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Various studies indicate that formal phased retirement programs within defined benefit plans are wanted and needed by both employers and employees. Phased retirement programs may be useful for employees who want to reduce their hours during later stages of their careers, but who wish to remain in the workforce. For employers, a phased retirement program may be a useful tool to retain talented employees who may otherwise fully retire.

In designing phased retirement programs, It is not surprising that many employers wish to have significant discretion in deciding which employees they will seek to retain through a phased retirement program. Indeed, the employer may view such discretion as vital to its business needs and interests. Under current law, however, such discretion would generally run contrary to the nondiscrimination requirements under the Internal Revenue Code (Code), which prohibits more favorable treatment of highly compensated employees.

This memo explores the history of the Code’s nondiscrimination rules, with a particular focus on the benefits, rights and features test. The memo also considers whether such rules remain appropriate for bona fide phased retirement programs within qualified pension or retirement plans or whether alternative approaches to achieve the social goals of the nondiscrimination rules are possible.