Here’s what employers need to consider before creating an Early Retirement Incentive Program.
Business owners know how costly it can be to have more senior level employees on the payroll than newcomers. Annual raises and bonuses can put these staff members at the highest level of compensation, often for decades, as their organization waits for them to retire. If they don’t, it may be time to develop an Early Retirement Incentive Program.
An ERIP can be beneficial in more ways than financial. As it creates incentives for staff members to move on, it makes room for upward mobility for junior peers. Employees who are stagnant in the position, whether at the top of the food chain or below, are often dissatisfied. If there’s not growth within the company, they’ll frequently move on. If you’re hoping to retain talent they must see a visible path to growth.
On the financial end, of course business benefits when highly compensated staff members make room for those less highly paid. The savings can be significant in the short term and long. Apart from the savings in payroll, there may be another incentive for a business to consider an ERIP.
In the wake of the COVID-19 pandemic, many companies are leveraging early retirement incentives for staff members who aren’t necessarily retirement age. Due to economic downturns, the airline industry, for example, is offering these programs to workers as young as their 40s and 50s. Other industries, like hospitality, are taking notice. Even teachers and government workers are receiving incentives to retire early, making room for new grads and new hires in the process.
In the wake of the COVID-19 pandemic, many companies are leveraging early retirement incentives for staff members who aren’t necessarily retirement age.
Is an ERIP right for your organization?
When considering creating an incentive program, examine your motivation. What does the company hope to gain? If you’re looking simply for financial savings, the math may work for or against you, when considering any cash or benefits payouts that will need to be offered.
If upward mobility for junior staffers is a core need, you’ll want to make sure you’re not retiring employees along with their loyal customer base. Another consideration is the wisdom and company historical information these workers hold. Can your business survive without their expertise?
Alternately, can your business thrive without their input? For some senior staff members the “we’ve always done it this way” attitude is more a hindrance than help. If these employees are creating obstacles to growth and development, they may be worth retiring sooner, rather than later.
Are they retirement ready?
One of the challenges business owners face when considering an ERIP is whether or not their staff members are financially ready to retire.
One of the challenges business owners face when considering an ERIP is whether or not their staff members are financially ready to retire. One recent survey suggests the majority of Americans, 64%, have little to no money set aside for their retirement. This places an undue burden on the worker and the workplace. Organizations that want to hire new workers and keep pathways of upward mobility open for existing staffers should be planning in advance with 401(k) savings and other retirement incentives for more seasoned employees. These tools can keep the wheels of promotion well oiled.
Incentives that make retirement appealing
An ERIP policy outlines key incentives structured equitably for all employees. Younger staffers who accept the benefit shouldn’t be provided with less than their senior counterparts. Alternatively, more seasoned employees shouldn’t be pressured to accept or provided with less benefits based on their age.
The Equal Employment Opportunity Commission allows employers to structure an ERIP to provide employees above a predetermined age the following financial incentives:
- A flat dollar amount
- Additional benefits based on the employee’s length of service
- A percentage of the employees most recent salary
- A flat dollar or percentage increase in retirement benefits
When employees reach the eligibility age your program has selected, they should be issued the policy information and given the opportunity to discuss retirement in more detail.
Whether a one-time payout, or remaining on the payroll for a specified length of time, employers often provide a financial incentive to ease the employee out of their role. This can be a predetermined dollar amount, or an amount calculated based on the employee’s tenure with the company.
Offering to continue the employee’s current level of health benefits is another option. Businesses offer to continue coverage until the employee is eligible for Medicare coverage.
If an organization proposes continuing the employee’s insurance benefits in lieu of a severance payment, there are strict guidelines to follow. These will assure employers don’t infringe employees’ rights under the Age Discrimination in Employment Act (ADEA). Two benefits businesses can provide in lieu of severance are retiree health benefits and additional pension benefits. To offset severance and provide these, EEOC/ADEA guidelines apply. The retiree must:
- Actually receive the health benefit coverage;
- Receive health benefits that are at least comparable to Medicare benefits in type and value, or if age 65 or over, at least comparable to one-fourth the value of Medicare benefits; and
- Be eligible for an immediate pension
Continuation of an employee’s 401(k) contributions through a specified age may be another incentive to retire. Under EEOC/ADEA guidelines, an employer may offset any severance payout with additional pension benefits to the employee. This offset is eligible only if it meets these criteria:
- The additional pension benefit is made available solely because of the employee’s separation from employment, and
- Counting the additional pension benefit, the employee is eligible for an immediate and unreduced pension
For industries developing an ERIP in response to economic conditions, offering outplacement services may be beneficial. These professionals can help employees find new work, within the industry or elsewhere.
When are employees eligible for retirement payments?
Savers can begin taking cash distributions from their 401(k) at age 59 ½ under IRS guidelines, but there will be a 10% penalty (in addition to taxes) on any money taken from their fund.A consideration employers may use when deciding if an ERIP is right for them is when workers have access to their own retirement funds. Savers can begin taking cash distributions from their 401(k) at age 59 ½ under IRS guidelines, but there will be a 10% penalty (in addition to taxes) on any money taken from their fund. There is an exception: the IRS rule of 55 allows workers who turn 55 and lose their job during the same year. These workers do not have to pay the 10% penalty on withdrawals.
At age 70 1/2, workers are required by the IRS to begin taking distributions of the funds in their 401(k) and IRA Plans or pay a penalty equal to half the amount that should have been withdrawn. There are some exceptions, but by age 72, most workers are required to take at least a required minimum distribution.
American workers are eligible for Medicare benefits at age 65, and they are eligible to receive Social Security payments at age 62.
Phased retirement options
For employees who aren’t quite ready to leave, phased retirement is an option. These can include reductions of hours or moving to part-time. As you phase out these workers, make sure to leverage their expertise training those moving up.
Another option is keeping the retiree on retainer or on standby for consulting work. This can be a plus for the business and worker: they will be able to work when/if they choose, while the company enjoys continued access to their skills and knowledge.
What to consider before creating your early retirement program
As you develop your ERIP consider the larger impact on the organization. A too generous package could be a short-term financial win but cost more over the long haul. A package that offers no real financial or other benefits will be less appealing to staff members.
Create a package based on reasonable criteria, and set minimums. Employees must, for example, be a specific age to be considered for the ERIP or have had a specified tenure at the company, or even both. You can set a minimum age for employee eligibility but not a maximum — you won’t want to penalize staff members that stay on the job longer. Whatever the guidelines you set, assure to apply them equally to all workers. An ERIP must be voluntary, not mandatory, to avoid any inference of age discrimination.
Structuring an ERIP that works for business and employees is a great way to maintain upward mobility in your organization, and provide incentives for workers to enjoy their retirement.