United States: Benefit Issues Impacting Older Workers

Last Updated: November 21 2017
Article by Lori Jones

Men and women in the United States are delaying retirement or re-entering the workforce after normal retirement age in increasing numbers. According to a Pew Research Center report, the number of Americans over age 65 who are employed rose from 12.8 percent in May 2000 to 18.8 percent in May 2016. The Pew Reseach Center report also notes that older workers are working longer hours. In May 2000, 46.1 percent of workers age 65 and older were working part-time (less than 35 hours a week as defined by the Bureau of Labor Statistics). By May 2016, only 36.1 percent of workers age 65 and older were working part-time.

There are a number of factors that may be driving this trend, including improved life expectancies and quality of life, the increase in the Social Security normal retirement age, the elimination of employer-provided retiree medical benefits, and uncertainty regarding the solvency of government retirement programs, such as Social Security and Medicare.

Regardless of the reason, the increased presence of older Americans in the workforce has created a number of interesting benefit issues for employers with respect to retirement and medical plans.

Defined Benefit Plans

Separation from service

Qualified defined benefit plans, commonly known as pension plans, typically require a separation from service on or after retirement age (normal or early) for benefits to commence. Issues often arise with respect to older workers who want to both start their pension benefits and continue working. An example is an employee whose current plan benefit is not sufficient to support the employee and spouse. The employee may ask his employer to "retire" with the understanding that the employee will resume part-time employment after a specified period of absence.

Such a fact pattern may put the defined benefit plan at risk of disqualification by the Internal Revenue Service. Even if the employee is processed as a retiree on the employer's payroll system and coded as a new employee upon his scheduled return, in the event of a plan audit, the IRS may take the position that no separation from service has occurred and that the plan administrator has failed to follow the terms of a plan. Although such a failure is grounds for disqualification of the plan, the IRS will typically impose penalties in lieu of such drastic action. If there is such a prearranged plan for the employee to return to employment after "retirement," it does not matter whether the gap period is one day or six months.

If a retired employee returns to employment without prearrangement between the employee and employer, there is no issue. For example, if a retiree is brought back to work after the replacement unexpectedly resigns, there is no qualification issue. However, in such a case, it is advisable to document the facts and circumstances with respect to the rehired employee, in case the termination is questioned by the IRS in an audit.

In-service distributions

To avoid the separation from service issue, some defined benefit plans have been amended to include a provision permitting the distribution of plan benefits while an older employee is still working. Such distributions are commonly referred to as "in-service distributions."

The Pension Protection Act of 2006 revised the Internal Revenue Code to permit in-service distributions at age 62. However, before adopting such a provision, a plan sponsor must weigh the possible adverse impact on the workforce.

For example, such a provision could create an incentive for an older worker to start benefits early, creating the possibility that the worker will have insufficient income for support throughout the retirement years. Such a provision could also encourage an older worker to switch from a full-time schedule to part-time work, allowing the participant to supplement retirement benefits with part-time earnings.

The result could wreak havoc on an employer's workforce.

Suspension of benefits

Another possible issue with rehiring older employees involves the suspension of benefits. ERISA permits, but does not require, a defined benefit plan to suspend the payment of retirement benefits if a retiree continues to work beyond normal retirement age or is rehired after a bona fide retirement. If a defined benefit plan includes a suspension of benefits provision and benefits are suspended, the participant is not entitled to any adjustment of the retirement benefit for the "missed" benefit payments during the period of reemployment (or continued employment beyond normal retirement age). However, ERISA prohibits a suspension of benefits if a participant works fewer than 40 hours per month. ERISA also requires that a notice be provided to a participant prior to the suspension of benefits.

Recalculation of accrued benefits

When a retiree is rehired, the plan administrator must consider the impact on the participant's accrued benefit. Most defined benefit plans require 1,000 hours of service during a plan year for the accrual of benefits for such plan year. If a rehired employee works more than 1,000 hours during the plan year, additional actuarial services will be required to recalculate the employee's benefits when the employee again retires. It will be important to review the provisions of the plan so that benefits are accurately calculated for rehired employees. In some cases, it may be possible for the plan sponsor to regulate a participant's hours to avoid this issue.

Defined Contribution Plans

Fewer issues arise if an employer maintains a defined contribution plan, such as a 401(k) plan, and an older worker continues employment beyond normal retirement age or is reemployed by the employer.

Separation from service

Section 401(k)(2)(B) of the Internal Revenue Code provides that salary deferral contributions under a 401(k) plan can only be distributed to a participant upon death, disability, hardship, separation from service or attainment of age 59½. Thus, as with defined benefit plans, an issue arises if an older worker terminates and is immediately rehired or rehired within a prearranged period. The IRS may argue that no separation from service has occurred and that distributions have been improperly made from the 401(k) plan, risking disqualification of the plan.

Medical Plans

Medicare penalty

Generally, a Medicare penalty applies if an individual does not apply for Medicare coverage at age 65. However, the Medicare penalty will not apply if an individual fails to apply for Medicare because he is covered under his employer's medical plan. Similarly, the Medicare penalty will not apply if an individual fails to apply for Medicare because the individual is covered under the spouse's medical plan. These exceptions apply only if an individual is covered under an employer's medical plan due to the active employment of the individual or the spouse.

Thus, these exceptions do not apply if an individual fails to apply for Medicare because the individual is covered under a retiree medical plan maintained by a former employer.

Medicare secondary payer rules

The impact of the Medicare Secondary Payer Rules on older employees depends on the size of the employer.

Generally, the Medicare secondary payer rules prohibit an employer from reducing health benefits offered to current employees due to their eligibility for Medicare based on age. Provided the employer has 20 or more employees, the employer medical plan is the primary payer and Medicare is the secondary payer. However, if the employer has fewer than 20 employees, Medicare will be the primary payer and the employer medical plan is the secondary payer with respect medical claims made by Medicare-eligible employees.

Medicare and retiree medical plans

The Medicare Secondary Payer Rules only apply to medical plan coverage for active employees. Thus, in the case of employer-provided retiree medical plans, Medicare is the primary payer for Medicare-eligible retirees and the employer's retiree medical plan is secondary. Given this fact, there are several ways that retiree medical plans can coordinate with Medicare.

For example, a retiree medical plan can be designed as a bridge plan that provides medical coverage from the time an employee retires until the employee becomes eligible for Medicare.

Alternatively, a retiree medical plan can be designed as a supplemental plan that provide retirees with coverage for out-of-pocket expenses not otherwise covered by Medicare, including the cost of co-insurance and deductibles.

Medicare and COBRA

The Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), requires continued medical plan coverage for a specified period after an employee terminates employment. The period of COBRA coverage can be shortened due to certain events such as becoming entitled to Medicare depending on when the terminated employee first became entitled to Medicare. If an employee first becomes entitled to Medicare before termination of employment, then Medicare coverage will not shorten the period of COBRA coverage. However, if the employee first becomes entitled to Medicare after termination of employment, COBRA coverage will cease as of the effective date of Medicare coverage. For this purpose, Medicare "entitlement" is defined as eligibility plus Medicare enrollment.

Medicare and health savings accounts

If an employee participates in a high-deductible medial plan with a health savings account (HSA), neither the employee nor the employer is permitted to make additional contributions to the HSA after the employee begins any type of Medicare coverage. Once an employee begins to receive Social Security retirement benefits, he will automatically be enrolled in Medicare Part A coverage at age 65. Thus, if an employee wants to continue to contribute to an HSA, he must forego Social Security benefits.

Age Discrimination in Employment Act

The Age Discrimination in Employment Act (ADEA) provides that an employer may not deny the opportunity to participate in benefit plans because of age. Under ADEA, an employer may not reduce a benefit due to age unless the cost of the benefit increases with age. An example is life insurance. An employer will not violate ADEA if it spends the same per-employee amount on life insurance for older and younger workers even though the level of life insurance coverage provided to older employees is lower.

The list of issues is not intended to be exhaustive. However, it does reflect some of the additional considerations that an employer may encounter in designing benefits for older workers.

Reprinted with permission of the Employee Benefit Plan Review – October 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions