Sept. 2002 This Active Life -- 10 Minute Activist

Early Retirement Incentive Benefits

Early retirement incentives often are incorporated into a qualified defined benefit plan as early retirement benefits. Under present law, such early retirement benefits are treated as not violating the age discrimination rules or the Employee Retirement Income Security Act of 1974 (ERISA). And these early retirement benefits (if derived from a qualified defined benefit plan) generally are taxed to employees only when they are received by the employees.

However, many teachers participate in their state's defined benefit plan, which may not offer early retirement benefits. Accordingly, for many years, numerous local school districts across the country have maintained separate early retirement incentive plans that are structured to provide the same type of incentive that can be provided by a defined benefit plan.

Employers (school districts) do so for two reasons. For one, it saves money by accelerating turnover. Two, education employees highly value these incentive benefits. Generally, the incentive benefits are coordinated with the state or municipal retirement system, so that the benefit offsets the reduced pension benefits the employee receives as a result of retiring before "normal retirement age."

Unfortunately, because these benefits are not provided under a tax-qualified defined benefit plan, several challenges have been raised and technical issues have arisen under age discrimination laws, ERISA, and the Internal Revenue Code.

Legislative Update

Over the past three years, NEA, AFT and other groups have been working with various executive agencies and the Congress to resolve the legal and technical questions that threaten the future of these valuable early retirement incentive benefits. And we have made some significant progress.

In May, the Equal Employment Opportunity Commission (EEOC) published in its semi-annual regulatory agenda its intent to "...amend regulations governing age discrimination in employment to exempt from the prohibitions of the Age Discrimination in Employment Act (ADEA) the practice of altering, reducing, or eliminating employer-sponsored retiree health benefits when retirees become eligible for Medicare or comparable State retiree health benefits.

The new rule will ensure that the application of the ADEA does not discourage employers from providing health benefits to their retirees." The published deadline for the proposed regulations is December 2002, and NEA will continue to monitor the development and implementation of these regulations.

Most recently, in July the Senate Committee on Finance unanimously approved S. 1971, the National Employee Savings and Trust Equity Act. This bill will amend the Internal Revenue Code of 1986 and the Employee Retirement Income Security Act of 1974 to protect the retirement security of American workers by ensuring that pension assets are adequately diversified and by providing workers with adequate access to, and information about, their pension plans.

Chairman Max Baucus (D-MT) and Senator Charles Grassley (R-IA), the ranking minority member, have amended this legislation to include the "Teacher Voluntary Early Retirement Act of 2002." Accordingly, the amendment will eliminate those technical issues in a narrow way so that it is clear that local school districts may continue to offer the same type of benefits that are permitted under a defined benefit plan directly without establishing their own pre-funded tax-qualified retirement plan.

The bill will permit such early retirement benefits to be paid in any form so long as the value of such benefits is designed to coordinate with the pension benefit provided from a tax-qualified defined benefit plan. Further, the bill resolves ambiguous questions about tax "timing" for certain benefits which cannot be accurately valued until the employee terminates employment, to ensure that these benefits are not taxable to the employee until after they are received from the employer.

To keep informed on developments regarding S. 1971 and other important legislation, go to NEA's online Legislative Action Center at www.nea.org/lac.

What You Can Do

Act Now
The legislative process for this bill is far from complete, and the actual number of working days left in this Congress is slipping away. The full Senate schedules S. 1971 for consideration in September.

Contact Your Representatives
Please call your senator's office and urge a favorable vote for S. 1971. In addition, you should contact your congressman's office to alert them to the imminent action in the Senate on S. 1971, and emphasize your expectations of support for this bill and the valuable teacher voluntary early retirement benefits contained therein.

Write
Write a letters to the editor of your local newspaper or call your local radio talk show to explain the importance of the issue and what must be done about it.

Stay Informed
To keep informed on developments regarding S. 1971 and other important legislation, go to NEA's Legislative Action Center. You can gather background information about the legislation and even contact your Senator or member of Congress directly.