Phased Retirement (Partial Retirement)

Also known as partial retirement, phased retirement is a program that allows employers to retain institutional knowledge while employees adjust to a retirement lifestyle and schedule. These programs can help reduce this oftentimes stressful transition, and allow employers to leverage the knowledge and skills these employees have obtained over time.

Generally, these programs allow the employee to begin collecting their retirement benefits, while working a reduced schedule. While the exact rules of these programs have not been finalized (as of March 2015), the proposed Internal Revenue Code includes the following:

• The work reduction percentage be at least 20% of the full-time schedule based on an hours counting method.

• Key employees must be excluded from these programs.

• Lump sum distributions from retirement accounts are prohibited.

• All early retirement benefits, subsidies, and optional forms of benefits that are available upon full retirement must be available under a phased retirement program.

• The amount of a phased benefit must be proportional to the reduction in hours worked.

• The start date for a retroactive annuity cannot be earlier than the date the individual could have otherwise begun receiving benefits.

• An individual who elects phased retirement must be entitled to participate in the plan in the same manner as if the employee were still maintaining a full-time schedule.

• Upon full retirement, the employee must be entitled to the same benefits that a similarly situated employee who did not elect phased retirement would be entitled. The years of service during the phased retirement period must be prorated based on either hours of service or compensation.

• Normal retirement age "cannot be earlier than the earliest age that is reasonably representative of a typical retirement age for the covered workforce."

• Phased retirement benefits need to be made available in a nondiscriminatory manner to both highly compensated employees and non-highly compensated employees.

• The plan administrator must compare the actual hours worked and the amount of the phased retirement benefit received each year. No comparison is necessary for the first two years of an individual's phased retirement if an employee has entered into an agreement with the employer to fully retire within 2 years and the employee fully retires.

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