The Early Retirement Wave

Amanda Wilke, CEBSNovember 24, 2020November 24, 2020

As employers have been forced to cut costs due to the pandemic, some have decided to offer early retirement packages in an effort to avoid laying off employees. Early retirement packages may allow those closer to retirement age to leave the organization voluntarily while helping the organization to cut costs through freed-up benefits and salary space.

The International Foundation has conducted two benchmarking surveys capturing snapshots of current conditions in both the U.S. and Canada. The surveys include employer findings regarding early retirement.

The April 2020 survey report, Employee Benefits in a COVID-19 World, found that 11.9% of responding organizations in the U.S. said that participants are asking more questions about early retirement options. (Stay tuned for the upcoming follow-up survey, Employee Benefits in a COVID-19 World: Six Month Update, to see data on offering early retirement incentives in the U.S.)

The June 2020 survey report, Impact of COVID-19 on Pensions and Benefits in Canada, found:

19.0% of responding Canadian organizations are reporting more questions related to early retirement options.
4.8% of participating organizations made changes to staffing levels by offering early retirement incentives due to the pandemic.
2.9% of participating organizations are considering offering early retirement incentives.

When deciding to offer early retirement packages, employers must carefully consider what to include. They should think about:

Which benefits to offer. It’s important to strike a balance between an offer that is enticing enough for employees to take, yet not so desirable that too many employees will leave as a result.
Eligibility criteria. It must be decided how many years of service employees must have with the company and whether there will be a minimum age requirement.
Desired outcome. This may assist employers in setting parameters for the package.
Avoiding discrimination. Employers should be fair in what is offered to potential retirees and consider how the rest of the workforce will feel about what is offered to different groups.
Compliance with all legal requirements. Consult an experienced attorney before developing an early retirement incentive plan.

Early retirement package designs may feature a variety of components including medical coverage, retirement incentives, continued perks and bonus payments.

Medical Coverage

One of the major factors that deters individuals from retiring early is medical coverage, which can also include dental and vision components. If the company already provides retiree health benefits, medical coverage may not be an issue.

In the U.S., offering medical coverage may be critical to the decision of whether individuals will accept the early retirement offer. There are many considerations for employers:

If an employee is not yet age 65, he or she is not yet old enough to apply for Medicare Parts A and B for hospital and major medical coverage. The employer must decide whether they want to close the gap.
Whether it is possible to continue coverage under the group health plan after early retirement. Employers should consult with insurers and stop-loss carriers to make sure they will allow for any exceptions to plan eligibility requirements if the employer wants to offer continuation coverage under the group plan.
The length of time employees may need coverage.
Will coverage be coordinated with COBRA? Will the former employee be responsible for any contributions? If so, what would the contribution be, and what is the length of time required for contributions?

In Canada, former employees are typically no longer eligible for extended health coverage under the plan for active employees once they retire. However, some employers may offer retiree benefits.

Early retirees may also be eligible for health coverage through a provincial pension plan. For example, in British Columbia, when an employee retires, they may be able to enroll in an extended health plan where premiums will be deducted from the retiree’s monthly pension payment. Other arrangements can be made if the pension is not large enough to cover the medical premiums. Eligibility criteria and available coverage can vary from province to province.

Retirement Incentives

Retirement plan incentives are also a big draw for those considering early retirement. The incentives can vary greatly depending on whether the employee is part of a defined benefit (DB) or defined contribution (DC) pension plan.

DB Pension Plans

For DB plan participants, employers may:

Add years to the early retiree’s age and/or years of service. This provides retirees with a larger pension due to the extra years of service and a smaller reduction for starting the pension early.
Allow employees to collect a pension before normal retirement age without a reduction for withdrawals made prior to normal retirement age.

In addition to these options, in Canada, employers may:

Provide a bridge benefit. This is an additional benefit amount from the early retirement age to age 65: the earliest age at which an individual can start receiving benefits from government programs such as the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), Old Age Security (OAS) and Guaranteed Income Supplement (GIS). The bridge benefit can be a flat dollar amount for each year of service, or it may be based on the estimated full government benefits not being paid.

Note: Between 2023 and 2029, the minimum age for starting OAS and GIS will gradually increase from age 65 to 67.

Regardless of what type of early retirement incentive is offered, it ends at the age the government benefits begin.

DC Pension Plans

Since the size of a DC plan benefit depends on how much money has been contributed and the investment returns on those contributions, benefit payments are often lower in early retirement than if the retiree had waited until normal retirement age.

Employers can’t offer as much in the way of additional benefits for DC plans due to annual contribution limits that apply to those types of plans.

[Related Reading: Are Laid Off or Furloughed Employees Eligible for Health Care Benefits?]

Continuation of Group Benefits and Perks

Early retirement packages may include extended coverage for a variety of group benefits and perks including group term life insurance, outplacement services, financial planning services, keeping a company laptop and other home office equipment, extending the use of a company vehicle, pet insurance continuation, tuition assistance and employee assistance program (EAP)/mental health benefits. Employers must be sure to review the eligibility requirements for each benefit, as some may have provisions allowing benefits to be provided only to active employees.

Bonus Payments

Employers often include a bonus incentive with their early retirement packages.

In the U.S., employers may offer severance payments to early retirees. The payments can vary greatly in size. Employers often use a formula based on tenure in deciding what amount to offer. For example, employees may receive X number of weeks’ salary for every year of service.

In Canada, employers often provide an incentive bonus, similar to severance payments, to early retirees. Payments are provided in the form of lump-sum installments over a certain period.

Learn More About the Impact of COVID-19

Download the full reports to learn more about how employers are reacting to the COVID-19 pandemic. The reports are available free to International Foundation and ISCEBS members.

Canada: Impact of COVID-19 on Pensions and Benefits in Canada: June 2020
U.S: Employee Benefits in a COVID-19 World: April 2020 Survey Report

Amanda Wilke, CEBS
Information/Research Specialist at the International Foundation

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