Blaming It On the Code

In New Jersey we have a rule requiring that public employees abide by a “bona fide severance” from public employment for at least 180 days in order to collect pension benefits. They must also vow that there’s no arrangement to be rehired by the same employer after that period.

A lot of public officials in New Jersey are in a quandary over this rule as it was explained:

New Jersey adopted the rule in March 2012 to comply with the federal Internal Revenue Code.
…….

State Treasury Department spokesman Christopher Santarelli wrote in an email that after the rule was adopted in 2012, it was “posted online and the Division of Pension and Benefits removed obsolete fact sheets on this issue from their website.”

“The division consulted with local officials when contacted on this issue and directed them to the regulation,” he said. “Due to the complexity of federal regulation over the pension plans, extensive legal and administrative review was required before the memo to certifying officers could be finalized.”

Now I am in a quandary.

An August, 2014 memo states:

The PERS, TPAF, PFRS, SPRS, and JRS are 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.

414(d) is simply the definition of a governmental plan.  401(a) is where they put all the rules to have a qualified plan including 401(a)(36):

(36) Distributions during working retirement.— A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section solely because the plan provides that a distribution may be made from such trust to an employee who has attained age 62 and who is not separated from employment at the time of such distribution.

If you are allowed to receive a pension even if you are still employed at the job in which you earned that pension then how is New Jersey forced to adopt this”bona fide severance” rule?

About half of you out there are pension experts.  Have any of you ever heard of such a 180-day rule or regulation?

23 responses to this post.

  1. Posted by anonymous on October 13, 2015 at 2:03 pm

    What I’ve always heard from counsel is that being rehired by a former employer is a problem when it is before the normal retirement age, but not at all when they are above. Similar to your age 62, but have heard with an age 60 plan that it’s fine at 60 or 61. And when they are under the NRA, they aren’t prevented from going back to work, just the benefit is suspended.

    The phrase “bona fide termination of employment” definitely appears in other states as well.

    Reply

  2. Posted by Tough Love on October 13, 2015 at 2:10 pm

    AND …(noting the age 62 in 403(d)(36)) …. how does re-hiring all the under age 62 Police Officer retirees as Sheriffs etc., not result in a disqualification of the “qualified Plan” status ?

    Reply

  3. Posted by MJ on October 13, 2015 at 5:26 pm

    Yes, I have heard that one must wait a certain period of time after retiring before accepting another public position even if it is different from the retired position and with a different public entity. I’m guessing that there are loop holes to this regulation and in some cases just plain ignoring it and hiring the same person under a different title.

    Reply

  4. Posted by george on October 13, 2015 at 7:50 pm

    Table with funding level by state.

    State Pension Funding Levels in U.S. Improve for a Second Year
    http://www.bloomberg.com/news/articles/2015-10-13/state-pension-funding-levels-in-u-s-improve-for-a-second-year

    Reply

    • Posted by Tough Love on October 13, 2015 at 8:27 pm

      The Funding ratios shown are the Plans’ “Official” ratios using the (extremely aggressive) asset return assumption to discount Plan liabilities and calculate ARCS, and are hence VERY materially OVERSTATED.

      Example:

      For NJ, it is showing a State-Plan Funding Ratio in the mid-low 60’s, but under the now-in-Place GASB 67 standards, NJ State Plan Funding rations have an average Funding Ratio of 32.6% ….. as Published by NJ in Bond Disclosure Supplement dated Nov. 25, 2014.

      For the lesser-informed, a Pension Plan with such a low Funding Ratio has a near-ZERO chance of not failing in the near future.

      Reply

      • Posted by Anonymous on October 13, 2015 at 9:12 pm

        Oh so 7.5% isn’t a realistic ror, just kidding…….

        Reply

        • Posted by Tough Love on October 13, 2015 at 11:38 pm

          The question is NOT whether it is a reasonable long term “Investment return assumption”, but whether it is reasonable as the rate for discounting future cash flows (i.e. Public Sector pension payouts) with a high guarantee of being paid.

          Likely, EVERY financial economist would respond with a resounding NO.

          Reply

  5. Posted by PatB on October 13, 2015 at 9:27 pm

    Curious- how do other states deal with double dipping?

    Reply

    • Posted by Anonymous on October 13, 2015 at 9:52 pm

      Probably runs the gamut, some better some worse. For example, I know City of Philadelphia and State of Florida (probably others) have DROP which allows an individual to retire, accrue retirement benefits for five years ( paid in a lump sum upon service termination), while continuing to work. If that’s not a form of double dipping. Also, prior to 2011 Florida employees’ pension contribution rate was zero!

      Reply

      • Posted by Tough Love on October 14, 2015 at 12:16 am

        DROP Plans are one the most outrageous taxpayer ripoffs. Officers CLAIM they need to retire at young ages due to the stresses of the job. Drop Plans prove that to just be MORE of the BS to get outrageously generous pensions payable (WITHOUT REDUCTION) at absurdly young ages.

        Reply

  6. Posted by Anonymous on October 14, 2015 at 4:14 pm

    Aside from the fact a Federal pension loan proram is probably a bad idea and Congress won’t approve it anyway does anyone think it MIGHT be a way to impose uniform P&B standards on potential participants?

    Reply

    • Posted by Tough Love on October 14, 2015 at 4:32 pm

      I believe that the ONLY thing that will “shake-them-up” sufficiently to agree to MATERIAL (future service) pension reforms (meaning REDUCTIONS) is actually see a nearby/comparable Plan fail with retiree actually getting their pension checks very materially reduced …. with nobody (i.e., the FEDS) coming to the rescue.

      And the SOONER it happens, the better for ALL stakeholders.

      Reply

      • Posted by Anonymous on October 14, 2015 at 6:02 pm

        You really think they’ll play their poker hand out to aces & eights?

        Maybe I’m an optimist….. Knowing the political blame game I’d say the D’s will get something done in the next two +years. The pension funds will be in worse shape, the D’s and the Unions can blame the R’s (Christie). The D’s will get members “buy in” by proposing tax increase(s) first knowing it’s not enough and significant reforms will be part of the tax increase deal.

        It probably won’t happen sooner but it might IF some R’s feel the heat for their seat and join the D’s in overriding the Gov with P&B Commission type reforms more in line with Republican Assemblyman Jack Ciattarelli’s proposal.

        Just my opinion, we’ll see.

        Reply

        • Posted by Tough Love on October 14, 2015 at 6:44 pm

          Quoting Anon …”You really think they’ll play their poker hand out to aces & eights? ”

          Yes, I believe nothing MATERIAL (i.e. sufficient to PERMANENTLY address the problem) will happen UNTIL …. as I described above ….. “a nearby/comparable Plan fail with retiree actually getting their pension checks very materially reduced …. with nobody (i.e., the FEDS) coming to the rescue.”

          THAT will send the CLEAR message …… it can and WILL happen to YOU.

          Reply

          • Posted by Anonymous on October 14, 2015 at 7:31 pm

            You COULD be right, as I said we’ll see.

            I really think the D’s would LOVE to override Christie. P&B reform COULD be the opportunity to get enough R’s on board. Especially using Ciattarelli’s proposal as a template for P&B reform.

          • Posted by Tough Love on October 14, 2015 at 7:39 pm

            Anon,

            I’m not sure that you understand the financial consequences to workers within 10 years of retirement (while excluding them neuters to financial savings that is so clearly needed).

            While necessary, justified, and fair to taxpayers (due to the CLEARLY grossly excessive level of current pension formulas/provisions), freezing these Plans means that many would lose 1/3 + of what they “anticipated” getting ……… and some will be so pissed-off that they might resort to threatening our lawmakers if they take such actions.

          • Posted by Anonymous on October 14, 2015 at 7:46 pm

            I get it but Ciattarelli’s proposal dials back the DB freeze to members with less than 10 years of service. I know you and others will be disagree with this but it’s a Republican proposal that SHOULD get serious Democratic and Union support, ultimately resulting in a reasonable compromise solution.

          • Posted by Tough Love on October 14, 2015 at 8:11 pm

            Quoting Anon ….”I get it but Ciattarelli’s proposal dials back the DB freeze to members with less than 10 years of service. ”

            WAY too little, too late.

            Perhaps if they did so 10 years ago.

          • Posted by Tough Love on October 14, 2015 at 10:24 pm

            Anon, I Googled Ciattarelli’s proposal,

            It
            seems to address ONLY Teacher’s pensions & (with few details) their healthcare benefits. Like I said above …. too little, too late.

            But what about everyone else employed at BOTH the State & Local levels ….. especially, BY FAR the MOST egregious pensions & benefits, those of Police & paid firefighters?
            ———————————————

            There is CLEARLY ZERO political (or guts) will to end the decades-long financial “mugging” of Private Sector taxpayers ….. and to grant our Public Sector workers EQUAL, but NO BETTER ….. and for the future service of all CURRENT workers.

            THAT’S what is needed.

            You have no idea how bad it really is.

          • Posted by Anonymous on October 15, 2015 at 8:28 am

            The NJ.com article has a sentence tucked in the middle that states it would apply to others. Not sure how f that means state and local pers as well as P&frs.

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