CUNA Comment Letter

Distributions From a Pension Plan Under a Phased Retirement Program

February 8, 2005

CC:PA:LPD:PR (REG-114726-04)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Re: Distributions From a Pension Plan Under a Phased Retirement Program

The Credit Union National Association (CUNA) appreciates the opportunity to respond to the Internal Revenue Service’s (Service’s) proposed rules setting forth requirements for a phased retirement program and permitting distributions to be made from a pension plan under a phased retirement program. A bona fide phased retirement program is a written program under which employees may receive a pro rata portion of their benefits (including early retirement benefits, retirement-type subsidies and optional forms of benefits) before attainment of normal retirement age. The benefit to the employees in a bona fide phased retirement plan, participation in which would be voluntary on the part of the employees, would be paid as a pro rata share based on the extent to which the employee has reduced hours under the program. Under these proposed regulations, the employee’s final retirement benefit would be comprised of the phased retirement benefit and the balance of the employee’s accrued benefit under the plan. By way of background, CUNA is the largest credit union trade association, representing approximately 90% of our nation’s nearly 9,300 state and federal credit unions.

Summary of Comments

Discussion of Comments

Eligibility Determination and Testing

The proposal states that an employee who participates in a bona fide phased retirement program must reasonably be expected to reduce, by 20 percent or more, the number of hours the employee customarily works. Further, the proposed regulations require that employers offering a phased retirement program have periodic testing to make sure that each employee in phased retirement is working at the reduced schedule as expected. Basically, this means that the plan must provide for an annual comparison between the number of hours an employee actually worked versus the number of hours the employee was expected to work. If the actual hours worked were materially greater than the expected number of hours, then the employee’s phased retirement benefit must be reduced prospectively.

Eligibility to participate in a phased retirement program should be extended to employees who reduce their workload using a standard other than such counting of hours, to identify the reduction as some employers are concerned that counting of hours and comparison testing would be an administrative burden. An adjustment in benefits would be required every time an employee in phased retirement changes his/her hours. Also, many executives and other key employees in credit unions and other organizations are salaried employees, not hourly and human resources departments may not keep records of the exact hours worked for those employees.

The “elapsed time” methodology, another methodology used to calculate service under the Employee Retirement Income Security Act (ERISA), would make sense in the context of determining eligibility for phased retirement programs. Another option could be to base the retirement benefit on the reduction in the employee’s base pay. This would allow the employer and employee to come to an agreement on reducing the employee’s responsibilities with a corresponding reduction in base pay.

Offset for the Actuarial Value of Additional Payments

The proposed regulations state that at the time of an employee’s full retirement following phased retirement, the employee’s total accrued benefit must be offset by the portion of the employee’s phased retirement benefit that is being distributed as a phased retirement benefit. The reduction to the regular retirement benefit should also include any early retirement subsidy. This provision does not sufficiently address cash balance plans (a type of defined benefit plan that expresses an employee's retirement benefit as an account balance growing at a rate of interest that is announced to employees in advance each year; the organization adds credits to the balance each year). The Service should address this issue in the final regulations.

Additional Flexibility

Some employers have raised the issue that they should have the flexibility to offer a phased retirement program to employees who meet the eligibility criteria and elect to participate in the phased retirement program during a certain limited timeframe. The final regulations should clarify that the phased retirement option can be offered during a set temporary period. Under Internal Revenue Code Section 411(d)(6) and related regulations (Treas. Reg. Section 1.411(d)-4(e)), an ERISA plan may not be amended to eliminate or reduce a protected benefit, including an optional form of benefit, that has already accrued. The proposed regulations should also clarify that a defined benefit plan is permitted prospectively to eliminate the phased retirement option with protections for employees included similar to those in the Treasury regulations noted above.

Coordination of Phased Retirement Distributions and Accruals With Employment After Normal Retirement Age

Some employers have indicated there should be special rules to coordinate distributions and continued accruals during phased retirement with a plan’s provisions regarding employment after normal retirement age. These special rules should indicate that a plan may: (1) require a phased retirement benefit to end at normal retirement age, with the employee’s pension suspended until he/she is fully retired or (2) allow the phased retirement benefit to continue as long as the employee remains eligible and continues to work.

These special rules should speak to how credit unions and other employers are to calculate benefit increases for late retirement when the employee participates in a phased retirement program.

Thank you for the opportunity to share our comments. If you have any further questions, please contact me at or at (202) 638-5777.


Catherine Orr
Senior Regulatory Counsel