U.S. Retiree Payroll - Year-End Checklist for Retirees: A Long Guide for U.S. Employers, HR & Payroll
Disclaimer: This guide is general educational information and not legal or tax advice. Requirements vary by plan documents, vendor setup, and state law. Confirm decisions with your payroll provider, third-party administrator (TPA), benefits broker, ERISA counsel, and/or CPA.
Who this guide is for
This is written for employers, HR, payroll, and benefits administrators who manage retiree-related payments and need clarity on what “year-end” obligations exist—especially in environments with pension distributions, retiree health coverage, and occasional post-retirement consulting work.
“Retiree” can mean different things in practice:
- A former employee receiving pension/annuity benefits
- A former employee taking distributions from a 401(k)/403(b)/457 plan
- A former employee covered under retiree medical or COBRA continuation
- A former employee who is truly separated with no ongoing benefits
- A retiree who returns for project work as a consultant or rehired employee
1) First principles: Do you “have to pay retirees” in the U.S.?
There is no general rule that employers must keep paying people just because they retired. What matters is whether you have:
- Wage obligations (final pay, PTO payouts depending on state law/policy)
- A retirement plan that pays benefits (defined benefit pension or cash balance plan)
- Post-employment benefits you promised (retiree medical subsidy, severance, union CBA terms, etc.)
Practical takeaway: Year-end tasks are driven by what you paid and what you provided during the calendar year—not by the label “retiree.”
2) What jobs commonly provide pensions (and why it matters)
In U.S. benefits language, a “pension” usually means a Defined Benefit (DB) plan (a promised benefit, often monthly, based on a formula). DB pensions are most common in:
- Government (state/local public employees, teachers, police/fire)
- Federal employment (often a pension component plus a 401(k)-style plan)
- Military (career service pension-style benefits)
- Union/collectively bargained roles (some trades and legacy industries)
- Legacy private-sector employers (select utilities/transportation/older employers)
Why HR/payroll should care: Pension/plan payments are typically reported on Form 1099-R (often issued by a plan administrator/recordkeeper/TPA). Wages are reported on Form W-2. Consulting work may be reported on W-2 or 1099-NEC depending on worker classification.
3) The master “year-end” decision tree
Answer these questions to identify what you need to issue:
- Did we pay the retiree any wages this year? (final paycheck, PTO payout treated as wages, bonus, post-retirement rehiring)
- Did the retiree receive retirement distributions? (pension payments, 401(k) distributions, rollover distributions)
- Did we provide health coverage to retirees? (retiree medical plan, employer-subsidized coverage, COBRA)
- Do retirees remain plan participants/beneficiaries? (ERISA disclosures, annual fee disclosures, Summary Annual Report)
- Did any retirees provide services as consultants? (independent contractor vs employee)
From that tree, your outputs are typically:
- W-2 (if wages)
- 1099-R (if retirement distributions)
- 1099-NEC (if independent contractor payments for services)
- ACA health coverage statements (1095-C and/or 1095-B depending on employer/plan type)
- Annual plan disclosures (SAR, fee disclosures, and other notices as applicable)
4) If you paid wages: W-2 (and related payroll hygiene)
When a retiree needs a W-2
A retiree receives a Form W-2 if they were paid taxable wages through payroll during the year, such as:
- Final wages / last paycheck
- Bonus or incentive paid after retirement
- PTO/vacation payout treated as wages (depends on state law and written policy)
- Post-retirement wages for part-time employment (rehire, seasonal, project employee)
Operational checklist
- Confirm the person’s mailing address and electronic delivery consent (if used).
- Confirm the correct work and resident state taxation setup (retirees often relocate).
- Make sure separation/rehire actions are clean so benefits deductions stop/transition correctly.
5) If you paid retirement distributions: Form 1099-R
What 1099-R is
Form 1099-R reports distributions from retirement arrangements: pensions, annuities, retirement plans (401(k)/403(b)/457), IRAs, and similar vehicles. It is not used for wages or service/consulting payments.
Who actually issues the 1099-R?
In most organizations, HR/payroll does not manually generate 1099-R. Typically:
- 401(k)/403(b)/457 plans: recordkeeper/TPA issues 1099-R
- Defined benefit pensions: plan administrator/TPA issues 1099-R
- Annuity contracts: insurance carrier issues 1099-R
Employer role: coordinate with the provider, validate addresses, confirm distribution categories (rollovers vs taxable), and ensure withholding data is correct.
6) How to read Form 1099-R: box-by-box explanation
Box 1 — Gross distribution
Total amount paid out during the year before taxes withheld. Includes taxable and nontaxable portions.
Box 2a — Taxable amount
The portion of Box 1 that is taxable income.
Box 2b — Checkboxes
- Taxable amount not determined: payer did not calculate taxable amount; recipient must determine.
- Total distribution: indicates the account/contract was fully distributed.
Box 4 — Federal income tax withheld
Federal withholding taken out of the distribution.
Box 5 — Employee contributions / insurance premiums (basis)
After-tax basis that is generally non-taxable and reduces the taxable amount.
Box 7 — Distribution code(s)
Identifies the distribution type. Common codes:
- 7 = Normal distribution
- 4 = Death (beneficiary/estate)
- G = Direct rollover
- 1 = Early distribution (no known exception)
- 2 = Early distribution (exception applies)
- 3 = Disability
10-second read: Box 1 = total paid → Box 2a = taxable → Box 4 = withholding → Box 7 = what kind of payout.
7) What are annuities (and how they show up in retiree administration)?
An annuity is a contract (often with an insurance company) designed to convert money into future income. Many pensions pay benefits in annuity form (monthly income, potentially for life).
Common annuity types
- Immediate: pay in, income starts soon
- Deferred: pay in, income starts later
- Fixed: predictable payment/return
- Variable: payment depends on investments; often higher complexity/fees
- Indexed: linked to an index with caps/limits
Payout options you may see
- Single life (lifetime)
- Joint & survivor (continues for spouse/beneficiary)
- Period certain (guaranteed number of years)
8) NEW: Retirees doing consulting after retirement — W-2, 1099-NEC, or 1099-R?
This is a very common situation in cities and other large employers: retirees return for project work, seasonal work, advisory roles, or “consulting.” The reporting depends on what the payment is for:
Key rule: 1099-R is only for retirement distributions
Never use 1099-R to report pay for consulting or services. A 1099-R is strictly for pension/annuity/retirement plan distributions.
A) If the retiree is treated as an employee: issue a W-2
Use Form W-2 if the retiree is working under an employment relationship (even if temporary). Practical indicators include:
- The city controls how the work is done (hours, methods, supervision)
- The worker uses city equipment/systems and is integrated like staff
- The work looks like a staff role, not a deliverable-based engagement
Operationally: pay through payroll, apply normal withholding/tax processing, and issue a W-2.
B) If the retiree is a true independent contractor: issue a 1099-NEC
Use Form 1099-NEC if the retiree is a non-employee contractor (typically a deliverables-based engagement, more independence in how work is performed, uses their own tools, etc.).
Operationally:
- Collect a Form W-9 before payment (legal name + TIN).
- Pay via Accounts Payable (not payroll).
- Issue 1099-NEC for reportable nonemployee compensation once thresholds and rules apply.
C) Very common: the same person receives both 1099-R and W-2 or 1099-NEC in the same year
A retiree can receive:
- 1099-R for pension/retirement distributions, and
- W-2 or 1099-NEC for consulting/work payments
These are different payment types and can coexist without issue when correctly classified.
Risk note (classification)
Don’t choose W-2 vs 1099-NEC based only on convenience. Worker classification depends on the facts (degree of control, financial arrangement, relationship). Misclassification can create tax and compliance risk.
9) Retiree health coverage & ACA reporting: what might be required
Health coverage reporting is where many year-end retiree questions live. The right forms depend on:
- Whether the employer is an Applicable Large Employer (ALE) under the ACA
- Whether retiree coverage is fully insured (carrier) or self-insured
- Whether the retiree is on COBRA continuation
Operational tips:
- Confirm who is responsible: employer vs carrier vs TPA.
- Reconcile who was covered in which months (especially if someone retired mid-year).
- Update addresses (retirees move often).
10) COBRA and retirement (not a “year-end” form, but frequently missed)
If retirement triggers loss of group health coverage, COBRA continuation may apply (depending on plan/employer circumstances). COBRA issues often surface months later, so cities include it in retiree offboarding checklists.
11) Annual ERISA plan disclosures that may still apply to retirees
If retirees remain plan participants/beneficiaries, annual disclosures may still be required depending on plan design and governance. Common examples:
- Summary Annual Report (SAR)
- Annual fee/investment disclosures for participant-directed plans
- Other notices depending on the plan’s funding and structure
12) “Who does what?”: clean division of responsibilities
Payroll typically owns
- W-2 delivery and wage/tax reconciliation
- Final pay timing and state compliance for wages
- Address validation and year-end mailing logistics
Benefits/HR typically owns
- Retiree eligibility and enrollment (retiree medical, COBRA, dependent changes)
- Coordination with broker/TPA/carrier for coverage and reporting
- Offboarding/rehire processes (especially when retirees return to work)
TPA/Recordkeeper/Carrier typically owns
- 1099-R issuance for retirement distributions
- Plan-level reporting and participant notices (depending on contract)
- Distribution processing and withholding elections administration
13) Sample retiree year-end checklist (copy/paste)
- Data hygiene: validate retiree addresses, emails (if e-delivery), beneficiary contacts
- W-2 audit: confirm any wages (rehire/bonus/PTO payout) and correct state taxation
- Consulting classification audit: confirm who is W-2 vs 1099-NEC and ensure W-9s are collected for contractors
- Retirement plan audit: confirm 1099-R production timeline with recordkeeper/TPA
- Distribution categorization: rollovers vs taxable vs death benefits; confirm Box 7 coding logic
- Withholding audit: federal and state withholding elections captured correctly for pensions
- Health coverage reconciliation: coverage months by person; confirm who issues ACA statements
- COBRA compliance: confirm election notices sent for qualifying events
- Plan disclosures: confirm SAR/fee disclosures distributed where required
- Support readiness: prepare an FAQ for retiree inquiries (“When do I get my forms?”, “Why is Box 2a blank?”, “What is Code 7?”)
14) FAQ for HR/payroll teams
Q1: If we don’t have a pension, do we still issue 1099-R?
Possibly. If retirees took distributions from your 401(k) or other plan, a 1099-R is still issued, typically by the recordkeeper/TPA.
Q2: Can we issue a W-2 and a 1099-R to the same person?
Yes. If they received wages and retirement distributions in the same year, they can receive both.
Q3: Our retiree is “consulting” — should we just use 1099-R?
No. 1099-R is for retirement distributions only. Consulting/services is reported as W-2 (employee) or 1099-NEC (independent contractor).
Q4: Why would Box 2a (taxable amount) be blank on 1099-R?
Sometimes the payer doesn’t determine the taxable amount and checks “Taxable amount not determined.” The recipient determines taxable income based on basis and other factors.
Q5: What’s the most common operational cause of retiree year-end problems?
Address changes and timing mismatches (retirement mid-year, coverage changes, distribution changes). The fix is disciplined reconciliation and clear division of responsibility with providers.
15) If you want to tailor this guide to your city’s Oracle EBS setup
If you want a version customized to your Oracle EBS implementation, gather:
- Do you run a separate Pension Payroll (payroll name, period type, consolidation set)?
- Who issues 1099-R (EBS, custom report, or tax vendor)?
- Do retirees return as rehired employees or independent contractors (and who decides classification)?
- Do you deduct retiree health premiums from pension checks?
