MASBO Classified Personnel Certification Program Salary Deferrals and Payroll

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MASBO Classified Personnel Certification
ProgramSalary Deferrals and Payroll

• Presented by
• Tamara Indianer, CFP
• Regional Vice President, New England
• September 12, 2013

Lincoln Investment Planning, Inc.Registered
Investment Advisor Broker/Dealer member
FINRA/SIPC 51 Sawyer Road, Suite 210 Waltham, MA
02453 [phone] tindianer_at_lincolninvestment.c
om
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Agenda

• Understanding whats behind the Salary Deferrals
• 125 Plans
• MTRS and Municipal Pensions
• Retirement Plans
• Compliance/Oversight 403(b) Plans

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Section 125 Cafeteria Plans

• Provides participants an opportunity to receive
  certain benefits on a pretax basis. Participants
  in a cafeteria plan must be permitted to choose
  among at least one taxable benefit (such as cash)
  and one qualified benefit.

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Section 125 Cafeteria Plans

• Qualified benefits include
• Accident and health benefits (but not Archer
  medical savings accounts or long-term care
  insurance)
• Adoption assistance
• Dependent care assistance
• Group-term life insurance coverage
• Health savings accounts, including distributions
  to pay long-term care services.

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MTRS Municipal Pensions

• MTRS
• Define Benefit Plan
• There are 3 options A,B,C
• Irrevocable decision once effective date of
  retirement occurs

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MTRS Pension - Option A

• Highest Payout Available
• For your lifetime only
• Payout ends when you die
• No beneficiary

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Factors for Option A

• Age
• Years of service
• Final Average Salary (FAS), average of your 3
  highest consecutive years salary
• New hires highest 5 year average

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Option B

• 1-2 less than option A income
• Anyone can be your beneficiary
• When you die, balance of your fund goes to
  beneficiary
• Account depletes itself in 10-11 years

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Option C

• Lowest possible payout
• Provides survivor benefit equal to 2/3 of Option
  C
• Beneficiary must be parent, spouse, sibling,
  child or ex-spouse who has not remarried
• Pop-up provision available

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Case Study

• Your age 60
• Final Average Salary 60,000
• Years of Service 35
• Beneficiarys age 59
• Option A Option B Option C
• 48,000 47,520 43,680
• Dies with you Any remaining 29,119
• to beneficiary to survivor
• (4,320 difference)
• For Illustrative purposes only

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Effect of Inflationon 50,000 Pension
5 Yrs 10 Yrs 25 Yrs
Actual Pension w/ COLA 51,800 53,600 59,000
Income needed w/ 3 inflation 56,275 65,236 101,626
For illustrative purposes only.
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Sources of Income for Retirement
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Retirement Plans

• Bank Accounts
• Investments
• Retirement Accounts
• 403(b)/457
• IRA

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Retirement Plans 403(b) Basics

• Defined Contribution Plan
• Salary Deferral Contributions
• Contributions are Pre-Tax
• Earnings grow Tax-Deferred
• Limits on Contributions (17,500 to 26,000 in
  2013)
• 10 tax penalty for premature distributions (pre
  59 ½)
• You send the to Provider or TPA (who forwards
  it to provider)

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403(b) Contribution Limits

• Elective Deferral Limit (402(g)) 17,500 in 2013
• Special catch-up election is only for employees
  with 15 years of service or more with their
  present employer. May permit an additional 3,000
  annually for five years. Still need to perform
  MAC calculation to ensure eligibility.
• Special 5,500 additional amount available to
  employees who are 50 years of age or older

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403(b) Contribution Limits

• Example 2013
• 17,500
• 5,500 if age 50 or older
• 3,000 if more than 15 years service (maybe)
• 26,000
• See IRS Publication 571 Tax-Sheltered Annuity
  Plans (403(b) Plans)
• www.irs.gov/pub/irs-pdf/p571.pdf

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403(b) Basics

• Basic types
• Annuity contracts purchased through an insurance
  company known as 403(b)(1) annuities
• Custodial accounts, which hold mutual fund shares
  known as 403(b)(7) accounts
• Pre-Tax Traditional 403(b)s and After-Tax ROTH
  403(b)s (not to be confused with ROTH IRAs)
  Deferrals must not exceed combined limit of
  17,500 (or 22,500 or 25,500)

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Retirement Plans 457 Basics

• Same as 403(b)
• Salary Deferral Contributions
• Contributions are Pre-Tax
• Earnings grow Tax-Deferred
• Limits on Contributions are Similar to the 403(b)
  
• 17,500 in 2013 23,000 if age 50 or older

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403(b)/457 Differences

• Premature tax penalty on distributions from a 457
• Age 59½ is not a factor. Once separated from
  service, participant can withdraw funds without a
  10 tax penalty.
• Withdrawal of funds from a 457 while still
  employed
• Loans may not be available
• In-service distributions may be more difficult
• In 457 plans, participant must have
  unforeseeable emergency
• Usually only medical expenses and emergencies
  qualify
• Purchase of residence does not qualify
• College expenses do not qualify

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403(b)/457 Differences

• In-service 403(b) hardship withdrawals are
  usually approved for safe harbor reasons
• Medical bills
• Purchase of primary residence
• Post secondary education
• Prevent eviction from primary residence
• Also, 403(b)s allow
• Post-employer contributions
• Higher Limits for Employer Contributions (51,000
  in 2013)

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Combined 457 403(b) Contributions

EXAMPLE 2013
403(b) 17,500 5,500 (if age 50 or older) 3,000 (maybe) 26,000 457 17,500 5,500 (if age 50 or older) 23,000
49,000
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403(b) Regulations

• Implemented January 1, 2009 by IRS
• Responsibility for compliance with these
  regulations now falls to the School District

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403(b) Regulations

• 403(b) Plan Requirements
• Plan Document
• Transfers and Exchanges
• Universal Eligibility
• Prompt Deposit of Contributions
• Hardship Withdrawals
• Loans
• TPAs

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403(b) Plan Document

• There must be a written plan
• Must contain all terms and conditions for
  eligibility, limitations and benefits
• Failure to comply could disqualify the entire
  plan
• Plan document has a form requirement and an
  operational requirement. IRS issued model
  language that helps with the form requirement.
• Employers must operate their 403(b) plans in
  accordance with the terms (form) of their
  written plan document.

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403(b) Plan Document

• Written record of responsibilities among
  employer, vendors and other entities
• Must outline who is responsible for
  administration and compliance responsibilities
• Employer and/or
• Third parties, such as product providers and TPAs
  
• Responsibility cannot be assigned to the employee

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Transfers and Exchanges

• No transfers or exchanges unless permitted by
  Plan Document
• Exchanges restricted to only those products named
  in Plan Document
• Plan could authorize different vendors for
  exchanges and for payroll access
• After employment Employees could transfer to
  another employers 403(b) plan if both plans
  permit

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Universal Eligibility

• All employees must be eligible to participate
  unless they are
• Unwilling to contribute at least 200 per year to
  the 403(b) plan
• Normally work fewer than 20 hours per week for
  the employer
• Or may use 1000 hours rule must keep good
  records
• Students
• Non-resident aliens
• Cannot Exclude Substitutes

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Universal Eligibility

• Annual notification
• Not new
• Let employees know they are eligible to
  participate
• If employees not aware of the plan (meaningful
  notice), plan can't be considered "available"
  even if employees could have participated if they
  had asked
• When and how often they can make or change their
  contribution
• That they have choice between Roth and regular
  403(b) (if Roth is available under the plan)
• Other conditions that may apply
• Notice can be electronic or hard copy

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Prompt Deposit of Contributions

• Contribution amounts must be transferred to
  providers within a period no longer than is
  reasonable for proper plan administration
• While the IRS did not mandate a time frame, it
  did give an example
• 15 days after the last day of the month that the
  funds were deferred from the employee's pay

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Hardship Withdrawals Changes

• Participants cannot withdraw funds from their
  403(b) account while still employed unless
  conditions are met
• Need to understand that money must stay in your
  403(b) until death, disability, separation from
  service, age 59½ or hardship
• These rules arent new but now they will be
  enforced

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Hardship Withdrawals

• Must follow same rules as in 401(k)
• All salary deferrals must stop for six months
• Hardship withdrawal limited to your December 31,
  1988, account balance PLUS contributions MINUS
  previous hardship distributions (no earnings)
• Need to submit proof of hardship (copies of
  medical bills, tuition bills, etc.)

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Loans

• Limited to lesser of
• 50,000
• 50 of account balance
• Must include all loans in all plans of employer
  (e.g., 457(b) plan) and all vendors

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Role of TPAs

• Contributions
• Reports
• Hardship Distributions
• Stopping Contributions
• Exchanges
• See Monitoring Your TPA in Nov-Dec 2009 MASBO
  MATTERS

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• QUESTIONS?

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