March 31, 2005
Proposed regulations issued by the Internal Revenue Service (IRS), are unlikely to spur widespread adoption of formal phased retirement plans, according to a new study from the Employment Policy Foundation (EPF), a Washington, D.C.-based research group. The study cites specific problems with the regulations, while explaining the mutual benefits employers and employees would see from implementing these plans. Phased retirement allows workers to retire gradually out of the workforce by transitioning into a part-time role.
"The proposed regulations attempt to address one key hurdle to plan implementation. Unfortunately, the regulations themselves create new impediments while removing the one the IRS intended," said Janemarie Mulvey, EPF Chief Economist. Current IRS regulations prohibit employees from drawing on their traditional defined-benefit pension plans while continuing employment with the same employer. The new regulations would remove that restriction, allowing workers in a "bona-fide" phased retirement program to receive a pro-rata portion of their benefits based on the percentage reduction in their work hours.
According to the report, the regulations would create an administratively burdensome testing system that would require many employers to set up new systems to monitor the hours their employees work. The cost to comply with such testing provisions would likely discourage many employers from implementing voluntary phased retirement programs for their employees with defined benefit pension plans.
"Employers would still be able to enter into voluntary phased retirement agreements with their workers. However, many employees are likely unable to work a reduced schedule for reduced pay without being able to receive a portion of their pension," said Mulvey.
In addition to the administratively burdensome testing procedures, the report cites the minimum age in the proposal (59 ½) as being too old for many workers who might want to enter into phased retirement. According to the study, 63 percent of defined benefit pension plans have early retirement incentives that take effect at age 55, if the worker meets minimum service requirements. These incentives would likely lead many workers to retire before being eligible for phased retirement.
EPF's report finds that even if the regulation is dramatically improved questions will remain about the legality of formal phased retirement programs. Currently, the Employee Retirement Income Security Act (ERISA) requires employers to adhere to rules promoting uniformity in the treatment of employees and the types of benefits offered. The standards make it difficult for employers to create special benefit packages for select groups of workers. Consequently, the design of phased retirement plans is challenging because the employees that companies would want to participate in a phased retirement program, could be chosen based on their level of skill and knowledge.
Additionally, there is some debate about the applicability of the Age Discrimination in Employment Act (ADEA) to phased retirement programs and its impact on retirees. With the Supreme Court ruling yesterday that an employer can be sued for age discrimination based on policies and practices that unintentionally cause a disparate impact on older workers, those concerns are more likely to cause employers to hesitate before implementing phased retirement plans.
The full report is available on EPF's web site at:http://www.epf.org/pubs/newsletters/2005/ba20050331.pdf