When a Retiree Returns to Work, WRS, ACA, and Tax Rules Impact Public Employers
March 31, 2015

As described in our February 23, 2015 Client Update, “Act 10 and Total Employee Compensation,” rules under the Wisconsin Retirement System (WRS) affect public employees throughout the employment life-cycle, from the initial determination of WRS eligibility through the termination of employment. An individual’s employment life-cycle is sometimes extended when he or she rejoins the workforce to provide services to a WRS employer after officially retiring.

It is easy to understand how public employers can benefit from rehiring retired public employees, whether on a temporary, part-time, or longer-term basis. Retirees come prepared with a wealth of specific skills and experience without the need for additional training.

It is not as easy, however, to navigate the applicable rules and to avoid the significant compliance consequences that can result from rehiring a retiree absent a careful review of the legal implications. Changing and overlapping laws have made it increasingly important for Wisconsin public employers to take into account how several employee benefits and tax laws may significantly impact both the retiree and the employer when a retiree returns to work.

WRS Rehired Annuitant Rules

As a qualified retirement plan under the federal Internal Revenue Code, the WRS is bound by Internal Revenue Service (IRS) requirements that an employee have a “good faith” termination from employment before receiving a retirement benefit. A good faith termination is evidenced by the employee having a “break-in-service.”

Someone who has reached retirement age and begins to receive a WRS retirement annuity, but then returns to work for a WRS employer, is known as a “rehired annuitant.” There are many complex state law and administrative code rules governing rehired annuitants and the corresponding responsibilities of WRS employers who employ rehired annuitants. The application of those rules is fact-specific and may differ based on whether a rehired annuitant returns to work with the same WRS employer, a different WRS employer, or in the capacity of a contractor.

Rehired annuitant laws were further complicated by 2013 Wisconsin Act 20, which created different standards for those with WRS termination dates on or after July 2, 2013. Specifically, someone who terminates WRS employment on or after July 2, 2013 must fulfill a 75-day break-in-service, whereas someone who terminated WRS employment prior to that date must only fulfill a 30-day break-in-service.

The potential impact of not following these rules may be severe—if an annuitant did not have a good faith termination and/or did not fulfill the appropriate break-in-service, that annuitant may have to pay back any annuity payments already received, which can amount to thousands of dollars. From an employer perspective, if that annuitant should not have been receiving annuity payments, the employer may owe WRS contributions dating back to when the annuitant returned to work.

Additional Benefit Issues When a Retiree Returns to Work

The hiring of retired retirees (whether or not a retiree is receiving a WRS annuity) should also be examined to ensure that the retiree participation (or lack thereof) in any employer health plans or other retirement benefit plans will not violate the tax-specific laws applicable to those benefits.

Issues to consider include how a retiree’s reemployment may affect compliance with the Affordable Care Act (ACA) and other tax laws with respect to the employer’s active and/or retiree-only Health Reimbursement Arrangement (HRA) plan(s); whether a rehired retiree may continue to take withdrawals from a 403(b) account or to receive post-employment TSA contributions; and whether any employee benefits plans should be amended (for compliance reasons) to specifically exclude retired retirees from eligibility.

The correct answers to these and other questions are extremely fact-specific and depend upon the exact details of an employer’s various benefit designs and combinations. For this reason, advice applicable to one employer will rarely apply in exactly the same way to a different employer with even a slightly differently-designed benefits package.

Conclusion

When a retired employee returns to work, a host of employee benefits issues are implicated. If you have any questions with respect to this article or other employee benefits compliance matters, please contact your Davis & Kuelthau attorney.

 

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