Early Retirement and Vesting Provisions

[KayC]

We're planning an early retirement program, and want to make sure our 401k plan synergizes with the new program. We do currently have an early retirement provision in the plan document:

"Early Retirement Age" means the later of: (i) attainment of age 55, and (ii) the 5 anniversary of Plan participation. If a Participant terminates from service before attaining age 55, but after the 5 anniversary of Plan participation, the Participant will be entitled to elect an early retirement benefit upon attaining 55.

Our current match vesting schedule is 3 years (profit sharing is 6, but we don't do that) - I'm wondering if the vesting provision in the above is providing any additional benefit - doesn't seem like it. Is it standard to have that provision match regular vesting, or offer an accelerated vesting? If our goal is to have an attractive early retirement package, woul dit make more sense to not have a plan participation requirement?

I'd love to hear anyone's thoughts who has an ERISA early retirement program!

 

[Bri]

A plan doesn't have to fully vest account balances upon Early retirement age (as opposed to NRA).

Will there be a noticeable number of participants who might not be getting vesting credit each year?  If you require 1000 hours a year for vesting credit, but everyone works that much anyway, then sure - anyone getting to the 5th anniversary of plan participation will have earned 3+ years of vesting credit.

But if you have a good number of part-timers, you might have folks who don't typically vest in their match contributions - that would make the ERA definition more important, in terms of requiring years of participation to it.

Typically in a DC plan I see the only "benefits" of naming an early retirement age are (a) possible waiver to allocation requirements for the year of termination, (b) possibly having in-service withdrawal ability tied to an ERA, or (c) getting less-than-65ers a faster track to 100% vesting.  If terminees already can get distributions upon termination of employment, it's not as though the presence of an ERA speeds up their ability to receive benefits.

[ratherbereading]

Retirement age for most people now is at least 66 1/2. You can't collect social security until 62, so curious as to what the benefit is to doing this?  

[KayC]

Thank you for the responses!

While you can't collect social security until age 62, 401k plans can have provisions that allow you to begin taking distributions at age 55 without penalty (but with tax). And, most of the early retirement takers will probably be high earners who have a bunch of money socked away...

[C. B. Zeller]

50 minutes ago, KayC said:

401k plans can have provisions that allow you to begin taking distributions at age 55 without penalty

Generally, you can only withdraw money from a 401(k) plan upon attainment of age 59½, termination of employment, financial hardship, or termination of the plan (there are a few other special distributable events like QBADs and QDDs as well).

IRC 72(t) imposes a 10% penalty on any distribution from a plan, with exceptions for distributions made after age 59½, or after the death or disability of the employee, or if termination of employment occurred after age 55, or various other reasons.

So it's not that the plan allows a penalty-free distribution at age 55 - it's that the plan would generally allow distributions after termination of employment (at any age), but if termination of employment occurred after age 55, then the 72(t) excise tax does not apply. The plan doesn't need to specifically allow this or really address it in any way; it's simply a consequence of the way the tax code is set up. However, a 401(k) plan may not permit distributions at age 55 in the absence of another distributable event.

To get back to the original question, I personally see little to no point to defining an early retirement age in a typical 401(k) plan.

[david rigby]

2 hours ago, KayC said:

And, most of the early retirement takers will probably be high earners who have a bunch of money socked away...

One wonders if the "designers" of this program have thought about the non-discrimination issues.  One also wonders if other aspects of the compensation package have been included in the planning (for example, vacation policy? are there stock options? is the timing of any bonus program relevant? flexible spending account? etc). I recommend two things:

• Learn more about early retirement programs by searching for prior discussions on these Message Boards, probably using a search term such as "early retirement window" or (even shorter) "window".
• Contact one (or more) of those with experience in such matter.  As an aside, while this particular situation might not include a DB plan (just a guess), those who have the best/most experience in such matters are often pension actuaries, primarily because many of them have already thought thru these issues.  It may also be useful to contact an ERISA attorney with such experience.  Although I'm (mostly) retired, if you need a recommendation, I'll be glad to offer a few names.

[KayC]

Thanks for the replies! Yes, we are considering other factors in the early retirement program (Bonus plan, FSA, vacation, etc). I appreciate the search term tip, David!

And I answered too casually about penalty-free distributions - I was thinking about the IRS rule of 55, which I think is in the tax code you mentioned, C.B. I thought we did have to have the provision for that in the plan, but sounds like I might be mistaken.

[acm_acm]

On 8/1/2023 at 11:31 AM, Bri said:

But if you have a good number of part-timers, you might have folks who don't typically vest in their match contributions - that would make the ERA definition more important, in terms of requiring years of participation to it.

Not sure of the impact here, but remember that 5th anniversary of participation does not mean 5 years of participation.  They could be different if there is an hours requirement for a year of participation.

Said another way, once some becomes a participant in a plan, their NRA is supposed to be known and should not change based on hours worked after that time.