Internal Revenue Service on Reemployment
There can be significant consequences to you and the SRPS if you retire before the normal retirement age of your plan and/or before age 59 ½, and are reemployed with the same employer without a bona fide separation of service. Please note that all units of Maryland state government, including the University System of Maryland, are considered one employer.
The Internal Revenue Service (IRS) can impose a significant tax penalty on your income if you are under the age of 59 ½, retire and begin receiving your monthly retirement benefits, and are reemployed by the same employer from whom you retired. In order to avoid this penalty, there must be a bona fide separation from service between you and your former employer.
If you retire before your normal retirement age, there are also serious tax consequences to the State Retirement and Pension System if a bona fide separation from service does not take place following retirement and prior to reemployment with the same employer.
While the IRS has not specifically defined what constitutes a bona fide separation from service, it is clear that the greater the difference between your last job before retirement and the job being performed upon your reemployment, and the longer the break between the date of your retirement and the date of your reemployment, the more likely it is that there has been a bona fide separation of service. If you are reemployed to perform the same job, even if there is a reduction in your work schedule, this would likely not qualify as a bona fide separation of service unless there was a lengthy break in employment. Even arrangements where you are rehired as an “independent contractor” may not meet the IRS standard.
If after retirement you consider reemployment with your former employer, you may wish to review and discuss this information with the employer and your tax adviser. Failure to do so could result in a significant tax penalty on your income.