What is phased retirement?
The term phased retirement refers to programs in which workers can reduce their working hours in lieu of immediate retirement. An employee would draw a reduced salary, which she would supplement with distributions from her employer’s retirement plan. Such plans can in some circumstances be positive for both the employee and the employer.
Are phased retirement program currently permitted to pay retirement benefits to employees who reduce their hours?
This depends. A profit‐sharing plan can pay benefits to still‐employed individuals. A pension plan historically could not pay benefits until an employee had separated from service, but the Pension Protection Act now permits such plans to pay benefits to active employees after they turn 62. A 401(k) plan can make payments to an employee once he attains age 59.5, even if he is still employed.
What are some of the concerns with phased retirement?
1 For example, assume a pension plan that provides 1% of final pay, multiplied by years of service. Further assume a 60-year-old employee who earns $50,000 per year, and thus has an accrued benefit of $10,000. The employee reduces her hours and is paid $25,000 for five years and then retires. Her benefit under the plan is now 25% of $25,000, or $7,500–$2,500 less than it was five years earlier. It should be said that there are some arguments under current law that such a reduction is illegal.< Back