Illinois ASBO May 18. 2011 1 Creating Cost Savings and Tax Efficient Retirement Incentives Illinois...

Illinois ASBOMay 18. 2011

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Creating Cost Savings and Tax Efficient Retirement Incentives

Illinois ASBO60th Annual Conference

May 18, 2011


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Wayne McClain

Senior Counsel, Retirement Services Tax, VALIC

Edie Russo

VP, Retirement Savings, AXA Equitable

Christopher Zingaro

VP, Relationship Management, AXA Equitable


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Thanks to EGTRRA*, employers who offer 403(b) plans can make contributions to former employees’ 403(b) accounts.

• Employer contributions can be made for up to 5 tax years following severance of employment or retirement

• Only available under 403(b) plans – not 401(a), 401(k), 457(b) plans

*Economic Growth and Tax Relief Reconciliation Act of 2001


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• Post-employment employer contributions to 403(b) can be made for each of up to 5 tax years post-employment

– Plus in the final year of service for total of 6 years

– Need not be a full 5 year period. District’s administrative rules can provide for a shorter period (e.g., 3 years post-employment is often used)

– Annual limit is 100% of final year includible compensation capped at $49,000 (2011 limit; may increase in future years – IRS announces limits in the fall for the next year)


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• How are school districts using this benefit?– Buy out of superintendent’s contract– Replacement of unused leave (sick, vacation) pay– Early retirement incentive– Alternative to severance type benefits

• No cash option– Must be specific language stating that employee has no

cash option to 403(b) contribution– Employee must establish a 403(b) account under the

plan while still employed


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• Saves money

– Employer contributions are less expensive to employer than compensation

– No payroll taxes including FICA or Medicare

• Provides ability to stretch obligations over post-employment years

• Especially important with large number of retirees with unused leave pay

– Avoids payment of total unfunded liability in year of retirement


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• Permits superintendent benefit not tied to salary increases

– Salary is often public information, but benefits are less visible in many states. (In Illinois, must post these arrangements. P.A. 96-0434, effective 8/13/09; PA-96-0266, effective 7/1/10. Do IL ASBO members agree this would apply to post-employment contributions?)

• Can be used to reduce unfunded liabilities of leave pay accruals

– Renegotiate current policy to reduce accruals, replace with employer contributions


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• What happens if death occurs during the post-employment period and before the employer contributions have all been made?

– 403(b) regulations prohibit further contributions after the month of death.

– During that month, employer contribution can be made up to the limit for that year – greater of includible compensation in final year of service and $49,000 (for 2011).

– No contributions thereafter.


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Caution!

• Remember not to offer terminating/retiring employees with a choice of cash or the employer contributions

• Remember that your 403(b) plan document and administrative rules must permit employer contributions


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Let’s review some examples of the post-employment contribution benefits.EXAMPLE 1:District has typically paid all unused sick and vacation leave, and other

severance pay, to employees as they terminate/retire.Retiring employees have complained about the income tax issues when they

receive large checks.District is also finding it increasingly difficult to make these large payments

due to budget constraints.District has considered spreading payments among more than one tax year

to ease the burden on it and the employees, but is concerned about the need to track payments due and violation of deferred compensation rules.


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Solution to example 1:Adopt a written policy (and plan amendment, if needed, to

provide for employer contributions*) that provides:• Employer contributions to the 403(b) plan, instead of cash

payments, over a stated period up to 5 years.• The maximum contribution each year will be the current

IRS §415 limit for that year - $49,000 for 2011. • This accomplishes tax-deferral for the employees and

budget relief for the District.*The plan amendment can be a simple addition to the plan’s adoption

agreement if applicable.


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EXAMPLE 2:

District wants to make employer contributions for retiring employees who have accumulated a large amount of unused leave pay, but thinks some retirees might want a lump sum of cash.


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Solution to example 2:Adopt a written policy (and plan amendment if needed) that

provides:• The first “X [dollar amount]” of unused leave pay will be

paid in cash at retirement.• Employer contributions will be made for the equivalent of

the unused balance, over a period of up to 5 years.NO choice of cash or contributions may be given to the

employees; otherwise, the contributions would be deemed “elective deferrals” which are not permitted post-employment (other than as will be discussed later in these slides).


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EXAMPLE 3:

District has many elementary school teachers who have reached the top of their salary schedule and are eligible to retire under the state pension system.

District has a shortage of high school teachers.

District wants to help solve a tight budget problem with an early retirement incentive for the elementary school teachers.


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Solution to example 3:Adopt a written policy (and plan amendment if needed) that

provides:• All elementary school teachers at a stated salary amount or

above, who are eligible to retire with a full unreduced state pension, are eligible to participate in an early retirement incentive program.

• District will contribute a stated dollar amount in annual installments, for a given period (up to 5 years) starting with the first year after retirement.

• Budget dollars are freed up to help hire high school teachers.


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What about employee contributions to 403(b) from severance pay?

• Employee elective salary deferrals may be made from the following kinds of payments, if paid before the end of the year of severance of employment or, if later, within 2 ½ months after date of severance– Unused sick, vacation or other per diem paid leave

time, but only if employee could have used the leave had employment continued

– Any type of pay that would have been paid had the employee not terminated service (back pay, bonuses, overtime pay)


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Severance pay NOT included:

• Any payments not paid by the end of the year of severance or, if later, within 2 ½ months of severance

• Payments made for any reason other than “replacements” for existing benefits:

– Early retirement incentives

– “Buy outs” of individually negotiated contracts


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THANK YOU!

Questions??

Illinois ASBO May 18. 2011 1 Creating Cost Savings and Tax Efficient Retirement Incentives Illinois...

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