Comments by the IEEE-USA Career Policy Committee to the United States Internal Revenue Service Concerning Phased Retirement In response to
IRS Notice 2002-43, 31 December 2002 These comments were prepared by the Career Policy Committee of the Institute of Electrical and Electronics Engineers-United States of America (IEEE-USA), a professional society with 235,000 U.S. members. Our members have dual concerns: in many technology sectors of our economy much of the intellectual capital is vested in older engineers and scientists, many of whom are scheduled to retire within a relatively short period of time, and, owing to declines in the value of retirement assets, numerous retirees are contemplating continued part-time work after retirement from their primary employer. ERISA requirements governing defined-benefit pension plans have not made it feasible for many of these engineers and scientists to continue to work part-time for the employer from whom they will derive their pension. Thus, those employers are deprived of continued access to the intellectual capital developed during years of employment, but their competitors, who are not involved in the pension calculations, can take advantage of this body of knowledge. Phase retirement can offer a way to address both of these concerns. In addition, there are larger demographic issues that can be ameliorated with phased retirement. The Workforce 2020 study done for the Department of Labor by the Hudson Institute (http://www.brook.edu/dybdocroot/press/books/clientpr/hudson/workforc.htm) showed that the future workforce will have a shortfall of available manpower, owing to low birth rates, that would have to be made up by encouraging workers to retire later, not sooner. The report notes that "there will be as many Americans of 'retirement age' as there are 20-35 year olds." Staying in the workforce longer would be a reversal of the recent trend. Earlier testimony supporting expanded retirement savings opportunities for baby boomers also pointed toward the need for many of them to supplement their retirement income by working at least part time in retirement and/or retiring later. Any change to regulations for qualified pension plans would have to address the full spectrum of employees; industries that typically have large cyclical variations in employment (and this certainly includes the aerospace industry, as noted in the recent Commission report on the future of the aerospace industry (see http://www.aerospacecommission.gov for the full report; Chapter 8 deals with workforce issues) would have to offer opportunities for phased retirement across the board. But phased retirement should not be another tool for easing workers out in two steps. Any phased retirement benefit should be revenue-neutral to the pension plan -- what a pensioner gets earlier comes out of what he gets later (after adjusting for nominal growth of the fund and net present value of the benefit(s). The Society of Actuaries has provided an example of how this could be done for defined-benefit pension plans (see http://www.soa.org/library/monographs/retirement_systems/M-RS02-2/M-RS02-2_partI_I.pdf). There probably should be a floor on the age at which phased retirement could start. Age 60 would fit within present law (no penalty if age 59-1/2 or older when withdrawals begin). Age 60 would fit airline pilots whom the FAA does not allow to fly passengers past age 60. Age 55 is the earliest age for drawing pension benefits from many plans. For IRAs, streams of payments beginning at ages lower than 59-1/2 are exempt from penalty. This doesn't apply to pensions, but could. Elections should be irrevocable -- once started on a phased retirement, the pensioner could not return to full-time work for the same employer. There may be a cap on how long phased retirement could last, e.g., 5 years or 10 years; perhaps to age 70 or 75. It is easy to say, "put the partial pension in a separate fund and don't touch it until full retirement," because that fits current law, but that defeats the purpose -- providing a viable income made up of contributions from both the pension and current employment. Therefore the request for comments rightly addresses ways to accomplish the phased retirement while retaining a livable income. Early retirement incentives such as 'bridge' payments, intended to help the worker being eased out until he qualifies for Social Security, should not be included in future pension computations. If a phased retiree keeps working half time (and half time should probably be the standard benchmark) he could accumulate additional pension credit on a pro-rata basis, i.e., two years of such work equals one year additional pension credit, and two years of compensation equals one year of pay for the final average computation. The alternative is to credit time but not change the Final Average Pay for pension purposes (especially if the hourly rate goes down compared to previous full time employment). Benefits are a separate issue -- should a phased retiree earn pro-rated vacation credit, or not? Should he receive the same group life insurance as other, full-time employees (the cost is negligible)? If he is working half time, should he get half the benefit from the employer's health plan, i.e., his premium contributions would be double that for a comparable full-time employee, but the deductibles and co-pays would be the same? As the ERISA Advisory Council task force on phased retirement noted, making Medicare the primary (not secondary) payer for workers over 65 with other health plans could encourage the employers to offer phased retirement. The employer's plan then becomes a surrogate for a Medicare Supplement policy. But the recent court decision that employers must offer comparable health benefits to active employees and retirees (after allowing for what Medicare covers) hasn't really settled out yet. Whether an employee goes into a phased retirement should be the choice of the employee with no nudging by the employer. Of course, the employer has to agree that there is a part-time job available for him, but this should not be a "house-cleaning" tool for the employer. Specific Comments For IRS Notice 2002-43, we have assigned numbers and letters to the major and minor bullets in order to respond unambiguously to the issues raised therein. 1. Circumstances under which phased retirement would support the goal of defined benefit plans to provide benefits after retirement- Phased retirement could aid in improving the competitiveness of the U.S. through the preservation and continued utilization of intellectual capital while allowing older workers to balance work and personal time as they transition into retirement. With suitable changes, the laws covering defined benefit plans can support phased retirement in a revenue-neutral way, while increasing tax revenues through payroll taxes that would not otherwise be incurred by full retirees. a. Bright-line rules - Employers are reluctant to embark on a phased retirement offering without clear guidance on how this could affect qualification of their defined benefit plans. Therefore, bright-line rules in this area would be beneficial. b. Should early retirement age be considered under a plan? - Yes, phased retirement plans should be available to workers who have reached the age for earliest retirement. An earlier age would have more impact on the actuarial assumptions guiding a pension plan; phased retirement should be revenue-neutral to the plan. c. Should there be consideration of how much the employment in a phased retirement has actually reduced his workload? Yes; minor reductions could be considered an abuse of the system and recalculations to accommodate them an unneeded administrative load. Half time would be a reasonable benchmark for phased retirement. 2. Deviation from "normal retirement age" with phased retirement - Normal retirement age has long been defined as age 65, but many industrial pension plans provide added longevity credits to permit full retirement at age 62, with reduced retirement benefits available as early as age 55. a. How should compensation under phased retirement be handled with respect to nondiscrimination testing? - If the hourly rate paid is used to develop an equivalent annual full-time compensation for purposes of determining whether the phased retiree is highly compensated, that would be equitable even if the phased retiree is only working half of those hours. The phased retirement option would have to be available to all workers who are vested and qualified to receive a full pension, if it is to be non-discriminatory. b. The requirements for provision of a qualified joint and survivor annuity and consent requirements - There should be no change in this area. If a phased retiree dies while still working part-time, in a revenue-neutral scenario, the survivor's annuity should be computed on the basis of what the employee's pension would have been under full standard-age retirement. Any early retirement subsidy, such as bridging payments until the Social Security benefit starts, should not be included in the computation. Spousal consent for deviation from the survivor annuity described in the plan should still be required. c. The phased retirement benefit should not be treated as a separable benefit - Rather, it is a reduced pension drawn over a longer period of time until full retirement occurs. Actuarially, the total benefit paid over the lifetime of the beneficiary should the same, including both reduced partial and later full pension. The full pension would have been reduced to account for the payments that are made prior to the age determined for full retirement. But, since the phased retirement work could continue past the date for normal full retirement, the later benefit may not necessarily be reduced. There may be credits earned during the phased retirement period that actually increase the amount of the final full pension. d. Accrued benefit requirements - Existing accrued benefit protections should be retained. No rights to a later full pension (adjusted actuarially) shall be abridged as a result of the phased retirement. e. Limitation on benefits and contributions under qualified plans - No changes to existing limitations are needed. f. Accrued benefit not to be decreased by amendment - No change is required, other than permitting partial payments while still in part-time employment with the sponsor's organization. The phased retiree's earned income will be subject to FICA payroll taxes as well as income tax. A pro rata adjustment in health care benefit premiums may be required. g. How phased retirement arrangements differ from total separation from employment before normal retirement data and then working as a consultant or independent contractor for the former employer - Before normal retirement age, the separated employee received either no pension or a reduced pension. Working as a consultant or independent contractor he can accrue retirement funds for his own account. In phased retirement, he may have the opportunity to add to pension credits with the employer used for computation of his ultimate full pension. These credits are the one exception to the revenue-neutral philosophy for the pension fund. | Top of Page | Policy Log | Public Policy Forum | IEEE-USA | Last Update: 31
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