Early Retirement Window Doesn't Benefit Participants Over 65

[HCE]

We want to do an early retirement window where if participants agree to retire, they get an extra 2 years of service and 2 years of age.  For most of our "over-65" folks, the extra service and years won't help them, as they are more or less maxed out in the plan. 

Is this OK?  Can we offer an early retirement window that benefits people under 65 more than people over 65?

Secondly, do early withdrawal penalties apply the same for people who retire during an early retirement window.  If I terminate employment because of the early retirement window at 54, am I still subject to the 10% penalty, even if the plan is treating me as older for purposes of the window?

[david rigby]

It has always been true that most ERW designs provide a better increase to younger employees, especially when measured relative to the pre-window benefit.  The final plan design may incorporate some of the concerns you express in order to provide a more meaningful "bump" to older employees, but (and this is important) you (often) don't have to do so.  For example, suppose the plan imposes a service limit (eg, 30 years); the ERW can temporarily override this limit if desired. 

I caution employers to make sure they have fully identified the purpose(s) of any ERW before deciding on the nuts and bolts.  Of course, don't lose sight of any non-discrimination issues.

As always, consult with your pension actuary.

[ERISA-Bubs]

This is very helpful.

So, you're saying I can either (1) keep the ERW as-is where everyone get an extra 2 years service and age, even though it doesn't really do much for older employees, or (2) adjust the ERW so people hitting service/age limits get to override those limits if they participate in the ERW, correct?  Either of these would be acceptable and not cause any legal issues?

My concern is the "(often)" in your answer above.  

When you say "identify the purpose," what do you mean?  We simply need to downsize because we are overstaffed and want people to quit voluntarily.  Doe the reason need to be stated in the amendment?

[david rigby]

Your (1) and (2) are probably acceptable, but please refer the details to your pension actuary.  BTW, it's possible (maybe desirable) to make sure an ERISA attorney has been involved in reviewing plan design.  Don't overlook non-discrimination issues, even if you think the plan design is "vanilla".

It appears you have stated your purpose: downsize with voluntary reductions.  (It's possible to have multiple purposes. IMHO, stating the purpose(s) is a good thing, but not in the amendment.)  Take note that some windows also include provisions that permit the employer to establish limits, based on the number of acceptances if "over-subscribed", but this usually happens in very large employee populations.

[HCE]

Thank you again for the response.  Do you know if an employee participating in an ERW can begin benefits immediately without penalty if he/she is under age 55?

[david rigby]

Exemption applies.  See page 33 of IRS publication 575:

 https://www.irs.gov/pub/irs-pdf/p575.pdf.