As employers throughout the country experience crippling labor shortages, some are turning to former employees, at least, temporarily to solve the problem. The Internal Revenue Service (IRS) has facilitated this process by removing obstacles that may have prevented employers from rehiring retirees and discouraged workers from continuing to work after reaching retirement age. The IRS recently provided guidance with Frequently-Asked Questions (FAQ) on two issues that relate to the payment of retirement benefits to employees who continue to work after reaching retirement age or when rehired after retirement.
The first issue clarified by the IRS in this guidance occurs when an employee retires and begins to receive retirement benefits from a qualified pension or other retirement plans. IRS rules for plan qualification generally require that the worker’s retirement is a bona fide retirement for the individual to receive retirement benefits. These rules apply to plans that do not permit in-service withdrawals of retirement benefits,
Some retirement plans define what qualifies as a bona fide retirement, while other retirement plans rely on the facts and the circumstances of the employment relationship’s termination. It is noteworthy that neither the IRS nor the Internal Revenue Code provides any definition of what constitutes a "bona fide" retirement.
In past years, the IRS has warned that at the time of retirement, if an employer agrees to later rehire the retiree, the retirement does not qualify as a bona fide retirement. However, the new IRS guidance clarifies that employers may rehire retirees because of unforeseen circumstances caused by the COVID-19–related labor shortage without any risk to plan disqualification. If the original retirement was bona fide and the rehire was not prearranged at the time of retirement, employers may rehire their retirees and, if permitted by the plan, continue to pay them retirement benefits while working after the rehire.
The guidance sets forth the following example:
“If a public school district sponsoring a qualified pension plan experiences a critical labor shortage due to the COVID-19 pandemic that was unforeseen at the time of an individual's prior bona fide retirement, the public school district rehires the individual to help ease the labor shortage, and the plan terms do not define a bona fide retirement in a way that prevents the rehire, the individual's reemployment would not cause the prior retirement to fail to be a bona fide retirement. Consequently, if plan terms permit, benefit distributions could continue after the rehire.”
The FAQ on the subject also provides the following:
If the sponsor of a qualified pension plan wishes to rehire a retired employee to fill an unforeseen hiring need related to the COVID-19 pandemic, the sponsor should analyze the impact of the rehire under the plan by taking into account any plan terms, including any need for plan amendments, relating to rehires. For example, plan sponsors should review any plan terms requiring that an individual who retires and commences benefit distributions not be rehired within a specified period, any plan terms relating to the suspension of distributions upon rehire, and any other plan terms that may have an impact on the pension benefit of a rehire.
The other FAQ relates to the issue of whether a qualified pension plan may permit individuals who are still working to begin receiving in-service distributions. The IRS states that a qualified pension plan generally may allow individuals to begin receiving in-service distributions if they have attained either age 59½ or the plan's normal retirement age. However, distributions that commence before an individual reaches age 59½ may be subject to a 10% additional tax under Code § 72(t) unless an exception applies.
An in-service distribution provision may allow employers to retain experienced employees who would otherwise retire to access retirement benefits but would be willing to continue working full- or part-time if they could receive their retirement benefits while working.
If you believe that your rights as an employee have been violated, Moss Bollinger can help you protect and assert these valuable rights. The experienced and knowledgeable employment law attorneys at Moss Bollinger will help ensure that your rights as a California worker are protected if your employer has engaged in any illegal conduct under federal or California law. Contact Moss Bollinger today at 866-942-7974 or reach us online.