Retirees Returning to the Public Sector Face Limitations

The growing need for public-sector employees has retirees willing to return to work, but limitations on public pensions and Social Security may deter them.

The overwhelming surge of COVID-19 patients means some states are asking retirees with experience in the public sector to return to work.

The list of states asking retirees to re-enter the health care workforce in particular is growing, with California, Colorado, Florida, Illinois, New York, Utah and others calling for medical retirees to rejoin their industries as volunteers or rehires. Law enforcement retirees, such as those who formerly worked as firefighters or police officers, are also being called in to help in California, Florida, New Jersey and Utah.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Because retirees who return to their fields would concurrently collect pension checks and Social Security, provisions on receiving these benefits have left some in the dark. In Utah, under federal requirements, retirees interested in returning to the law enforcement field must be at least 50 years old and have retired from a public safety or firefighter role in order to continue receiving a pension check.

This poses a concern for many former law enforcement workers, who normally retire within their field much earlier than the traditional retirement ages of 65 to 67. Additionally, retirees younger than 59 1/2—the age when workers can begin to withdraw distributions—may not be able to continue making such withdrawals under certain 403(b) plans, depending on the state.

“When a person is rehired, they’re going to be in-service again,” says Martin Tierney, partner at Michael Best & Friedrich LLP. “If they’re younger retirees, especially law enforcement officers which are usually younger retirees, they might not have the ability to take a distribution while they’re working.”

Other states, however, allow retirees to return to work and continue drawing a pension, under specific provisions. A report by the National Association of State Retirement Administrators (NASRA) highlights how under the Maryland State Retirement and Pension System, retirees may continue collecting a pension if they go back into the workforce, but they are subject to an earnings cap unless they’re in specific teaching and health care positions or have been retired for more than five years.

Yet the surge of the coronavirus pandemic has caused some states to suspend their provisions and waive post-retirement employment policies. In New Jersey, Gov. Phil Murphy signed an executive order allowing public employees to return to work to combat the pandemic without any consequences to their pensions.

Likewise, California Gov. Gavin Newsom issued an executive order suspending wait periods and work-hour limitations for retired annuitants going back to work under the California Public Employees’ Retirement System (CALPERs).

“In response to the critical shortages and a need for workers with specific backgrounds, skill sets or training, we’re seeing spaces waiving restrictions in accordance to the statewide emergency and to last for the duration of the emergency,” says Alex Brown, a research manager at NASRA.

For states that haven’t implemented suspensions or changes, Tierney says he is concerned for those retirees eager to jump back into the workforce only to face multiple limitations on their retirement. “You can have formerly retired employees who come back and have an unexpected suspension of pension benefits or some other adjustment,” he adds.

Even with regard to Social Security, retirees may be subject to limitations if they go back to work. While volunteering roles do not interfere with a retiree’s pension or Social Security benefits, returning to the workforce and receiving a salary does. According to AARP, employees who re-enter the workforce after claiming Social Security between the ages of 62 and 67 are subject to the Social Security Administration’s retirement earnings test. For example, in 2018, if workers earned more than $17,040, Social Security would deduct $1 for every $2 earned above that limit. If workers earn above those limits, they can expect to see losses on their Social Security claims.

Since the system is federally mandated, this applies to all retirees who re-enter the workforce. “Social Security has its own set of restrictions,” Brown explains. “Anyone who is receiving a Social Security benefit should be aware of what these restrictions are, what they need to do to remain compliant, and what exemptions would apply for re-employment.

Just as retirees should be vigilant about provisions and rules in resuming work, plan sponsors can benefit from paying attention to their plans’ return-to-work policies too. Since governmental and public pension plans are not subject to the Employee Retirement Income Security Act (ERISA), employers and retirees can expect unique, complex provisions that are tough to navigate.

For 403(b) plans, this means paying close attention to eligibility provisions under the plan, as well as in-service distributions, Tierney says. As more employers see retirees returning to work, it’s important to ensure these former employees know what limitations they may face. “The single most important thing would be for participants to ask their employers what happens on rehire, and to review the documents themselves or ask someone to review those documents,” he says.