“I’ll be back.” More and more retirees are uttering the line Arnold Schwarzenegger made famous and deciding to return to work. For pension plan administrators, this plot twist can create very different visions of the future. Some will picture the organizational benefits that come with the institutional knowledge and experience of returning retirees. Others will envision ominous legal obstacles and fear the idea of workers coming back for a sequel.
As always in the action-packed world of benefits, preparation is key. In “The Returning Retiree,” published in the September/October issue of Plans & Trusts magazine, pension lawyer Lisa Chamzuk highlights some legal and financial issues that pension plan administrators should consider when a retired employee returns to work.
Chamzuk, a partner with Lawson Lundell LLP in Vancouver, British Columbia, cites Statistics Canada research confirming that retirees today are more likely to return to work than they were in the past. The top reason, cited by 40% of respondents in the Statistics Canada study, was for financial considerations. Other reasons included dissatisfaction with retirement and wanting a sense of purpose and accomplishment. Chamzuk notes that improved mortality means more people can—and may want to—return after an initial retirement, making it important for plan administrators to be aware of the legal issues concerning this growing trend.
[Related: Replacing the Replacement Rate: How Much is “ENOUGH” Retirement Income?]
The Income Tax Act Will Find You—It’s What It Does
The Income Tax Act prohibits individuals from drawing a pension from a plan in which they also are accruing a pension entitlement, Chamzuk notes. When retirees return to work for financial reasons, they can be upset to learn that they cannot draw from their pension and accrue further entitlements.
The Income Tax Act also requires pensions to be paid by no later than the age of 71, even if a person is continuously employed at that age and beyond. This rule can frustrate members, Chamzuk writes, but it must be adhered to in order to maintain the status and registration of a pension plan.
[Related: A Story About the Importance of Decumulation]
It Can’t Be Bargained With
There are added considerations in a unionized environment with a collective bargaining agreement (CBA) that requires an employer to contribute to a pension plan for all actively employed individuals covered by the CBA. Administrators may face frustration and requests for other forms of remuneration from returning retirees who discover they can’t accrue additional pension benefits despite working and despite employer contributions.
Administrators must review requirements in applicable legislation, Chamzuk writes. In British Columbia, for example, Section 14 of the Pension Benefits Standards Regulation requires a pension plan to state what happens when a retired member reenters a plan. The administrator is allowed to let the returning retiree choose between options, but those options must be spelled out in the plan text. In British Columbia, the plan must state whether:
- The pension continues and the individual does not become an active member or
- The pension is suspended and the retired member becomes an active member.
An Answer May Be Here, in Our Present
An important exception to the prohibition on simultaneous pension withdrawal and accrual can be found in defined contribution (DC) plans, Chamzuk writes. “An individual is not prohibited from accruing a pension in a defined contribution plan at the same time he or she is receiving benefits in respect of that plan,” she states. This option can allow workers to continue receiving their pensions and earning accruals while also allowing the plan to avoid suspending and restarting pensions. The decision to implement this option depends on the circumstances of membership and the number of retirees seeking to return to work, Chamzuk adds.
For some plan administrators, T4 forms sound even scarier than T2 cyborgs. Either way, it helps to have a plan. Administrative preparation in the present can better position your plan for the future—even when that future involves the past. So when returning retirees tell you they’ll be back, focus on the positives. Armed with key knowledge from applicable regulations, comprehensive plan text and an alternative option like a DC plan, your fears can be terminated.
Editor, Publications for the International Foundation