IRS Warns Against “Sham” Retirements
December 3rd, 2011 by JBWK
The IRS, in a recently released private letter ruling, held that pension plan participants would not be considered “retired” under an arrangement in which they would “retire” on one day, only to come back to work in the same position a day or week later.
The pension plan in the PLR was undergoing required benefit reductions because of its critically underfunded status. Part of this required an elimination of the early subsidized retirement benefit. To try to take advantage of this option before it was eliminated, the employer proposed that eligible employees could “retire” and therefore become eligible for a full, early retirement subsidy, but immediately return to work and suspend their benefit payments. That way, when the employees retired legitimately, their fully subsidized benefits would still be in effect.
Despite the apparent simplicity of this scheme, the IRS ruled that these sham retirements would violate the Internal Revenue Code’s plan qualification requirements, which could result in disqualification of the entire pension plan.
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