The Pension Protection Act of 2006 allows employers to pay pension benefits to employees age 62 and older who are covered under a defined-benefit pension plan even if they continue to work.
Until now, employers were not allowed to pay retirement benefits from defined-benefit retirement plans, either as a pension or a lump-sum payment, until the employee had terminated employment or had reached the plan’s normal retirement age. The new law lifted that restriction on Jan. 1.
The change makes phased retirement a viable option for employers who want to keep their mature, experienced workers.
What is phased retirement?
Phased retirement can be any work arrangement that falls somewhere between full-time retirement and working full time. Many programs:
- Allow mature employees to work on a reduced or modified schedule as they approach retirement.
- Enable workers who are already eligible for retirement to collect some pension benefits while they continue to work.
- Allow companies to rehire retirees.
- Give retirees phased-retirement options: working for a different employer or starting their own businesses.
Employers should make sure that their compensation and benefits support the phased-retirement options they offer, says Anna M. Rappaport, co-author of a Conference Board report on phased retirement.
Examples: An organization could pro-rate the salary of an employee who plans to cut back hours in preparation for retirement, but continue to pay health insurance and some pension credits.
Another option: Simply pay the retiree a fixed fee or hourly compensation per project, based on the person’s former salary, adjusted for inflation.
Advice: Try these techniques to make phased retirement work:
- Pay a premium to retirees with skills or knowledge that doesn’t exist elsewhere in your organization.
- Pay extra to retirees who work on project-by-project basis—rather than a certain number of hours a week—so they’ll be available when you need them.
- As employees reduce their schedules to phase in their retirement, remind them to work enough hours to keep their benefits.
- Consider pro-rating benefits if retirement-age employees work part time. Offering health and pension benefits only to full-time employees discourages older workers from phasing in retirement.
- Alternatively, adjust the compensation of mature part-timers to make up for lost benefits.