Phased retirement is an arrangement where an employee (the “participant”) in a qualified defined benefit plan elects to keep working on a part-time basis, rather than completely retire and take full benefits. The employer and the employee agree that an employee will work part-time for a specified period. However, the parties may agree at any time to change the period of part-time employment.
During phased retirement, the employer pays the participant a portion of his or her full retirement benefits, in the form of a single life annuity. At the same time, the employee continues to earn additional retirement benefits and to make additional contributions. The guidance provides an example where the employee in phased retirement works 40 percent of his full-time schedule. During part-time employment, the employee receives payments equal to 60 percent of the employee’s benefit at full retirement. Thus, for example, an employee who would be entitled to a single life annuity of $2,000 a month at full retirement would receive $1,200 a month during part-time employment.
When the part-time employee terminates all employment, the employee begins to receive an annuity based on full retirement. The employee’s total retirement benefit equals the monthly benefit paid during phased retirement, increased by a cost-of-living adjustment and an additional amount.