Buck Bond Group

Re-entry: Rehiring Retirees


Bill Price is a seasoned human resources professional with extensive experience and profession recognition in compensation and benefits. After a 25+ year career ranging from information technology to pharmaceuticals, Bill proudly retired in May 2013. He has an adequate pension from various company retirement plans and spends time doing the things he planned in retirement: golf, family, and leisure.

But like many new retirees, the promise of freedom from work didn’t quite live up to Bill’s expectations. It’s not that he didn’t have enough money from his retirement savings; Bill found that he actually wasn’t quite ready to leave the work environment. He missed the social aspects of working with his long-time colleagues, missed his connections with clients, and missed doing the work he’d enjoyed for so many years.

Re-Entry to the Workplace

So Bill discussed the possibility of returning to work, albeit with a reduced work week. It’s something we see more and more of, as people who hit retirement age and decide to leave their employer to “live the good life” find that they’re in good health, with a lot of energy and enthusiasm for the routines and connections that work provides. They miss that environment, and especially for those with a career, miss the social status that working gives them, and the chance to continue doing “what they do best.”

And employers are not usually averse to the idea. Many industries face a loss of expertise and knowledge when their more experienced employees decide to retire. In some industries, affected by staff cutbacks and shrinking HR budgets over the past half-decade, this “brain drain” approaches what the U.S. defense industry terms a national disaster. Many are open to the notion of retaining the skills and overall know-how of their retiring employees.

In other cases, employers may prefer not to commit to continued employment but would want retirees to fill in as temporary help is needed or as projects come up that can be done on a consulting basis. Likewise, some employees may want to commit to ongoing work but at a reduced pace. Others prefer to leave their time available for travel and personal interests but are happy to work on an “as–needed” basis.

Employer Benefits: Continuity and Knowledge Transfer

There are lots of reasons to re-hire a retired employee, especially one with a good record of performance. Those employees know the company and how it does business, and can continue to make a strong contribution to the organization. They have the technical and historical knowledge of the company and its clients, so they help in building and maintaining firm client relationships. The credibility that comes with the experience they’ve gained often helps boost morale and deepen employee engagement, especially when they’re in a mentoring role. Knowledge transfer and succession planning are the key reasons an employer would look favorably at these arrangements.

Regulatory Challenges

All of these options should be available to employers as they structure programs, and they should be available without undue legal risk.

The IRS has viewed these arrangements with suspicions, and so there are regulatory challenges around re-hiring retired workers. For retirees to receive pension plan payments, they must have a true separation of service. This is not well-defined in the IRS code, but it is understood from rulings and letters by the IRS that there must be a “bona fide termination of employment in which the employer and employee relationship is completely severed.” The IRS expects the retiree’s return to be unforeseen at the time of retirement; otherwise the employer is at risk of a penalty. Factors to consider are how soon the retiree returns after retiring, what the reason for the rehire is, whether there was an arrangement in place for the retiree to come back, and whether the retiree received any training while retired.

In 2012, the IRS gave some recommendations on those factors without outlining rules—this includes avoiding understandings with retirees that their rehiring is imminent, waiting at least 30 days before bringing someone back regardless of reason, and that changing job type (i.e. full-time to contractor) is not a viable solution to this uncertain legal risk.

Fortunately, on Social Security Tax requirements, the IRS has straightforward rules. If an employee retires from a position covered by Section 218 of the Social Security Act, that is, was subject to Social Security taxes, and is then rehired into another position that is covered, they must pay the tax and must not receive a pension. If the position is not covered by Section 218, the tax is not paid.

What Can Employers Do?

If you have a defined benefit plan: Lower retirement age, adopt DROP arrangements. A DROP (Deferred Retirement Option Plans) arrangement in a DB plan allows long-term employees to eventually leave their job with both a traditional annuity and a lump sum amount. Employees elect to participate but continue to work—all future DB credits are frozen but they start accumulating DC credits in a personal retirement account, which grow with interest at a stipulated rate. Internal Revenue Code provisions allow for the distribution of benefits (known as “in-service distribution”) from DB plans and some DC plans, only upon termination of employment or retirement age. A cash balance plan (a DB plan with DC features), does not pose that problem.

If you have a defined contribution plan: Remove restrictions for in service distributions after age 59.5 to serve as income during times of reduced workload. A pension-purchase option might allow retirees in an amended DB plan to transfer all or a portion of a DC account balance to the DB plan, thus allowing retirees returning to work to use the annuitized value of the account balance in order to supplement their income under the reduced work schedule.

Key Role, Not Filler

According to the Society of Actuaries’ Risks and Process of Retirement survey (2003), almost half of pre-retirees polled would prefer to cut back on working hours (and pay), stay on the job, and start collecting their pension. However, they’re often impatient with bureaucracy, and don’t need to be burdened with administrative issues. Rather, the employer and the retiree need to find ways to structure the work so that it’s a part time opportunity, limited to the most important 15 hours a week and not just a “filler” role.

That’s a benefit to employers under the strain of keeping and transferring key job skills and technical knowledge.