Phased Retirement Proposal Could Put New Hardship on Employers

Employers may have thought that the proposed regulation on phased retirement would put to rest their concerns about retaining older workers, but they could be in for a new round of headaches.

    The rule, which was proposed by the Internal Revenue Service and U.S. Department of the Treasury, would allow older employees to work part time and receive benefits accrued in their pension plans, a seeming benefit for both employers and employees. There is a catch, however, in that employers would have to conduct annual audits of how many hours employees are working to determine how much in pension benefits they receive.

    Under the proposal, employees’ benefits during phased retirement would be limited to the percentage by which they expect their hours to be reduced. For example, employees who expect to reduce their hours by 25 percent would receive up to 25 percent of their benefits during the phased retirement period. If employees end up working more than they expected, however, the employer would have to reduce the pension benefits being paid out to them.

    This means that employers who pay employees annual salaries would not only have to count their employees’ hours during the phased retirement period, they also would have to know how many hours they worked when they were full-time employees. Such calculations will require hours of administrative work particularly for companies with salaried employees, versus those that pay by the hour. Many observers expect employers to rely on technology to help them with this burden. Creating an automated system to do the calculations would cost about $100,000 for a one-time implementation, according to Valerie Paganelli, senior consulting actuary in the Seattle office of Watson Wyatt Worldwide, who testified on the subject at a March 14 hearing before Treasury and IRS officials.

    Counting employees’ hours and figuring out what percentage of a pension benefit they should receive becomes even more complicated given that employees’ hours often change from week to week. For example, an employee could work 20 hours one week and 30 the next. “This is just not practical,” says Bruce Schobel, chairman of the retirement security principles task force at the American Academy of Actuaries, who helped write the group’s comment letter to the Treasury Department and the IRS. Schobel says the academy views the proposal as a good step, but it does not believe that employers of salaried employees would be willing to implement systems to track their hours.

    The Society for Human Resource Management and the American Benefits Council have expressed similar concerns. “This is going to be incredibly burdensome, and human resources professionals are the ones who are going to have to deal with it,” says Wendy Wunsh, former manager of employment regulations at SHRM. “We are not saying that we don’t want to do it, but we also want to make it easy as possible.”

    Another concern about the proposal is that it would allow for phased retirement at 59½, which many believe is too late. In its testimony, the American Benefits Council argues that the age at which phased retirement begins should depend on the terms of the plan. Many employers’ plans allow employees to retire at 55, and if phased retirement does not kick in until 59½ it could cause employees to leave their jobs, take their pensions and then work somewhere else, notes Jan Jacobson, director of retirement policy for the American Benefits Council.

    The other issue is that under current law, an employee who begins to take pension payments before 59½ gets hit with a 10 percent tax. Schobel says that if employees want to access their pension benefits and pay the penalty, it should be their prerogative. A Treasury Department official, however, says that the agency is unlikely to permit phased retirement before 59½ and subject employees to this tax because it would invite “misunderstanding and disappointment.”

    Jacobson and others predict that the IRS and Treasury will come out with final rules by the end of the year and that the hour-counting will be part of it. “Employers will have to figure out if offering phased retirement is worth it,” she says. “A lot of employers may decide it’s not.”

Workforce Management, May 2005, p. 26 — Subscribe Now!