Rule of 55: what qualifies for service?

[The Cosmic Avenger]

I've been thinking about this lately, especially when I was "out of work" last year. Technically my company kept me as a zero-hour, on-call employee, in the hope that they would find work for me, and they did! They also had a very few hours here and there, although eventually I said I would do it if they NEEDED me, but otherwise I'd rather not.

So for the Rule of 55, does anyone know what qualifies as "separation from service"? I've looked, but I haven't found the details. I'm sure my company would keep me on call if I asked until that year, but at zero hours, would that qualify? I'm very curious, because the contract for the work I'm doing will end halfway through the year I turn 54, so while I think we're doing a great job, in consulting you never can rely 100% on a government contract being renewed, no matter how happy the client is with you.

I have a feeling that part time would qualify, but on-call would not, but I can't find anything confirming that. Heck, they could probably find 8 hours of work I could help with and hire me back for one day in January of the year I turn 55, I've been there over 20 years and I'm always being asked for advice from all over the company. If on-call doesn't count, maybe doing on-call work full time for one day and then retiring would count?

 

[pb4uski]

I've never seen it defined, but I would suspect it might be linked to eligibility for company benefits like company subsidized health insurance or to contribute to 401k and receive company match where applicable.

I guess if you are hired on in January of the year you turn 55, work some and then resign then technically you will have qualified but I would make it more than a day and of course YMMV and recognize that there is some tax risk associated with that scheme.

 

[The Cosmic Avenger]

I've never seen it defined, but I would suspect it might be linked to eligibility for company benefits like company subsidized health insurance or to contribute to 401k and receive company match where applicable.

I guess if you are hired on in January of the year you turn 55, work some and then resign then technically you will have qualified but I would make it more than a day and of course YMMV and recognize that there is some tax risk associated with that scheme.

You're probably right, which sucks, because to be hired back long enough to qualify for benefits would cost the company more than just my salary, it's a big overhead cost for all that administrative work, too. Well, it's something to keep in mind, I'll keep researching it as a contingency if I don't find a definitive answer.

 

[cathy63]

Here's a round-up of court opinions and IRS rulings on the definition of "separation from service". Tax status resulting from separation from service. (Employee Benefit Plans)

... The IRS has ruled in Rev. Rul. 69-647 (1969-2 C.B. 101) that a senior executive who retired from full-time employment and continued to render services on a part-time basis as a consultant was considered to have separated from service. Factors which the IRS considered in reaching this conclusion are:

1. The employer did not exercise supervision over the former employee;

2. The employer did not require compliance with detailed orders or instructions;

3. There was not an established schedule for performing the services and it was not necessary for the taxpayer to obtain the employer's permission to be absent from work;

4. The taxpayer rendered only advisory services on an irregular basis.

 

[njhowie]

If you are earning income from employer, you are paying income taxes on those earnings, employer is making Social Security deductions/contributions - you have not separated from service. The amount of work or income from employer is irrelevant. Maybe you do not qualify for certain benefits employer provides in that you are no longer a full time employee. But, aside from that, I don't think there is an issue here.

IRS Pub 575 does not address this situation, and since it does not explicitly disallow it, I think you're fine. It does explicitly disallow separating prior to age 55, waiting while separated, and then taking distributions at/after age 55 under the rule.

https://www.irs.gov/pub/irs-pdf/p575.pdf

Ed Slott says the following:

This is a tough question because there is no tax code or IRS Reg definition for "separation from service".

https://www.irahelp.com/forum-post/22420-separation-service-defined-under-sec-72t2av

 

[pb4uski]

It sounds like it relates to your providing continuing services to the employer at their beck and call and direction as an employee. Since you're talking about 6 months or so, I wonder if they keep you on payroll at a negligible salary... like $100/month as a retainer and you are available to provide services to them the entire time and would be paid extra for services exceeding x hours... if that might qualify.

Or if it is critical to your plan take a demotion for six months if necessary.

 

[The Cosmic Avenger]

Here's a round-up of court opinions and IRS rulings on the definition of "separation from service". Tax status resulting from separation from service. (Employee Benefit Plans)

Interesting, a lot of that sounds similar to the criteria for employee vs. independent contractor.
Well, we'll see. Right now I should be able to keep doing what I'm doing now until the year I turn 55, and if not, my plan before if I didn't go back to work was monthly 72t withdrawals to cover essential expenses, and pulling from cash or taxable investments to cover anything over that. My crystal ball is in the shop, so I guess I'll have to wait and see!

 

[sengsational]

It's less about what the IRS says about it (gasp!) and more about what they say when you call and talk to the 401k provider; no need for you to analyze the laws your interpretation means nothing.

 

[Out-to-Lunch]

I have a straightforward scenario, unlike yours. However, I asked my HR and my 403(b) provider about "how will they know" that I am separated. In my case, I was told that my HR would send notification to the provider that I had separated.

Maybe that is all you need?

 

[The Cosmic Avenger]

Good point, sengsational and Out-to-Lunch. I am friendly with the person in charge of HR, so I might ask them to join me for a drink on Zoom and run a "hypthetical" by them. (They know I would not ask them to treat me any differently, especially if it could mean trouble for them or the company, I just want to know how they think they would handle it.)