The IRS has issued proposed regulations pertaining to phased retirement. This is a long-awaited and long-overdue development in the benefits arena. While there will be much more on this later, here is what the IRS has to say in its regulations regarding why it has issued the regulations and its approach to clearing some of the legal hurdles to permit “phased retirement”:
As people are living longer, healthier lives, there is a greater risk that individuals may outlive their retirement savings. In addition, employers have expressed interest in encouraging older, more experienced workers to stay in the workforce. One approach that some employers have implemented is to offer employees the opportunity for “phased retirement’ . . .The proposed regulations would amend Sec. 1.401(a)-1(b) and add Sec.1.401(a)-3 in order to permit a pro rata share of an employee’s accrued benefit to be paid under a bona fide phased retirement program. The pro rata share is based on the extent to which the employee has reduced hours under the program. Under this pro rata approach, an employee maintains a dual status (i.e., partially retired and partially in service) during the phased retirement period. This pro rata or dual status approach to phased retirement was one of the approaches recommended by commentators. While all approaches suggested by commentators were considered, the pro rata approach is the most consistent with the requirement that benefits be maintained primarily for retirement.
Previous post on the topic here–“Baby Boomers and the Need for Phased Retirement.”
An interesting point to note here is that the proposed regulations contain a link to this NPR broadcast–“Older Workers Turn to ‘Phased’ Retirement.“