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CUNA Regulatory Comment Call

January 5, 2005

EXECUTIVE SUMMARY

• The Internal Revenue Service (IRS) has issued a notice of proposed rulemaking on setting forth requirements for a phased retirement program and permitting distributions to be made from a pension plan under a phased retirement program.
• The benefit would be paid as a pro rata share based on the extent to which the employee has reduced hours under the program.
• Under these proposed regulations, the employee’s final retirement benefit would be comprised of the phased retirement benefit and the balance of the employee’s accrued benefit under the plan.
• In explaining the rationale behind the new program, the IRS notes the increased risk that individuals, who are living longer lives, may outlive their retirement savings. Further, the IRS is responding to the desire expressed by employers to encourage older, more experienced workers to remain in the workforce.
• Comments are due to the IRS by February 8, 2005. Please submit your comments to CUNA by January 28, 2005.
• Please feel free to fax your responses to CUNA at 202-638-7052; or e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Senior Regulatory Counsel Catherine Orr at corr@cuna.com; or mail them to Mary or Catherine c/o CUNA’s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. You may also access the proposed rule here

DISCUSSION

The IRS has issued a notice of proposed rulemaking on setting forth requirements for a phased retirement program and permitting distributions to be made from a pension plan under a phased retirement program.

Phased retirement allows employees who are at or near eligibility for retirement the opportunity for a reduced schedule or workload. Employees may supplement their part-time income with a portion of their retirement savings.

The IRS previously issued Notice 2002-43 requesting comments regarding phased retirement. (The notice is available here.) After receiving comments, the IRS has issued proposed regulations that would amend Internal Revenue Code sections §1.401(a)-1(b) (Post-ERISA qualified Plans and qualified trusts; in general) and add §1.401(a)-3 (benefits during phased retirement) so that an employee’s accrued benefit could be paid under a bona fide phased retirement program. The benefit would be paid as a pro rata share based on the extent to which the employee has reduced hours under the program.

In a bona fide phased retirement program, the employee would maintain a dual status during the phased retirement as partially retired and partially in service.

A bona fide phased retirement program is a program that is written and adopted by the employer whereby employees may reduce the number of hours they customarily work beginning on or after a retirement date specified under the program and receive phased retirement benefits. There are certain conditions that must be met before payment of the phased retirement benefits is permitted:

• Employee participation must be voluntary.
• The number of hours the employee works must be reduced by 20 percent or more.
• The maximum amount that can be paid is limited to the percentage of the employee’s total accrued benefit that the employee reduces the hours he or she works.
• The payment may not be made in a single-sum distribution or other eligible rollover distribution.
• The plan must have periodic testing to make sure the employee is working at the reduced schedule as expected by having an annual comparison between the number of hours the employee actually worked and was expected to work.
• The employee must be able to participate in the plan in the same manner as if the employee were still maintaining a full-time work schedule, including calculation of average earnings.
• The employee must be entitled to the same benefits at full retirement the same as an employee who does not elect phased retirement. Benefits include early retirement benefits, retirement-type subsidies, and optional forms of benefits.

One of the requirements of the proposed phased retirement plan is periodic testing by annual comparisons to ensure that employees are working at the reduced schedule. The proposal provides exceptions to requiring annual comparisons. The annual comparison is not required if the employee is within three months of normal retirement age. Additionally, it is not required if the employee’s compensation does not exceed the compensation that would be paid to the employee if he or she had worked full time multiplied by the employee’s work schedule fraction.

Under these proposed regulations, the employee’s final retirement benefit would be comprised of the phased retirement benefit and the balance of the employee’s accrued benefit under the plan. When the employee fully retires, the phased retirement benefit can continue unchanged or a new election is offered with respect to that benefit.

The plan may provide one or more additional phased retirement benefits to the employee if his or her phased retirement benefit is less than the maximum amount of the phased retirement benefit permitted or his or her work schedule is further reduced at a later date.

1. Should eligibility to participate in a phased retirement program be extended to employees that reduce their workload using a standard, other than counting hours, to identify the reduction, and, if so, are there administrable methods for measuring the reduction?
   
   

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2. The proposed regulations require periodic testing of the hours an employee actually works during phased retirement, and if the hours are materially greater than the employee’s phased retirement work schedule, the phased retirement benefit must be adjusted. There are a number of exceptions to this requirement. Are there other, less complex alternatives that also would ensure that phased retirement benefits correspond to the employee’s reduction in hours?
   
   

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3. The proposed regulations require an offset for the actuarial value of additional payments made before a reduction in phased retirement benefits. Should the regulations permit this offset to be calculated without regard to any early retirement subsidy and, if so, how should a subsidy be quantified?
   
   

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4. The right to receive a phased retirement benefit as a partial payment is a separate optional form of benefit and therefore is a benefit, right, or feature for purposes of the special nondiscrimination rules in this section. Comments are requested on whether there are facts and circumstances under which the age and service conditions for a particular employer’s phased retirement program should be disregarded in applying the nondiscrimination rules or under which the rules should be modified with respect to phased retirement.
   
   

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5. Should any special rules be adopted to coordinate the rules regarding distributions and continued accruals during phased retirement with a plan’s provisions regarding employment after normal retirement age, such as suspension of benefits?
   
   

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6. Do you have any additional comments?
   
   

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