IRS Guidance Hopes to Alleviate Concerns in Rehiring Retired Workers

October 29, 2021

The IRS clarified that employers generally will not jeopardize the tax status of their pension plans by rehiring retirees due to COVID-related worker shortages or permitting distributions of retirement benefits to current employees who have reached age 59 1/2 or the plan’s normal retirement age.  The move highlights the need to allow employees to collect defined benefit plan retirement income earlier while continuing to work for their employer.

Background:  The IRS has previously cautioned that prearranging at the time of retirement to rehire a retiree would not qualify as a “bona fide” retirement.  Payment of retirement benefits in that scenario would jeopardize the qualified status of the retirement plan.

The IRS FAQ reminds employers that: 

  • If a qualified pension plan (which does not provide for in-service distributions) commences benefits to an individual who has applied for retirement benefits and experienced a bona fide retirement, rehiring the individual due to unforeseen needs related to the pandemic will generally not cause that individual's prior retirement to no longer be considered bona fide.

  • A qualified pension plan may permit individuals who are working to commence in-service distributions. 

HR Policy has proposed that employees should be allowed to collect defined benefit plan retirement income earlier while continuing to work for their employer, with no “bona fide” break in service requirement.

Outlook:  The COVID-19 pandemic has intensified the war for talent, pointing to the need for relief and new thinking in these areas.