Retiree Return to Work Policy FAQs
(Bona Fide Separation of Employment)
- 1. Who does this new policy affect?
The policy affects all members of the Public Employees’, Teachers’, Judicial and Elected Public Officer’s Defined Benefit Retirement Plans, and all members of the PERS/TRS Defined Contribution Plans who retire effective December 1, 2017.
- 2. What is the reason for the new policy on termination of employment and rehire of employees by the same employer?
In 2016 the Internal Revenue Service and Treasury Department released proposed regulations setting a normal retirement age of 62 years old. Although the proposed regulations have not been finalized, governmental plan sponsors may rely on them until the issuance of final regulations. The Division has conferred with its outside tax counsel and confirmed that to avoid potential early distribution tax penalties for our members and to avoid a risk of disqualification of our plans, retirees must clearly demonstrate a valid severance from employment with the participating employer before returning to any type of employment with the same employer.
While the Division of Retirement and Benefits (DRB) has required a minimum 30-60 day break-in-service period since 2005, the establishment of a federal normal retirement age of 62 to determine when an employee receives an in-service distribution has required a new policy to be adopted. The new policy follows the IRS guidelines for break in service duration and prevents tax penalties from being levied against our retirees.
- 3. What does the IRS require for a valid termination to have occurred?
A valid termination has always been a requirement for retirement benefits to be effective. However, the IRS has issued guidelines for what constitutes a valid termination. For a valid termination of employment to have occurred there must be no prearrangement for reemployment prior to the member’s retirement date. In addition, members must observe a six month break in service before reemployment in any capacity can occur with the same employer.
Retiring members must certify on their retirement application, under penalty of fraud, that no prearrangement for employment exists.
- 4. What is meant by “reemployment in any capacity”?
Reemployment in any capacity includes but is not limited to employment as a part-time, temporary, contract, or leased employee or as an independent contractor or any fee-for-service arrangement.
- 5. Is the policy effective now?
The requirement for no prearrangement for reemployment has been in effect since 2005. If an employee does not sever the employer-employee relationship by having a break in service of 60 days before returning to employment, their termination of employment date is considered invalid and they are not eligible for retirement benefits.
The extended requirements for a break-in-service equaling six (6) months will become effective when the regulations have been adopted. This is estimated to be by December 1, 2017.
- 6. Will the policy be applied retroactively?
As previously stated, the requirement for a valid termination is currently in effect. The increased break-in-service requirement of six (6) months will be applied to retirees rehired after December 1, 2017.
- 7. What happens to existing returned retirees when the regulation becomes effective?
The Division will administer the regulations prospectively for retirees rehired after the effective date and no retroactive action will be taken. However, the returned retiree is still subject to the requirement for a bona fide separation from service before receiving a retirement benefit. Should an IRS review of the retiree occur, a facts and circumstances review may be done and a final determination will be made by the IRS.
- 8. If the returning retiree returns to a non-permanent position which does not receive PERS/TRS/JRS/EPORS benefits is the regulation still violated?
A retiree who returns to work with the same employer, without the required separation of service period, would have a violation of the return to work limitation regardless ow whether the retiree was returning to work in a full-time, part-time or temporary position, or if the retiree is returning as a leased employer or an independent contractor.
- 9. Does this policy apply to substitute teaching on an incidental basis during the waiting period?
The policy applies to all employment with the employer and would include substitute teaching on an on-call or incidental basis.
- 10. Can we undo a hire if we accidentally hire someone within the 6-month period?
No. Once the retiree has been reemployed they become subject to the IRS provisions. Once you have knowledge of rehire before the required elapsed break-in-service has occurred you are required to notify the Division so corrective action may be taken.
- 11. What is the corrective action?
The Division will first do a facts and circumstances review to determine if a prearrangement for reemployment was made prior to the member’s retirement date. This will require certification from the employer to the facts and circumstances of rehire.
If a prearrangement for rehire was in effect, the member will be deemed to not have had a valid termination of employment and must repay the Division the full amount of retirement benefits received since the effective date of their retirement.
If no prearrangement for rehire was in effect and the member is under age 62, the Division will be required to code the member’s retirement benefits retroactively to date of retirement (or to December 1, 2017 whichever is later) as an early distribution and a 10% tax penalty will be levied by the IRS for an early distribution of retirement benefits.
- 12. If an employee retires in TRS, can I hire them back in a PERS position?
The key to this requirement is whether the employee/employer relationship has been severed, not what retirement plan the member participates in. An employee must still observe the six (6) month break-in-service period before rehire with the same employer. The fact that the employee would be a member of a different retirement system before and after the return to work is irrelevant to the requirement.
- 13. Does the period of absence only apply to the employer from which the employee is retiring, or does it apply to all PERS, TRS or EPORS participating employers? For example, if a State PERS employee retires July 1, can the employee go to work for a city on August 1 without violating the requirements?
In order for the IRS to consider an employee to be “retired,” the IRS requires an employee to have a bona fide separation from service with the employee’s employer. Therefore, based upon this example, a State PERS employee could retire on July 1 and immediately commence employment with a local government, even though the local government also is a PERS employer. The requirements refer to employment with the same employer only.
- 14. What if the employee is a State employee working for the Department of Administration? Can the employee immediately return to employment with a different department with the State?
A State PERS employee could not retire from one department of the State and then begin work with another department of the State without fulfilling the six (6) month break in service. The reason for this is because all departments and branches of the State are considered to be part of the same employer – e.g. the State of Alaska.
- 15. How does it work for the PERS and TRS Defined Contribution Retirement Plans (PERS/TRS DCR)? Will they not be able to touch their money for six months?
The requirements for bona fide termination apply to both PERS/TRS defined benefit and defined contribution plans. There can be no pre-arrangement for reemployment with the same employer prior to termination of employment. If a PERS/TRS DCR Plan member terminates employment and withdraws their funds, they will automatically pay the 10% early withdrawal penalty if they are under age 59 ½ per the defined contribution plan rules. PERS/TRS DCR Plan members must be terminated from employment for 60 days before their funds can be disbursed as part of the current plan rules.
- 16. How will I know if the person I’m considering hiring is a retiree who has not been retired for six (6) or more months?
You will likely not know. However, to protect the prospective employee, you can tell them that if they are a retiree and have been for less than six months to contact the Division of Retirement and Benefits to be sure they can accept employment without consequence. As the employer, your responsibility is to not have a prearrangement for retirement and to caution prospective employees about the rehire rules.