According to the National Council on Aging, by 2019, 25% of the American workforce will be age 55 or older.
Whether you have seniors on your payroll now or are hiring and may have older job applicants, here are some of the special legal and tax concerns for businesses with older workers.
As a baby boomer myself, this subject is highly relevant to me, but should be of concern to all small business owners.
You’ll see that older worker or senior worker is defined differently for different purposes.
Age Discrimination in Employment Act (ADEA)
There’s a federal law called the Age Discrimination in Employment Act (ADEA) that bars employment discrimination against workers age 40 and older. This means taking adverse actions on hiring, firing, promoting, and compensation based on a worker being older.
From an employer perspective, in light of the potential for claims by older workers who think they’ve been adversely treated because of age, it’s vital to document all employment decisions. For example, if an older worker is terminated because of persistent tardiness, be sure that this cause for dismissal is documented by retaining all time slips, notes on the warnings about lateness, and the fact that this was shared in the exit interview. This action can help to thwart a legal claim or will ensure success if such a claim is made.
Medical coverage
If you have a company health plan, you must offer seniors coverage even if they are on Medicare. These employees will then have a coordination of benefits, which means that either your coverage, or Medicare, is the “primary payer.” This depends on a number of factors, one important one of which is the number of your employees:
- If you have less than 20 employees, Medicare pays first. Your employees should enroll in Medicare at age 65. If they do not, even though there is employer coverage, it is as though they have no health coverage. (Note: Medicare is also the primary payer for those with COBRA or retiree health coverage.)
- If you have 20 or more employees, your group health plan pays first. Your employees do not have to sign up for Medicare Part B until they retire from the company coverage because the group plan is the primary payer; the cost of Medicare premiums may not be worth it because of Medicare being the secondary payer.
That’s how your older employees are impacted. From an employer perspective, it’s just a fact that you’re paying more in premiums for older employees. However, if you have 20 or more workers, your older employees may decline your offer of coverage in favor of Medicare (explained earlier).
Health savings accounts. If you have a high-deductible health plan (HDHP) and are making contributions to employees’ health savings accounts (HSAs), you cannot continue contributions once an employee enrolls in Medicare. Thus if you have 25 employees and your employee is covered by your company’s HDHP (primary payer) so that she doesn’t enroll in Medicare, you can continue making HSA contributions on her behalf.
Retirement plans
If you have a qualified retirement plan, do you have to make contributions for older workers, including those age 70½ and over? Due to nondiscrimination rules, the answer is yes. For example, you have a two-person corporation with a SEP; you are age 59 and your co-owner is 72 years old. The corporation must make contributions for both of you. This is so even though it is a rule that the employees in most cases must begin taking required minimum distributions (RMDs) at age 70½, so your co-owner will be taking distributions.
Employees who do not have a more-than-5% interest in the business can postpone their RMDs from qualified retirement plans (e.g., 401(k)s) until retirement even though they are over age 70½, if the plan allows it. However, this postponement option does not apply to IRAs, including SEPs and SIMPLE IRAs.
In-service benefits. If you have older employees who want to work fewer hours, they may be able to do so and start receiving retirement benefits from the company’s defined benefit (pension) plan. The law says that a pension plan is not disqualified for allowing distributions during working or phased retirement. It allows a plan to pay benefits to an employee who reaches normal retirement age set by the plan (not younger than age 62 in most cases) but no longer working full time. In other words, this option only applies to those who work part-time or on a contract basis (e.g., are called back to the company from time to time). It’s designed to let companies retain the talents of older workers who may prefer to work less or transition to retirement. Last year the IRS provided guidance on determining the taxable portion of these distributions.
Older workers, whether full- or part-time, may be able to take in-service distributions from their 401(k)s without causing the loss of tax-exempt status for the plan. It’s up to the plan to specify that such distributions are permissible. Such distributions, which employees can transfer directly to their individual IRAs, can be offered only to those who are age 59½ who met a length-of-service requirement (typically 2 to 5 years). The amount of distributions may be restricted and, for married employees, are subject to spousal consent.
Final thought
Older workers can bring a wealth of work experience, work ethic, and other benefits to your company. Just be sure to understand the specific issues related to older workers. When in doubt, discuss your concerns with an attorney or tax adviser.
