With the U.S. workforce growing older and life expectancy rates continuing to climb, the playbook for retirement is in the process of being rewritten–and not just by employees, but by employers, too. Thanks to the watershed 2006 Pension Protection Act (PPA), employers may now pay pension benefits to workers 62 years and older, even if they continue to work. As these phased retirement programs become easier to implement, more companies are expected to turn to the practice to retain older workers with valuable skills and knowledge. The one obstacle: The Internal Revenue Service (IRS) has yet to define the regulations.

The big IRS issue, explains Kyle Brown, retirement counsel at human resources consulting firm Watson Wyatt Worldwide Inc., is subsidies. "If a plan has a subsidized early retirement benefit, can the plan pay the subsidy upon the in-service distribution under phased retirement?" The IRS has sought public comment on the issue, taking the pulse of the employers and employees.

And employees are keen on the issue. The Californian Budget Project survey found that Californians are working longer. After a long stretch from 1979 to 1995–which saw little or no change in the percentage of workers age 65 or older–that figure is now on the rise, jumping 35.2% between 1995 and 2006. Today, more than one in four senior Californians (26.5%) are still working.