IRS Allows Employers to Rehire Retirees, Retain Existing Employees Beyond Retirement Age by Adam Cohen, CPA
Posted on January 20, 2022
Businesses struggling to keep up with consumer demand during the current labor shortage can find relief in some of the retirement plan provisions included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted in 2020.
According to the U.S. Department of Labor, despite strong economic recovery since the start of the pandemic, an increasing number of workers are leaving the labor market. In October, 4.2 million people voluntarily quit their jobs, leaving more than 11 million positions unfilled. With some of this shift attributable to an aging workforce, many employers are looking for ways to retain experienced workers who are eligible for retirement and even rehire those who took early retirement and are already receiving retirement plan benefits.
The IRS recently addressed these issues by adding two new questions and answers to its previously published FAQs concerning CARES Act-relief for retirement plans and IRAs. Essentially, employers may rehire retired workers and allow them to continue receiving retirement plan benefits if the plan allows. Moreover, employers may make retirement plan distributions available to existing employees who have reached age 59 ½ or the plan’s normal retirement age in an effort to prevent those workers from taking early retirement.
Following are the specific details provided by the IRS.
Q: A qualified pension plan that does not provide for in-service distributions commences benefit distributions to an individual who applies for retirement benefits and experiences a bona fide retirement. If the plan sponsor rehires the individual due to unforeseen hiring needs related to the COVID-19 pandemic, will the rehire cause that individual’s prior retirement to no longer be considered a bona fide retirement?
A: Generally, no. Treasury regulations generally require a qualified pension plan to be maintained primarily to provide systematically for the payment of definitely determinable benefits over a period of years, usually for life, after retirement or attainment of normal retirement age. See Treas. Reg. § 1.401(a)-1(b)(1)(i). Accordingly, a plan that does not permit in-service distributions may commence benefit distributions to an individual only when the individual has a bona fide retirement. Although the determination of whether an individual’s retirement under a plan is bona fide is based on a facts and circumstances analysis (in the absence of plan terms specifying the conditions under which a retirement will be considered bona fide), a rehire due to unforeseen circumstances that do not reflect any prearrangement to rehire the individual will not cause the individual’s prior retirement to no longer be considered a bona fide retirement under the plan. For 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.
In addition, 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.
Q: May a qualified pension plan permit individuals who are working to commence in-service distributions?
A: Yes. A qualified pension plan generally may allow individuals to commence in-service distributions if the individuals have attained either age 59½ or the plan’s normal retirement age. See Internal Revenue Code section 401(a)(36) (in-service distributions generally permitted at age 59½); final regulations on distributions from a pension plan upon attainment of normal retirement age (Treas. Reg. § 1.401(a)-1(b), TD 9325, 72 FR 28604); proposed regulations on the applicability of the normal retirement age regulations to governmental pension plans (Prop. Treas. Reg. § 1.401(a)-1(b)(2)(v), 81 FR 4599); and Section F of Notice 2020-68, 2020-38 IRB 567 (regarding recent changes to in-service distribution rules under § 401(a)(36). However, distributions commencing to an individual before age 59½ may be subject to a 10% additional tax under Internal Revenue Code section 72(t), unless the distributions fit within an exception to that tax (for a description of the exceptions to the 10% additional tax under section 72(t), see Retirement Topics – Exceptions to Tax on Early Distributions).
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or email@example.com.