar to casual employees
• Requires either a large pool or retired employees
  who have flexibility
• Beneficial to employer to pay for employees only
  when needed based on work flow
• Coverage during leaves

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Retirement Pool

• Flexibility
• Company culture
• Skill levels

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What are Employee Choices?

• Reduced work schedules
• Job sharing
• Work for the same employer
• Work for a different employer

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Reduced Work Schedules

• Part-time
• Phased
• Company culture
• Flexibility

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Job Sharing

• Economic savings
•  
• Challenges
• Work product
• Personal interactions
• Company culture

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Work for the Same Employer

• Ambiguity in current guidance
• Better transition for current employer
• Model may include reemployment directly, through
  a leasing organization, or independent contractor

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Work for a Different Employer

• Removes ambiguity in current guidance
• Less desirable to current employer/competition

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Advantages to the Employer

• Retention of skilled and experienced workers
• Leadership development and mentoring
• Training of newer and younger workers saving
  costs to the employer
• Retention and continuation of corporate wisdom
  and culture
• Smooth transition of Baby Boomer retirements,
  i.e. large outflow from workplace

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Disadvantages to the Employer

• Lack of clear guidance
• Company culture
• Perception of favoritism/morale

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Advantages to the Employee

• Smooths transition to retirement.
•  
• Can be tailored to the employees situation to
  some extent.
• Social Security considerations.

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Disadvantages to the Employee

• May become ineligible for profit sharing plan
  contributions which often require 1,000 hours of
  service in a year.
• Lower compensation since part-time means lower
  qualified plan contributions.
• May be ineligible for extra plans like incentive
  pay programs.
• Social Security benefits are based on an
  employees 35 highest income years.
• Phased Retirement over several years could lower
  an employees 35 year average.

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Disadvantages to the Employee

• Pension plan formula may base retirement benefit
  on compensation and years of service with a
  higher weighting on final average pay, especially
  a consideration in governmental and many union
  plans.
• May be better to terminate employment completely
  and return as a part-time employee.
• May be better to terminate employment and work
  part-time for another employer.

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Disadvantages to the Employee

• May become ineligible for employers health care
  plan.
• May not be a problem if Medicare eligible.
•  
• If eligible for employer provided health
  insurance and Medicare, coordination can be
  tricky.

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Disadvantages to the Employee

• Phased Retirement may affect the employees life
  insurance benefits.
• Often the amount of death benefit is linked to
  current compensation which in Phased Retirement
  has decreased.
•  

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Type of Phased Retiree Matters

• Some of the above issues change when comparing a
  Phased Retiree who terminates and is rehired when
  compared to a Phased Retiree who stays employed
  but works less hours, especially if the latter
  accesses qualified plan benefit payments while
  still employed.
• Qualified Plan and other benefits eligibility
  issues.
• Qualified Plan in-service distribution
  differences.

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What Options Maximize Both Employer and Employee
Benefits?

• It depends on the Company culture.
• The demographics of the Company will play a
  critical role in determining the best option.
• The Companys needs will drive the best solution.
• The availability of the Phased Retirees and their
  number will impact the best choice. 

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• RECOMMENDATIONS

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Education When to Start and What to Provide

• Employers, especially Human Resource personnel,
  need training to understand the benefits of
  flexible work schedules before considering a
  Phased Retirement program work on the company
  culture.
• Employers should design Phased Retirement
  programs that maximize an employees Social
  Security benefits.

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Education When to Start and What to Provide

• Human Resource personnel should familiarize
  themselves with the interplay of Phased
  Retirement with Social Security to make sure the
  employee understands the ramifications of working
  less than full-time for the employer.
•  
• Employers and Human Resource personnel need to
  understand eligibility requirements for employer
  provided retirement and health care plans,
  including death benefits, to carefully design
  Phased Retirement Programs and counsel potential
  Phased Retirees.

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Demographics

• Is the employer top heavy with older employees?
• What costs of training are saved by having a
  Phased Retirement program?
• What options make the most sense for the
  employers demographics how to evaluate?

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Getting Started How to Implement

• Educate management regarding the various options.
• Analyze the Employers demographics.
• What percentage of near retirees constitutes the
  workforce?
• What are the needs of the Company in the areas
  currently handled by near or potential retirees?
•  Assess the Companys current policies and
  procedures regarding flexible schedules.

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Getting Started How to Implement

• Review resources available for companies like
  yours, both by industry type and geographically.
• Network to stay current with developments in this
  changing landscape.
• Obtain employee feedback.
• Assess talent management needs.

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Phased Retirement ProgramsExploring
the Issues

• Diane Goulder Cohen, Esq.
• 99 Summer Street, 13th Floor
• Boston, Massachusetts 02110
• Tel [phone] Fax [phone]
• Website www.wagnerlawgroup.com
• dcohen_at_wagnerlawgroup.com
• A0152228.PPTX