Continuing to Work and What It Does to a Pension
Somebody who keeps working past a plan's normal retirement age faces a set of interactions nobody explains: whether benefits continue to accrue, whether distributions can begin while still employed, and how required withdrawals apply to somebody still in the job.
The rule in short
Continuing employment past a plan's normal retirement age affects several things at once. Benefits may continue to accrue or may not, depending on plan terms. In-service distributions may be available at a defined age or not at all. Required minimum distributions generally begin at a defined age, with an exception for a current employer's plan that does not extend to earlier employers' plans or to individual accounts. Plan documents govern throughout.
The decision to keep working is usually made for reasons that have nothing to do with pensions, and it interacts with them in three ways at once. None of the three is complicated and all of them depend on documents nobody has read.
Whether benefits keep accruing
Some plans continue accrual. For as long as employment continues, which makes working on straightforwardly valuable in benefit terms as well as in income.
Others cap it. At a number of years of service or at normal retirement age, after which additional work adds nothing to the eventual benefit.
Some substitute an actuarial adjustment. Increasing the benefit to reflect its later start rather than continuing to accrue on the ordinary formula.
The plan document decides. Which is why the summary description is worth requesting, per what a plan must tell a member.
And the answer changes the decision. Since somebody working on for a benefit that stopped growing three years ago is doing so on a false assumption.
Distributions while still employed
In-service distributions may be available. At a defined age and only where the plan permits them, which many plans do not.
They matter for phased arrangements. Since supplementing reduced income from accumulated savings is what makes reduced hours viable for many people.
They interact with reduced hours. On the eligibility questions set out in reducing hours without losing status.
Rollovers may be an alternative. Where a plan permits a transfer out at a defined age, which can open options the plan itself does not offer.
And tax consequences follow. Which are a separate consideration and should be modeled rather than discovered at a filing.
| Question | Answer depends on |
|---|---|
| Does accrual continue past normal retirement age | The plan document |
| Can money be drawn while employed | The plan document |
| Do required withdrawals apply | The type of account |
| Does the still-working exception apply | Whether it is the current employer's plan |
| Does reducing hours affect accrual | The plan document |
Required withdrawals
They generally begin at a defined age. Applying across retirement accounts and producing a minimum that must be taken each year thereafter.
An exception may defer them. For somebody still working, in relation to the plan of the employer they are still working for.
It does not cover earlier employers' plans. Which remain subject to the ordinary rules, and which is where most errors in this area occur.
Nor individual accounts. Which are outside the exception entirely and continue to require withdrawals on the ordinary schedule.
And missing one carries a penalty. Which is why consolidating or at least listing every account is worth doing before the relevant age arrives.
Somebody working at seventy-two, believing that continued employment defers all required withdrawals, may be right about their current employer's plan and wrong about everything else. Accounts left with previous employers, and individual retirement accounts, remain subject to the ordinary schedule, and a missed withdrawal carries a penalty. Listing every retirement account in one place, well before the relevant age, is the step that prevents this.
What to check, and when
Whether accrual continues. Which is the question that most directly affects whether continuing to work is financially worthwhile in pension terms.
Whether in-service distributions exist. Since their availability frequently decides whether a reduced-hours arrangement is affordable.
Which accounts are subject to required withdrawals. Listed individually, since the exception is narrower than most people assume.
What the plan says about later retirement. Including any actuarial adjustment, which can be substantial and is rarely mentioned unprompted.
And the interaction with other income. Including any retirement benefit already being drawn, per working while drawing a benefit.
The errors that recur
Assuming accrual continues. When it stopped some years earlier, so the additional work produced income but no additional pension.
Assuming the exception is general. And missing required withdrawals from earlier employers' plans or individual accounts, which carries a penalty.
Losing track of old accounts. Which is extremely common across a long career and is the practical cause of most missed withdrawals.
Reducing hours without checking. The effect on accrual and on service credit, which can be disproportionate to the reduction in pay.
And relying on general advice. Where the plan document says something different, which it frequently does.
The three interactions here are simple individually and are almost never looked at together, which is how somebody ends up working an extra three years for a benefit that stopped growing before they started.
Accrual is the question that matters most to the decision itself, and the answer is in a document that plans must provide on request and that almost nobody asks for.
In-service distributions are the question that matters most to phased retirement, because reduced hours are only affordable for many people if the shortfall can be met from accumulated savings.
Required withdrawals are the question that carries a penalty, and the exception for people still working is narrower than nearly everybody assumes.
Old accounts are the practical cause of most difficulty here. A career spanning six employers leaves accounts nobody has thought about in twenty years, all of them subject to the ordinary schedule.
Listing every account in one place, well before the relevant age, prevents almost all of it and is a task that takes an afternoon and some old paperwork.
Plan documents govern throughout, which means general advice about how these arrangements usually work is a starting point rather than an answer.
The summary description is what to ask for, plans must supply it, and it answers the accrual and distribution questions directly.
Where a reduced-hours arrangement is being considered, the pension effects should be modeled alongside the pay reduction rather than after it has been agreed.
And where somebody has been working on partly for pension reasons, establishing whether accrual actually continues is worth doing before another year passes on an assumption.
There is a broader observation here about how retirement plans communicate. The information in this article is not hidden. It is in the summary plan description, which the plan must provide, which is written to be readable, and which the overwhelming majority of members have never opened.
That is not entirely their fault. These documents arrive during onboarding, decades before they matter, and nothing prompts anybody to read them at the point when the answers become relevant.
The prompt worth adopting is a birthday. At sixty, request the summary description for every plan the person has ever been a member of, read the sections on accrual, distributions and required withdrawals, and write down the account numbers. It is one afternoon, once, and it answers nearly every question that will arise over the following fifteen years.
Points to carry away
- Accrual past normal retirement age depends on plan terms.
- In-service distributions may or may not be available.
- Required withdrawals generally begin at a defined age.
- An exception may apply to a current employer's plan only.
- Earlier employers' plans and individual accounts are not covered by it.
Questions readers ask
Do benefits keep accruing past normal retirement age?
It depends on the plan, and both answers are common. Some plans continue accrual for as long as employment continues; others cap it at a number of years of service or at normal retirement age, sometimes with an actuarial adjustment instead. Where accrual has stopped, an employee working on is giving their time without any increase in the eventual benefit, which is worth knowing before deciding to continue. The plan's summary description will say, and requesting it costs nothing.
Can money be drawn while still working?
Sometimes, through what plans call an in-service distribution, generally available only at a defined age and only where the plan permits it at all. Many plans do not. This matters for somebody who wants to reduce hours and supplement the reduced income from their own accumulated savings, since the availability of an in-service distribution can determine whether a phased arrangement works financially. It is one of the first things to check when considering reduced hours.
Does the still-working exception cover everything?
No, and this is where the largest errors occur. Where an exception defers required withdrawals for somebody still employed, it generally applies only to the plan of the employer they are still working for. Accounts held with previous employers, and individual retirement accounts, remain subject to the ordinary rules. Somebody who assumes that continuing to work defers everything can miss required withdrawals from other accounts entirely, which carries a penalty.
Sources
- 26 U.S.C. § 401 — Qualified pension, profit-sharing, and stock bonus planslaw.cornell.edu
- 26 U.S.C. § 408 — Individual retirement accountslaw.cornell.edu
- 29 U.S.C. § 1053 — Minimum vesting standardslaw.cornell.edu
- Legal Information Institute — ERISAlaw.cornell.edu
- Legal Information Institute — Pensionlaw.cornell.edu
- Legal Information Institute — Employee Benefitslaw.cornell.edu
Silverline Legal Notes is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
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