As the renowned Baby Boomer generation inches its way into the retirement years, employers are beginning to consider how this vast purge of experienced workers is going to affect the workplace.
To help employers ease through the demographic shift and to enable them to continue to provide training to an upcoming, smaller generation of workers, the Internal Revenue Service has issued proposed new Treasury regulations that would permit a system of phased retirement.
Under a plan of phased retirement, workers approaching retirement age, instead of being faced with a choice of continuing to work full-time or ending employment in order to begin collecting a pension, would have an additional option of working part-time and collection a partial pension.
According to current census data, in the next 30 years, the percent of the U.S. population made up of individuals age 65 and over is expected to increase from 19.4 percent to 30 percent. The number of people in that age group is expected to more than double, from 36,696,000 in 2005 to 76,641,000 in 2035.
Until now, employers have mostly not addressed the issue of retaining older members of the workforce. Those who have participated in some type of retention generally resort either to rehiring a former employee who has severed a relationship with the firm and adding the employee to the part-time staff, or engaging the former employee as an independent contractor.
According to Patrick Purcell, of the University of Pennsylvania's Wharton School, "This introduces considerable uncertainty into the process for both the retiree and the employer, because once the employment relationship is severed, neither party is legally bound to renew it."
As employees age, they may find that they are physically unable to continue a full-time relationship with the employer, or they may simply want to cut back on work to have more time for personal endeavors. Yet at the same time, there is a national trend toward working beyond the traditional retirement age of 65. Increased longevity, improved health care and changes in the structure of Social Security to make later retirement more attractive have all contributed to an aging of the nation's active workforce.
Boston College economist Joseph F. Quinn estimated that at least one-third of older men and one-half of older women now retire gradually, instead of making a complete transition from fully employed to fully retired. This trend is expected to continue and increase.
Currently these partially retired individuals seek "bridge jobs," part-time jobs to help bridge the gap after they leave their full-time job and before they completely retire. An attractive alternative is to allow workers to continue at their full-time jobs, where they have established skills and responsibilities, but with a reduction in the number of hours worked.
Having, and eating, your cake
An economic problem arises because today's typical pension plans are structured in such a way that an employee is not eligible to receive retirement benefits if she is still employed by the company, even if that employment is only part-time. But switching to part-time work with no pension benefits may not be financially feasible for the retiree.
Thus the allure of bridge jobs. A person of retirement age can leave full-time employment and begin drawing on pension benefits, and at the same time take a job elsewhere to increase income, provide benefits, and simply to keep busy.
The Treasury's proposed regulations address the problem of retirees not being eligible for pension benefits if they choose to remain on the job part-time, and simultaneously give employers an opportunity to retain members of the skilled yet aging workforce. The proposed regulations would amend regulations under Internal Revenue Code Section 401(a) relating to pension plans to allow access to partial pension benefits for those workers of retirement age who choose to remain with a company on a part-time basis.
Specifically, the proposed regulations would establish the concept of a phased retirement plan. Only companies offering pension plans would be affected. The proposed regulations do not apply to retirement plans such as 401(k) plans.
Should a company adopt a phased retirement plan, the following characteristics apply:
* The plan would be a written plan and would provide for voluntary participation among full-time employees.
* Eligible employees would be required to be at least age 59-1/2 and would be entitled to pension benefits if they left their jobs.
* The plan would provide for a pro rata share of pension benefits for eligible employees who reduce their work schedules by at least 20 percent.
* The calculation of the amount of retirement benefit payable under the phased retirement plan would be based on the percentage of the employee's work schedule reduction.
* The phased retirement benefit would be payable as an annuity based on the terms of the existing pension plan, but it could not be paid as a lump-sum benefit.
* The employee who opts into the phased retirement program would continue to be eligible to participate in the company's pension plan. Benefits payable upon full retirement would be made up of two parts - the phased retirement benefit and the total retirement age benefit (as adjusted for the phased retirement benefit).
* At least once a year the employee's work schedule and phased retirement benefit would be recalculated based on a formula provide in the regulations.
* The employer would have the ability to place restrictions on eligibility for phased retirement, including age, service and job classification restrictions.
* Key employees would not be eligible for participation in the phased retirement plan.
The new regulations will be a proving ground for future changes in the lifestyle of our aging workforce. Bill Sweetman, benefits tax counsel at the Treasury Department, was quoted as saying, "We're really testing the waters to see if this is something employers would like to do and employees would like to participate in."
The IRS is soliciting comments on the proposed regulations. Specifically, it is focusing on the areas of:
* Alternatives methods for calculating workload reduction other than number of hours worked;
* The correlation of the amount of phased retirement benefits with alternative methods of calculating reduced workload;
* Alternatives for calculating the offset for the actuarial value of additional payments before a reduction in phased retirement benefits; and,
* Whether there are circumstances under which age and service conditions for a particular employer's phased retirement program should be disregarded or modified.
The full text of the proposed regulations (REG-114726-04) can be read, and comments submitted electronically, on the IRS Web site by going to www.irs.gov/regs.
Comments must be received by Feb. 8, 2005.
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