How Do We Distinguish an (Early) Retirement From a Termination?

[Guest Dash02]

This is probably a silly question, but please indulge me.

How is a termination of employment distinguished from a retirement (or an early retirement)? Is it purely a matter of when the termination occurs ... i.e., if the termination occurs before both the Normal Retirement Date and the Early Termination Date, it is a termination of employment, if it occurs on or after the Early Retirement Date, but before the Normal Retirement Date, it's an early retirement, and if it occurs on or after the Normal Retirement Date, it's a normal retirement? Surely the distinction is not made based on whether the participant intends to stop working (and move to Florida), right?

Now, a second question: Assuming that Early Retirement under the plan is age 55, if a participant terminates employment at age 50, will his termination ripen into an early retirement in 5 years, once he attains age 55 (assuming that he hadn't received a distribution of his vested benefit), or ripen into a normal retirement in 15 years once he hits his Normal Retirement Date?

Thanks in advance for your help and input.

[My 2 cents]

My understanding of these things (with respect to a defined benefit plan) is as follows:

1. An active participant who meets the plan's age and service requirements for early retirement and then separates from service is entitled to an early retirement benefit. In general, full vesting should be granted to anyone whose date of separation is on or after the date on which the person meets the requirements for early retirement. Most of the plans I see specify the early retirement benefit in terms of an amount payable at NRA under the normal form, but then go on to permit the participant to elect an earlier commencement date subject to (usually) a reduction in the amount payable.

2. An active participant who does not meet both the plan's age and service requirements for early retirement is entitled to the vested portion of the accrued benefit payable commencing at NRA. If the person had met the service requirements but not the age requirements, it is my understanding that the plan should permit the person to commence receipt of benefits on or after meeting the age requirements. In that event, the amount payable would normally be reduced (and may be reduced more than would be the case for someone eligible for early retirement). Most plans I see say that the benefit would be the actuarial equivalent of the accrued benefit payable at NRA, but some cross-reference the adjustment applicable to people electing early retirement. One distinction is that a person who separates from service prior to eligibility for early or normal retirement and who later commences benefit payments would not be said to have retired, just to have commenced receipt of benefits.

3. People who separate from service prior to eligibility for early or normal retirement are not necessarily entitled to any benefits at all. If someone terminates, as in your example, at age 50 but without enough service to be vested, no benefit will ever be payable to that person (so long as the termination does not closely precede the termination of the plan).

As a general rule, actual retirement (as in no longer working for pay) is not relevant to qualified plans. Separation from service with the sponsor and/or any member of its controlled group is enough to permit receipt of plan benefits. Working elsewhere (especially working elsewhere in a job not competing with the sponsor or with other union members), even full time, cannot interfere with the right to collect a pension.

[ESOP Guy]

It is all defined in the plan document. It will tell you how someone meets the definition of both early retirement and normal retirement.

As a general rule if a person terminates after they have met the early retirement age but not met the normal retirement age they are early retirement. Same with normal retirement.

It has nothing to do with if they say they are retired or if the company gives them a gold watch.

As a general rule if you don't meet the early or normal retirement age when you terminate you are a normal termination and don't age into the new definition.

But that wold be clear if you read the document. It will almost certainly say you have to separate from service after your early or normal retirement age.

One last observation most documents just say separate from employment. So if the person is fired after the right age often times means the person still retired.

Once again READ the DOCUMENT. This is answered in it.

[david rigby]

Good comments above.

Note that the word "retired" can have multiple meanings. In a qualified plan, it usually means separation from service after any date at which benefit commencement is permitted, and may also mean that the benefit has actually commenced. However, it may have other connotations under HR policies.