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WASHINGTON – While an IRS proposal that would allow distributions from a pension plan under a phased retirement program may benefit credit unions, CUNA is concerned that certain portions could be “administratively burdensome.” At issue is the IRS’ proposed rules setting forth requirements for a phased retirement program and permitting distributions to be made from a pension plan under a phased retirement program. A bona fide phased retirement program is a written program under which employees may receive a pro rata portion of their benefits (including early retirement benefits, retirement-type subsidies and optional forms of benefits) before attainment of normal retirement age. The benefit to the employees in a bona fide phased retirement plan, participation in which would be voluntary on the part of the employees, would be paid as a pro rata share based on the extent to which the employee has reduced hours under the program. Under the IRS’ proposed regulations, the employee’s final retirement benefit would be comprised of the phased retirement benefit and the balance of the employee’s accrued benefit under the plan. “These arrangements can be very advantageous in that they permit credit unions and other employers to retain the services of an experienced employee and provide the employee with the opportunity to continue active employment at a level that also allows greater flexibility and time away from work,” wrote Catherine Orr, CUNA senior regulatory counsel in a recent comment letter. Still, CUNA has asked IRS to consider the eligibility to participate in a phased retirement program be extended to employees who reduce their workload using a standard such as elapsed time methodology or reduction in base pay. Orr pointed out that many executives and other key employees in credit unions and other organizations are salaried employees, not hourly, and human resources departments may not keep records of the exact hours worked for those employees. As a result, an adjustment in benefits would be required every time an employee in phased retirement changes his/her hours, she said. CUNA has suggested several calculation options including the “elapsed time” methodology used to calculate service under the Employee Retirement Income Security Act (ERISA) and basing the retirement benefit on the reduction in the employee’s base pay, which would allow the employer and employee to come to an agreement on reducing the employee’s responsibilities with a corresponding reduction in base pay. Orr said because the IRS’ final regulation should also address cash balance plans, which are a type of defined benefit plan that expresses an employee’s retirement benefit as an account balance growing at a rate of interest that is announced to employees in advance each year. As the proposal stands now, at the time of an employee’s full retirement following phased retirement, the employee’s total accrued benefit must be offset by the portion of the employee’s phased retirement benefit that is being distributed as a phased retirement benefit. The reduction to the regular retirement benefit should also include any early retirement subsidy. Because some employers have raised the issue that they should have the flexibility to offer a phased retirement program to employees who meet the eligibility criteria and elect to participate in the phased retirement program during a certain limited timeframe, the IRS should clarify that the phased retirement option can be offered during a set temporary period, Orr suggested. Under Internal Revenue Code Section 411(d)(6) and related regulations (Treas. Reg. Section 1.411(d)-4(e)), an ERISA plan may not be amended to eliminate or reduce a protected benefit, including an optional form of benefit, that has already accrued. The proposed regulations should also clarify that a defined benefit plan is permitted prospectively to eliminate the phased retirement option with protections for employees, Orr wrote. Other employers have indicated there should be special rules to coordinate distributions and continued accruals during phased retirement with a plan’s provisions regarding employment after normal retirement age, Orr said. “These special rules should indicate that a plan may require a phased retirement benefit to end at normal retirement age, with the employee’s pension suspended until he/she is fully retired or allow the phased retirement benefit to continue as long as the employee remains eligible and continues to work,” Orr wrote. [email protected]

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