1 / 29

Executive and Deferred Compensation Options for Public School Employees

Executive and Deferred Compensation Options for Public School Employees. Presented by: Kristi Cook, JD for Kades-Margolis Corporation March 14, 2002. Why Enact Changes to Retirement Savings?. Congressional Recognition of Need for Additional Retirement Income Expect:

dolan-wolfe
Download Presentation

Executive and Deferred Compensation Options for Public School Employees

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Executive and Deferred Compensation Options for Public School Employees Presented by: Kristi Cook, JD for Kades-Margolis Corporation March 14, 2002

  2. Why Enact Changes to Retirement Savings? • Congressional Recognition of Need for Additional Retirement Income • Expect: • Reduced Social Security benefits • Longer life expectancies • Compounded inflation rates diminish fixed benefits • Market fluctuations on investments

  3. Retirement Plan Changes • All individuals will be permitted to save more for their retirement • Easier calculations and contribution limits • Portability at retirement • Using pre-tax dollars to buy past service credit under PSERS • “Roth” type 403(b) contributions for estate planning and post retirement tax-free assets

  4. 403(b) Plans Were Changed… • Easier contribution limits • Higher contribution limits • Contributions after retirement permitted • Coordination with 457 plans • Source for PSERS “buy back” dollars • Portability

  5. Higher Employee Deferral Limits • New 402(g) limit for employee salary reduction contributions will be $15,000 • Effective in $1,000 increments

  6. Special Aged 50+ “Catch Up” • For any individual who is aged 50 or older during the calendar year, the deferral limit is increased by the following amounts: • Does NOT replace “15 Years of Service” catch up limit • Qualified individuals may use both “catch ups” in the same calendar year • Is not reduced by any other limit

  7. Review of New 403(b) Deferral Limits

  8. Employer Contribution Limits • MEA repealed after 2001 • 415 limit applies to sum of employer and employee contributions • New 415(c) limit is lesser of 100% of compensation or $40,000 • Thereafter automatically increase for cost of living increases in $1,000 increments (not $5,000) • $40,000 limit only applies if employer contributes to plan

  9. Special Note… • One definition of “includible compensation” for all 403(b) purposes • Very friendly definition of “compensation” for all 403(b) purposes • Compensation measured over most recent one-year period of service • Allows look backs • Excludes “termination pay” or other extraordinary compensation accrued over more than one year

  10. In 2002… Employee contribution limit is $11,000 If aged 50+, deferral limit is increased by $1,000 to $12,000 total If eligible for 15 years of service “catch up,” limit is increased by up to $3,000 for possible total of $15,000 Limit for employer and employee contributions is lesser of 100% of includible compensation or $40,000 In 2006… Employee contribution limit is $15,000 If aged 50+, deferral limit is increased by $5,000 to $20,000 total If eligible for 15 years of service “catch up,” limit is increased by up to $3,000 for possible total of $23,000 Limit for employer and employee contributions is lesser of 100% of includible compensation or $40,000 Review of 403(b) Limits

  11. Summary of New 403(b) Deferral Limits Through 2006

  12. 457 Plans…More Deferral Opportunities • Because of changes under EGTRRA, 457 plans will become more attractive to school districts and other governmental employers

  13. What is a 457 Plan? • Considered “nonqualified deferred compensation” plan • NOT a “retirement” plan • Usually a payroll reduction but employer may contribute • No offsets against other plans • Salary reduction agreements are not effective until the 1st day of the month following the election to participate • Distribution timing restrictions • No 10% penalty for distributions before 59 ½

  14. New 457 Plan Limits • Total annual limit is same as deferral limit for 403(b) plans • $11,000 in 2002 increasing to $15,000 in 2006 • Aged 50+ catch up • $1,000 in 2002 increasing to $5,000 in 2006 • OR “Final 3 years” catch up equals 200% of normal limit • Cannot use in final year of service, only in last 3 full years before year of retirement • BUT, cannot use final 3 years of service “catch up” in same year as aged 50+ “catch up”

  15. Combined 403(b) and 457(b) Limits * In 457 plans, cannot use both “catch ups” in same year

  16. Compliance Issues… • Some calculations are still necessary • 15 YOS catch up (in 403(b) plans) is still only available if employee has not averaged more than $5,000 per year in elective deferral contributions and has not previously used the full $15,000 limit • Contribution history • Service history • Available catch up dollars • Must still monitor deferrals and 415 dollar limit if employer contributes to plan • Must collect information on calendar year age • Includible compensation differences between 403(b) and 457 plans

  17. How to Install 457(b) Program • Employer must establish a “plan” • Need plan documentation to satisfy IRS requirements • Two Options • Employer adopts plan funded through trust, custodial account or annuity contract like a “traditional” retirement program, or • Investment products provide “document” through custodial accounts, annuities or contracts • Like current 403(b) relationships • Set up payroll process/procedure like 403(b) plans • Need separate tax reporting “slot” • FICA withholding issues • Will report 403(b) and 457(b) on W-2 as separate items

  18. How to Maximize Deferred Compensation • Multiple Plan Options • Employer may contribute to 403(b) and 457 plan for same employee • School district 457 plan is not subject to general eligibility requirements • Employer may contribute amounts into 457 or 403(b) plan for one, some or all employees • Employer may also contribute to other qualified plans in addition to 403(b) and 457 plans

  19. Multiple Plan Options • Multiple Plan Limits: • Separate 403(b) and 401(a) 415 limits • Employer contributions are not offset by contributions to other plan • Up to $40,000 in each plan! • PLUS 457(b) plan • Employer may fund all or any portion • $11,000 in 2002, $15,000 in 2006 • Employee deferrals DO NOT offset 403(b) contributions

  20. New Employer Funding Opportunities… • Employers may make contributions into 403(b) plans for employees who have retired or otherwise severed their employment for a period of up to 5 years • No post employment contributions into 457(b), 401(k) or 401(a) plans

  21. How Much Can An Employer Contribute? • Up to 100% of final year’s “includible compensation,” capped at 415 dollar limit (currently $40,000) • In each of the 5 years following the year in which employee retired/terminated • Possible total of $200,000 • Will increase as 415 dollar limit increases • Codifies previous private letter rulings • Effect is to increase annual limit from $15,000 to $40,000

  22. Possible Deferred Compensation Scenarios • Using 403(b) Plans… • Employer funds up to $40,000 per year • Employee may still contribute age 50+ catch up • Employer may fund $40,000 per year for up to 5 years after retirement • Add 457(b) plan… • Employer or Employer could fund up to deferral limitRESULT? For 2002 retiree, possible $253,000 For 2006 retiree, possible $265,000

  23. More possibilities • Using 457(f) • Unlimited dollar amounts, but all contributions are immediately taxed when they are no longer subject to a “substantial risk of forfeiture.” • NOT taxed when received • What is a substantial risk of forfeiture ? • Only “approved” risk is a fixed period of years • Perspective on attorneys vs. IRS

  24. Recommendations on Maximizing Deferred Income • Install 457(b) program to double deferral opportunities • Employees can defer up to $40,000 (in 2006) with no employer funding • Have employer make contributions into 403(b) accounts • Up to $40,000 per year while active employee • Employee could also contribute aged 50+ catch up amount • Employer or employee could also fund 457(b) plan

  25. Still More Deferred Compensation… • Employer should contribute to 403(b) plan for 5 years after retirement or severance • If more is needed, consider 457(f) with unlimited contributions

  26. Miscellaneous Changes • Past Service “Buy Backs” with 403(b)/457 Assets • School district employees could use 403(b) and 457 assets to buy past service credits under PSERS • Portability from all plans including 457(b) plans • “Roth” Type Contributions into 403(b) and 401(k) Plans, beginning in January 1, 2006

  27. Education Savings Programs • Education IRAs • Increased to $2,000/yr • May be used for K-12 expenses • 529 Tuition Savings Plans • After tax contributions deposited into “approved” 529 product • Proceeds are tax free if used for qualifying education expenses • Subject to 10% penalty if not used for education expenses • May change beneficiary to anyone within first cousin relationship to first named beneficiary

  28. Summary of New Opportunities • More opportunities for retirement savings • Compliance is easier for employers • More payroll issues • Post retirement funding of employer 403(b) contributions • Retirement planning is tax free benefit • Help will be needed to coordinate retirement options, portability issues and “Roth” viability • Integration of benefits with Social Security and state pension system

  29. Thank You Any Questions?

More Related