Labor Shortage Loophole: How Businesses Can Rehire Retirees Without Major Tax Implications

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The IRS recently provided additional guidance to employers who are rehiring or retaining employees past retirement age as a means to find qualified help in a historically tight labor market.

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The pandemic has created a perfect storm of problems through unstable labor market conditions. Persisting virus fears coupled with new variant strain pressures and supply chain blockages in almost all major ports and sectors throughout the world have created an international backlog in both production and employment. Be it massive meatpacking centers shutting down for infections or a global chip shortage, every corner of the labor market has shown signals of stress — particularly in the United States where there have been consecutive months of abundant open positions and not enough willing workers to fill them. 

The situation has become so dire that employers are now turning to already-retired workers to come back and help out. The IRS stated that employers typically will not threaten the tax status of their employees; pension plans if they rehire a retiree or allow distribution of retirement benefits to their current employees who have reached the age of 59 ½, or the plan’s normal retirement age. 59 ½ is typically the age at which you can begin taking distributions from plans if you so wish, but not sooner. 

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The agency made clear that “if the sponsor of a qualified pension plan wishes to rehire a retired employee to fill an unforeseen hiring need related to the COVID-19 pandemic, the sponsor should analyze the impact of the rehire under the plan by taking into account any plan terms, including any need for plan amendments, relating to rehires.”

For example, plan sponsors should review any plan terms requiring that an individual who retires and commences benefit distributions not be rehired within a specified period, any plan terms relating to the suspension of distributions upon rehire, and any other plan terms that may have an impact on the pension benefit of a rehire, they stressed. 

Also, if it is permitted under plan terms, those employees may also continue to receive benefits after they are rehired. An employer can generally choose to make retirement distributions available to existing employees who have reached a minimum age of 59 ½ or the plan’s normal retirement age. This can assist in the retention of employees who may soon be eligible for retirement.

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“Also, if permitted under plan terms, those employees may continue receiving the benefits after they are rehired. Moreover, an employer can generally choose to make retirement distributions available to existing employees who have reached age 59 ½ or the plan’s normal retirement age. This may assist in the retention of employees eligible for retirement.”

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 

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