Pension Law Eases Way for Phased Retirement Plans

By Joanne Sammer Sep 15, 2006

Phased retirement is an idea that has been around for some time but has never really taken hold on a widespread basis outside of certain industries, such as higher education. Individual employees and supervisors in many companies have developed ad hoc arrangements that allow individual employees to reduce their work hours or to structure more flexible work scheduling as they approach retirement, but those situations tend not to be endorsed formally or policed by the companies involved.

However, the ground under phased retirement may be shifting thanks to two recent developments with the potential to bring phased retirement back to the forefront for many employers.

Pensions During Phased Retirement

The first change is the recent passage of the Pension Protection Act of 2006, which answers a crucial question about defined benefit retirement plan distributions to employees who opt for phased retirement.

Before this law was enacted, employees covered by a defined benefit plan who wanted to reduce their work hours while receiving pension benefits had to retire from their current employer and get a new job. There was no provision for employees who wanted to continue working for their current employer while receiving pension benefits.

Starting in 2007, the new pension law specifically lets companies offer in-service distributions from a defined benefit plan to employees who have reached age 62 even if the pension plan’s normal retirement age is later than that.

The Pension Protection Act allows in-service distributions
from a defined benefit plan to employees who reach age 62—
even if the pension plan’s normal retirement age is
later than that.


In addition, the new law seems to negate the need for the proposed but not finalized regulations issued by the IRS in 2004 that allow these in-service pension plan distributions for employees at age 59 1/2 under certain circumstances. “The new pension law leapfrogged over the proposed IRS regulations,” notes George Whitfield, a partner with Warner Norcross & Judd, a law firm based in Grand Rapids, Mich.

Companies with 401(k) plans and other defined contribution plans do not face issues with regard to phased retirement. Those retirement plans can allow any employee to take a plan distribution at age 59 1/2 regardless of their retirement status.

Aging Workers, Lost Talent

Our aging workforce is the second change with the potential to spur development of formal phased retirement plans. Employers will increasingly need to retain the skills and experience that older workers tend to have in abundance as organizations face increased recruiting challenges in competitive labor markets. This will be especially crucial for industries facing major labor shortages, such as health care.

Indeed, companies are turning to phased retirement as a way to hold onto talent longer as the workforce ages. Research by Watson Wyatt Worldwide found that phased retirement increases the average retirement age by 21 months for women and five months for men. Another Watson Wyatt study found that one-third of workers would delay retirement if phased retirement were an option.

“Keeping older workers through phased retirement can also help companies to accelerate the development of younger employees by asking older employees to train or mentor younger employees,” says Anne Hartman, partner with consulting firm Working Differently LLC in Truro, Mass.

So, What Is Phased Retirement?
Phased retirement programs can take many forms. Some programs allow older employees to reduce their work hours, shift to part-time schedules or simply gain more flexibility in setting their hours. Other companies set up pools of temporary workers made up of retired employees who can be called on to fill vacancies as needed. These newly minted temporary workers can accept or decline an assignment as they see fit.

When successful, these types of phased retirement can help companies to save money by retaining older workers as part-time or temporary employees rather than facing the cost of filling those vacated positions from the outside or through a temp agency that charges a fee. Moreover, companies in competitive industries or geographies can use phased retirement to keep talented older employees from retiring and going to work for a competitor.

Communication Is Key

Companies that implement phased retirement programs would do well to communicate them thoroughly to employees, managers and supervisors. When communicating about phased retirement, Hartman suggests, companies should look at their demographics and target communication accordingly.

For example, the demographic data from various divisions might indicate that one division has a high percentage of its workforce between the ages of 50 and 55. That division would benefit significantly by being able to retain some of those employees as they get older, and phased retirement can be one way of doing so.

In some cases, employers may face resistance to phased retirement programs at the supervisory level. When this happens, Hartman suggests, HR should work to educate supervisors about how the program works and about its benefits, while listening to supervisors’ concerns. It is possible that the nature of the work in a specific department or facility does not lend itself to the types of work arrangements that take hold when an employee opts for phased retirement.

Communication and education are important tools for avoiding legal issues. Age discrimination issues can arise based on how companies use a phased retirement program. For example, if the program is open to employees over age 55, the company could face legal issues if it appears to be favoring employees between, say, the ages of 55 and 60 and not doing enough to bring older employees into the program.

“In this case, it wouldn’t be the design of the plan that is the problem but how the plan is used,” says Chantal Sheaks, legislative counsel for tax and benefits with Workplace Flexibility 2010 at Georgetown University Law Center in Washington, D.C.

Joanne Sammer is a New Jersey-based business and financial writer. Her articles have appeared in a number of publications, including Business Finance, Consulting, Compliance Week and Treasury & Risk Management.


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