Why We Did This Report

Item 498 of Chapter 2 of the 2022 Special Session I Acts of Assembly tasked the Virginia Retirement System (VRS) with conducting a review of the current return-to-work (RTW) provisions governing its retirees, including an overview of the Internal Revenue Service (IRS) laws and regulations regarding return to work, an analysis of Virginia's return-to-work provisions compared to those of other public employee pension plans, and an actuarial analysis of potential modifications to the return-to-work provisions.

What We Found

Return to work refers to a retiree returning to post-retirement employment with the same employer or another employer in the same retirement system while continuing to receive a retirement benefit. There is considerable flexibility within the existing return-to-work provisions, especially for those who are returning on a part-time basis. Retirees can choose to stop their retirement benefit and return to full-time active employment. Alternatively, there are currently several additional avenues for a retiree to return to work with a VRS-covered employer and continue to receive retirement benefits. As long as there is no prearrangement, a retiree can accept:

(i) a part-time position in which the retiree can work up to 80 percent of full-time employment after the required one full calendar month break in service;

(ii) an interim position that lasts no longer than six months after the required one full calendar month break in service and approval from VRS; or

(iii) a full-time position in one of the three position categories allowed under the Code of Virginia after the required 12 consecutive calendar month break in service.

Virginia’s current return-to-work provisions are largely consistent with the provisions in numerous other states and are generally aligned with national trends regarding return to work. However, some plans are narrowing their current RTW rules and increasing break-in-service requirements. In addition, VRS’ return-to-work provisions overall are designed to balance protecting the plans while allowing flexibility for employers and retirees.

Section 414 of the Internal Revenue Code (IRC) establishes numerous requirements that qualified governmental plans, including VRS, must comply with in order to qualify for favorable tax provisions. These requirements include when and how a retiree may return to work for a system employer following retirement while continuing to receive a retirement benefit (an “in-service distribution").

Maintaining VRS’ status as a governmental plan is paramount as such status allows members to make pre-tax retirement contributions and provides an exemption from taxation for the trust fund’s investment earnings. These and other benefits allow members to retain more of their salary and, since investment income accounts for approximately two-thirds of a retiree’s pension benefit, exemption of investment earnings from taxation is critically important for VRS members as well as the overall fiscal health of VRS. Further, investment income contributes to VRS’ funded status, which impacts the Commonwealth’s bond rating.

Current return-to-work provisions provide flexibility, even when compared to other state plans. At present, VRS allows retirees to return to work at 80 percent of a full-time position with a one full calendar month break in service over a period where the employee would otherwise work and still receive their retirement benefit. In addition, there are multiple categories of critical shortage positions where full-time employment is allowed after a one-year break in service. If part-time service (defined as 80 percent of a full-time schedule) and the existing critical shortage provisions are not sufficient for workforce needs, then an expansion of current return-to-work rules with certain protections for the plans could be considered.

If the current 12-month break-in-service provision for full-time employment following retirement is reduced, then requiring a break in service of at least six months for those members who have not reached normal retirement age would provide additional flexibility for members and employers, while avoiding the likelihood of increased adverse actuarial impacts to the plans. Another option to increase flexibility would be to allow anyone who has reached normal retirement age (age 65 or Social Security Normal retirement age for general employees and age 60 for hazardous duty) to retire and return to work without a break in service. However, and importantly, this approach would need to be coupled with employer contributions and under the Internal Revenue Code specified age limitations. If the break-in-service requirement is further reduced below six months without age restrictions, then there would be changes in retirement patterns and deleterious impacts to the fund, including increased cash flow requirements and resulting higher employer costs. Further, VRS will be unable to ascertain the full extent of the magnitude of the impacts until systematically observing plan experience in the VRS quadrennial actuarial experience study. In summary, no matter what approach is taken, VRS in conjunction with the plan actuary strongly recommends use of a sunset clause including actuarial analysis conducted in conjunction with VRS’ quadrennial experience study; continued employer contributions for full-time return-to-work options, similar to the approach taken with school security officers; a break-in service requirement of at least six months or normal retirement age restrictions as outlined in the body of the report.