NJ Division of Pension & Benefits Issues Memo on Post-Retirement Employment & Compliance with IRS Rules
New Jersey State-administered retirement systems do not permit the payment of retirement benefits without a severance from public employment (defined as a period of not less than 180 days) as required by the Internal Revenue Service (IRS). The New Jersey Division of Pension and Benefits issued a memorandum August 22 that addresses restrictions pertaining to the re-employment of retired members from any of New Jersey’s State-administered retirement systems – including TPAF.
Bona-fide Severance Required
TPAF, in addition to the other State Retirement Systems (PERS, PFRS, SPRS, and JRS) was established as qualified governmental defined benefit plans in accordance with Internal Revenue Code (IRC) Sections 401(a) and 414(d). In order to preserve the qualified status of these plans and to protect retirees from a 10% excise tax penalty on their monthly retirement payments, the Division of Pensions and Benefits was required to adopt and to enforce regulations to ensure compliance with the IRC requirements. These rules, N.J.A.C. 17:1 et. seq, went into effect in March of 2012. Included within these rules was a requirement that employees completely terminate from the employee-employer relationship for at least 180 days, defined as a ‘Bona fide severance from employment.’ That definition also made clear that employment or re-employment in a part-time position; employment or re-employment in a position that is not covered by the Defined Benefit Plan; a change in title; employment or re-employment as a contract employee, a leased employee, or an independent contractor; or termination of employment with a pre-arranged agreement for re-employment, does not qualify.
Re-employment by a different unit of the same public entity, whether in a position covered by the same retirement system or a different retirement system, is considered to be employment by the same employer.
If an individual returns to public employment with the former employer prior to satisfying the requirements of a bona fide severance from employment, the employee will be required to repay all retirement benefits received from the date of retirement and may be required to re-enroll in the same or a different retirement system.
In addition, the IRS does not consider a pre-arranged return to public employment to be a bona fide severance from employment no matter how long the break in employment. If the employer and employee make an arrangement prior to the employee’s retirement to return to the same employer in any capacity, including as a volunteer — at any future time, regardless whether the position is covered by the former retirement system — the employer/employee relationship is not completely severed and the retirement will be invalid. This would apply even if he or she waited 180 days before returning to the public employment.
Interim Employment & the IRS
In addition, the memo makes clear that while state statute allows school administrators to return in an interim role (dubbed a ‘critical need’ under N.J.S.A. 43:15A-57.2(c) and 18A:66-53.2(b)) after 120 days, the 180-day requirement still applies for tax purposes when considering the pension as an early distribution (defined as a retiree who is under the age of 59½ and returns to employment with the same employee).
The memo also specifies that if an employee holds more than one position with the employer, he or she must separate from all employment in order to retire, even if the positions are covered by different retirement systems, or the second position is not subject to pension contributions.
Finally, the Division now requires employers to fill out a new form, the Notification of Employment after Retirement, whenever they engage the services of any retired New Jersey public employee. This requirement pertains to employees returning to the same or another district or other New Jersey public employer.
Members should be aware of these rules as they begin their retirement planning.