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IRS Proposal Would Help Older Workers Slow Down

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The Internal Revenue Service is moving ahead with efforts to adapt to the new “phased retirement” movement.[@@]

The IRS wants to adjust the way tax regulations and employers handle defined benefit pension benefits for the oldest workers, so that older workers who voluntarily shift to part-time work a few years before the normal retirement age can do so without losing pension benefits.

The IRS discusses public reaction to a phased retirement proposal it released in July 2002 today in the Federal Register.

The discussion includes a draft of a proposed phase retirement pension benefit regulation.

One major goal of the commentators, and the regulation, is to make sure that workers who are participating in phased retirement programs can collect some of their pension benefits once they move to part-time work, according to the IRS officials who wrote the phased retirement discussion.

A second goal is to make sure that the workers can continue to accrue additional pension benefits while they are working part-time, and a third goal is to make sure that workers in phased retirement programs end up with pension benefits based on the income they were earning when they were working full-time, the officials write.

The IRS officials have tried to meet the first goal by letting workers collect a portion of their pension benefits while they are still working part-time in a phased retirement program.

The “pro rata share” of the benefit “is based on the extent to which the employee has reduced hours under the program,” the officials write.

Similarly, workers in phased retirement programs would be able to accrue some of the pension benefits that they would accrue if they were still working full-time, and workers would be able to accrue some pension benefits even if they were in a plan that did not normally provide pension benefits for part-time workers, the IRS officials write.

A worker who shifted to a 20-hour week under a phased retirement program from a 40-hour week would accrue half of the pension benefits that the worker would accrue during a 40-hour work week.

Finally, the officials say the proposed phased retirement regulation would base pension benefit calculations on the income a worker earned before the worker entered the phased retirement program.

“Under the proposed regulations, the employee’s final retirement benefit is comprised of the phased retirement benefit and the balance of the employee’s accrued benefit under the plan (i.e., the excess of the total plan formula benefit over the portion of the accrued benefit paid as a phased retirement benefit),” the IRS officials write.

In general, workers who enter phased retirement programs should end up with pension benefits that are at least as generous as the benefits they would have received if they had not chosen phased retirement, the officials write.

Public comments on the proposed regulation are due Feb. 8, 2005.

The IRS has posted the proposed regulation on the Web at ttp://