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david rigby

Early Retirement Windows

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There are many issues involved. I suggest you do a search on the Message Boards first.

Most of the windows I have seen have been an increase in the pension benefit, such as a waiver of the usual early retirment reduction and an award of addtional years of service in the benefit computation. These are usually funded through the DB plan, usually for 2 reasons:

1. the plan has sufficient excess assets at that time to absorb the entire cost of the increased benefits.

2. including the benefit in a bonafide employee benefit plan will typically avoid the issue of age discrimination (ADEA). However, the window itself must not be considered discriminatory under related pension regualations.

There are also issues relating to FAS 88 accounting.

Please feel free to post additional Qs.

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Guest Julie

Our company is looking into early retirement windows. I'm interested in the types of windows that companies have offered. And, if those windows were funded through the DB plan or was the window plan setup outside of the DB plan. Any thoughts, suggestions, would be appreciated.

------------------

Julie

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There are many varous types of early retirement subsidies (reducing or waiving the early retirement reduction, granting additional years of service, increasing pension amoutns by 10%, or whatever else the mind can come up with).

The time frame that you require the employee to make a decision must be reasonable --- you cannot say on Monday that we must have your decision by Friday!

Watch out for employees who retired shortly before your announcement of this window -- they may want to be included. In fact, there have been recent situations where the company's managers must tell employees of possible early retirement windows -- even before they have been finalized. (Generally, at some point when the windows are being seriously considered, that fact must be disclosed!)

FAS88 issues can be summarized and the amounts estimated by your actuary.

Don't forget to consider the impact on any post employment benefits (health care, etc.) that you may offer. Will this be extended to them as well?

The benefit increase must not be discriminatory under 401(a)(4).

From a cost standpoint, you can calculate the maximum potential cost if every eligible employee took the window. Now you can limit the cost by saying only the first 50 eligible employees (for example) who apply for retirement can get the window.

(The calculation of "cost" is very tricky, since it is not only the pension cost but the additional business costs --- salary, other benefits, retraining, etc. --- as well.)

A major issue, more a business issue than merely a pension issue, is "who will take the window, and who will remain." In the early days of this stuff (about 15-20 years ago), the "good" workers took the generous windows, and the workers who you would prefer if they left actually stayed. So, companies had to rehire their good employees, either as employees (which raises other issues) or as consultants.

If you're a public company, think about what you'll say on your SEC filings.

Can be very tricky stuff, so think it out thoroughly.

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Hi Richard-

You said "Now you can limit the cost by saying only the first 50 eligible employees (for example) who apply for retirement can get the window."

Is there any official guidance that discusses this technique?

Thanks.

card

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Early retirement window programs are usually designed by HR with the assistance of counsel and the consultants because of the myrad of legal requirements and options. Window plans can be either part of a qualified or a non qualified plan, voluntary or involuntary, for all employees, a pre selected group of employees or only non highly compensated employees. Some plans offer increased age and years of svc ( 5 & 5 plans) which increase retirement benefits and reduce or eliminate early retirement reductions. Some early retirement plans also provide some form of retiree health subsidy. Providing benefits through the retirement plan avoids a cash flow problem while paying benefits from a severance plan reduces the operating income of the employer. Also the maximum period for severance benefits is 2 years of salary where there is no limit on the increase in a qualfied plan other than the 415 limits.

All window programs are subject to the ADEA requirement that benefits not discriminate against employee 40 and over and the ability to have the participants waive all of their rights against the employer. I use a check list for early retirement programs that runs about 4-5 pages of issues that must be resolved. You really cannot do this kind of a project with out proper legal and actuarial advice. It is my understanding that the cost of the early retirement plan must be booked as an expense in the year it is implimented. Usually the cost determines the size of the program.

Card: Like all things relating to the ADEA, there are no regulations just general principles. An employer can limit a voluntary plan to a fixed number of people, reserve the right to defer the early retirement for critical emplyees for a period of time, limit eligibility to stipulated groups of employees, etc, provided that the program does not discriminate against persons in the protected group-- age, sex race, etc. This is why counsel is so important. Each early retirement plan has to be analyzed for employment discrimination, tax, ERISA and qualified plan requirements. This is why they they are expensive to impliment.

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MJB-

My question to Richard was really this- if you establish a window benefit and, for example, limit it to 100 positions, and you indicate you will accept the first 100 that apply, does this affect the voluntariness of either the window itself, or any ADEA waiver given in conjunction with the window?

Also, what are other technicques are available where an employer wants to limit a window to X number of employees? I've seen employers take applicants based on seniority. What other methods are used?

card

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