Working After Retirement

Transcription

1 Working After Retirement Presented by: Alan D. Conroy, Executive Director Phone: Financial Institutions and Insurance March 9,

2 Working After Retirement Background Establishing Retirement Status Returning to Work 2009 Special School Rules 2

3 Working After Retirement Establishing retirement status The ability to return to work for a KPERS-affiliated employer after retirement can have multiple legal and actuarial ramifications. For this reason, there have long been limitations on working after retirement, including A waiting period before returning to work After returning to work, either A limitation on earnings if returning to work for the same employer from which the member retired; or An employer contribution if returning to work for a different employer. 3

4 Working After Retirement Establishing retirement status In order for KPERS benefits to begin there must be a bona fide retirement, which requires termination from covered employment. The IRS requires a break occur before a retiree can return to an affiliated employer, but does not specify the length of the break. The current break requirement is 60 days for KPERS members. 4

5 Working After Retirement Returning to work If a retiree returns to work for a KPERS affiliated employer after their break in service, they Do not become an active member Do not make any employee contributions Do not earn any additional benefit. Specific limitations and rules have varied depending on When the retiree returned to work Whether they returned to the same employer they retired from or a different employer. 5

6 Working After Retirement Returning to work For many years, KPERS retirees who returned to work for the same employer have been subject to an earnings limitation ($20,000 per calendar year from 2006 to 7/1/2016). If a retiree reaches the earnings limit, they must stop working or suspend their benefit for the remainder of the calendar year. Retirees returning to work for a different employer have not had an earnings limitation. Beginning in 2006, employers paid a contribution equal to the actuarial rate plus the employee contribution rate on the compensation of these retirees Employee contribution rate was originally 4% and increased to 6% by

7 Working After Retirement 2009 Special school rules In 2009 a special, three-year exemption from the earnings limitation was created for licensed school employees who retired under normal retirement Not available to those who took early retirement after May These employees were allowed to return to the either the same or different employer without an earnings limitation. The employer was required to contribute the full actuarial required contribution (ARC) rate plus 8%. As the sunset date neared in 2012, the Legislature extended the special rules an additional three years (to July 1, 2015). 7

8 Why Changes Were Made in 2015/2016 Statutory Sunset Legal Implications Costs to the System Retirement Behavior Changes 8

9 Working After Retirement Why were changes made 9

10 Working After Retirement Legal Implications KPERS is a qualified 401(a) retirement plan as defined by the Internal Revenue Service. Members receive all of the tax advantages that come with being a qualified plan The IRS requires a bona fide retirement take place before distributions can occur If an employer pre-arranges with an active member to retire and return to work as a retiree, this is not a bona fide retirement in the eyes of the IRS The IRS has indicated through a private letter ruling that pre-arrangements could not only create tax implications for the employer and employee but ultimately jeopardize the qualified status of the plan 10

11 Working After Retirement What are the costs KPERS is a pre-funded defined benefit plan Employer and employee contributions are based on premise that members retirement benefits are funded during their working career Contribution calculations require use of actuarial assumptions, including assumptions about how long members work and how soon they retire after becoming eligible. Working after retirement rules permitting employees to simultaneously work and receive benefits encourage earlier retirements No earnings limit (or a high limit relative to pay during active membership) provides a clear financial incentive to apply for benefits and continue working Members can be expected to make decisions based on their own financial interests 11

12 Working After Retirement What are the costs Earlier retirements have a cost to the system Shorter period for contributions. Contributions are received for a shorter period than assumed, so their retirement benefit may not be fully funded during their working career Longer period of benefit payouts. In general, there is a higher actuarial liability for retirements at or soon after initial eligibility (even when considering potential for benefit increases with additional years of service) Filling a position that is normally an active, contributing employee with a non-contributing retiree results in a cost to the System The exact cost to the System varies by individual and is due in part to behavioral choices that cannot be quantified 12

13 Working After Retirement What are the trends that indicate a cost to the System Based on data from 2009 (when the exemption for licensed school professionals took effect) through 2014, most KPERS members retire at age 62 or later (even if eligible to retire earlier) 13

14 Working After Retirement Retirement Trends: Retirees returning to work as licensed school professionals retired at younger ages than retirees not returning to work during that period Licensed school professionals have a financial incentive to retire at younger ages under the working after retirement rules in effect since

15 Working After Retirement Addressing policy issues 2015/2016 legislation Cost considerations The new policy reduces the financial incentive for members to retire with an intention to return to work Contributions on retiree earnings offset some of the cost to the System Staffing considerations Special education and hard-to-fill licensed positions can still be filled with a retiree when recruitment efforts fail Emergency vacancies can be filled with retirees Daily call substitutes are not subject to the working after retirement policy 15

16 Current Policy (First effective July 1, 2016) Basic working after retirement rule Certification of no prearrangements Grandfathered positions Special education, Hard-to-fill, and Hardship exemptions Assurance protocols Cumulative limits Sunset 16

17 Current Rules 17

18 Current Rules Makes explicit that no prearranged agreement to return to work for a KPERS employer is a condition of retirement Requires members to affirm on their application for retirement that They will not be employed with any participating employer within 60 days of retirement They have no prearrangement to return to work with any KPERS affiliated employer Requires the employer s appointing authority, at the point of rehiring a KPERS retiree, to affirm that The retiree has not been employed by the participating employer within 60 days of the retirement That there was no prearranged agreement for employment Prearrangements are not permissible before retirement or completion of the 60-day waiting period 18

19 Current Rules Prearrangements are determined by facts and circumstances indicating that the employer and employee reasonably anticipated that further services would be performed after the employee s retirement, as stated in an IRS private letter ruling May include written or verbal understanding Penalties for prearrangements are established The retiree s benefit will be suspended starting in the month the retiree returned to work and ending six months after the retiree ends employment Employers are to pay KPERS costs associated with the prearrangement, such as 19

20 Current Rules Grandfathered Positions Retirees who retired before May 1, 2015 can work without an earnings limit in a licensed school professional position until July 1, 2020 Previously scheduled to sunset on July 1, 2017 Employer contributes actuarial required contribution plus 8% (24.03% in FY 2017) Retirees who accepted employment or returned to work for a different employer in a non-licensed position before May 1, 2015 can work in that same position indefinitely without an earnings limit Employer contributes actuarial required contribution plus 6% (For schools: 22.03% in FY 2017) Retirees who accepted employment or returned to work for the same employer in a nonlicensed position before May 1, 2015, can work in that same position indefinitely Employee is subject to $25,000 earnings limit Employer does not pay an employer contribution Retirees who returned to work in any position prior to July 1, 2006 are grandfathered indefinitely No employer contribution If a grandfathered retiree in a non-licensed position changes position or has a break in service, the retiree will lose grandfathered status 20

21 Current Rules Retirees in special education teacher positions are not subject to the earnings limitation for up to 36 months or 3 school years, whichever is less Retirees who have worked under the exemption for the 3-year maximum are then subject to the earnings limitation If employer meets the requirements of an assurance protocol and maintains documentation, can extend exemption for one year Retirees make no (direct) employee contributions Employers report each retiree to KPERS and contribute at a rate of 30% on all compensation Employers must maintain documentation of efforts to fill the position with a non-retiree throughout the exemption 21

22 Current Rules Retiree hired in a top 5 hard-to-fill licensed position (as designated annually by Department of Education) is not subject to earnings limitation for lesser of 36 months or 3 school years For school year: (1) secondary-level English Language and Literature; (2) secondary level science; (3) elementary classroom teacher; (4) secondary mathematics; and (5) fine arts For school year: (1) elementary classroom teacher; (2) mathematics (5-12); (3) life and physical Sciences (5-12); (4) English language arts (5-12); and (5) fine and performing arts (PreK-12). Retirees who have worked under the exemption for the 3-year maximum are then subject to the earnings limitation If employer meets the requirements of an assurance protocol and maintains documentation, can extend exemption for one year Retirees make no (direct) employee contributions Employers report each retiree to KPERS and contribute at a rate of 30% on all compensation Employers must maintain documentation of efforts to fill the position with a non-retiree throughout the exemption 22

23 Current Rules Retiree hired in a hardship position (due to emergency or inability to fill the position, as designated by the agency s governing authority) is not subject to earnings limitation for one school or calendar year Retirees who have worked under the exemption for that one year are then subject to the earnings limitation If employer meets the requirements of an assurance protocol and maintains documentation, can extend exemption for one year The employer can extend a hardship position through the assurance protocol a total of three times Retirees make no (direct) employee contributions Employers report each retiree to KPERS and contribute at a rate of 30% on all compensation Employers must maintain documentation of efforts to fill the position with a non-retiree throughout the exemption 23

24 Current Rules Assurance Protocol An employer can extend an exempt position by submitting an assurance protocol to KPERS The assurance protocol is to be signed by the superintendent and school board president, if submitted by a school district employer The assurance protocol must state that the position was advertised on multiple platforms for a minimum of 30 calendar days, and at least one of the following conditions occurred: No applications were submitted for the position If applications were submitted, none of the applicants met the reference screening criteria of the employer If applications were submitted, none of the applicants possessed the appropriate licensure, certification or other necessary credentials for the position The Joint Committee on Pensions, Investments, and Benefits can review employer s documentation of efforts to recruit a non-retiree for the position The Committee can revoke an exception if they find an employer has not made adequate efforts to fill the position on an permanent basis KPERS field auditors will begin checking that the provisions of the new working after retirement law are being met by employers 24

25 Current Rules Cumulative limits on working after retirement The total time individual retirees can work without an earnings limit is capped if working under The grandfathered licensed school professional exemption Special education teacher exemption Hard-to-fill position exemption Hardship position ANY COMBINATION of these exemptions Cumulative limit is total of 48 months or 4 school years, whichever is less 25

26 Current Rules Sunset Most of the new working after retirement rules are now scheduled to sunset on July 1, 2020 Does NOT apply to provisions Making the prearrangement prohibition a condition for retirement Requiring members to affirm there are no prearrangements as part of retirement application Penalties for prearrangements The sunset requires the Legislature to take positive action to maintain or modify the new working after retirement rules Would provide opportunity for review of stakeholders experience with the new policies 26

27 2017 Legislation Joint Committee Recommendation House Action Additional Topics 27

28 Joint Committee Applying working after retirement to Regents New working after retirement rules require that all retirees who return to work for a KPERS affiliated employer are subject to the working after retirement rules After reviewing the law with KPERS tax counsel, it was determined that all employees of KPERS-affiliated employers would be subject to the new working after retirement rules, even if the position was not a KPERS-covered position Based on that determination, retirees who return to work for Regents institutions are subject to the working after retirement rules, even if they are employed in a position covered by the Board of Regents Mandatory Retirement Plan Unlike KP&F and Judges, there is no statutory exception for KPERS retirees in positions covered by the Regents retirement system Before the new law took effect, Regents institutions did not enroll retirees who were working in positions covered by the Board of Regents Retirement Plan 28

29 Joint Committee Recommended Legislation The Joint Committee on Pensions, Investments, and Benefits recommended the introduction of legislation to the 2017 Legislature to exempt positions covered by the Regent s retirement system from working after retirement rules. The recommendation from the Joint Committee would treat the Regent s retirement system similar to the way KP&F and Judges groups are currently treated. House Bill 2005 originally contained the changes recommended by the Joint Committee. The language in House Bill 2005 was amended into House Bill 2268 by the House Committee in Financial Institutions and Pensions. 29

30 House Actions Changes to the current working after retirement rules The House Committee on Financial Institutions and Pensions has had several meetings and subcommittee meetings on working after retirement The current House recommendations on working after retirement changes are contained in HB 2268, which has passed the House and been assigned to this Committee The House Committee does intend to look at additional working after retirement issues after turnaround 30

31 House Action House Bill 2268 House Bill 2268, as amended by House Committee, makes several changes to the existing working after retirement rules: 1. Third party and independent contractors. Clarify the way working after retirement restrictions apply to retirees returning to work for KPERS employers as independent contractors or through a third party contractor. 2. Age 62 exemption. Added a new exemption from the working after retirement rules for any member who retires at the age of 62 or later on and after July 1, Employers must pay a 30% contribution on these rehired retirees. 3. Regents provision. Clarify that KPERS retirees who work for Regents institutions in positions covered by the Regents retirement plan are exempt from the working after retirement earnings limit (HB 2005). 4. Consolidate exemptions. Create a single emergency exemption that could be used for up to three years with a possibility of a one-year extension (after submitting an assurance protocol) and eliminate the hardship, hard-to-fill and special education exemptions. 5. Legislative earnings cap. Clarify that certain legislative expenses would not be considered in applying the working after retirement earnings cap for KPERS retirees serving as legislators. 6. Technical amendment. Change a specific statutory reference to 8.0 percent as the assumed investment rate of return to the rate as specified by the Board of Trustees (now 7.75%). 31

32 Additional Topics Senate Bill 138 and other items for continued discussion Senate Bill 138 contains potential changes to existing working after retirement rules by eliminating the hardship, hard-to-fill and special education exemptions and going back to allowing all licensed school professionals to return to work without an exemption (the exemption in effect prior to 2016). Other Items Daily call versus long-term substitute teachers. Uniform contribution rate for all working after retirement exemptions. Allowing a retiree to unretire and enter the KPERS 3 cash balance plan in cases of a personal emergency 32

33 Questions? 33