MASBO Classified Personnel Certification Program

Salary 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 (800) 608-3937 tindianer@lincolninvestment.com

Agenda

Understanding what’s behind the Salary Deferrals

125 Plans

MTRS and Municipal Pensions Retirement Plans

Compliance/Oversight: 403(b) Plans

2

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.

3

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.

4

MTRS & Municipal Pensions *

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

*Slight variances between MTRS and Municipal Pensions

5

MTRS Pension - Option A

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

6

Factors for Option A

• Age• Years of service• Final Average Salary (FAS), average of

your 3 highest consecutive year’s salary– New hires – highest 5 year average

7

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

8

Option C

9

• 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

Case Study

10

•Your age: 60•Final Average Salary: $60,000•Years of Service: 35•Beneficiary’s 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

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

11For illustrative purposes only.

Sources of Income for Retirement

Social Security

Pension

Savings

Retirement Plans

• Bank Accounts• Investments• Retirement Accounts

– 403(b)/457– IRA

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)14

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

15

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

16

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)

17

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

18

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

19

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)

20

Combined 457 & 403(b) Contributions

21

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

EXAMPLE 2013

403(b) Regulations

• Implemented January 1, 2009 by IRS

• Responsibility for compliance with these regulations now falls to the School District

22

403(b) Regulations

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

– TPAs

23

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.

24

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

25

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 employer’s 403(b) plan if both plans permit

26

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

27

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

28

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

29

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 aren’t new — but now they will be enforced

30

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.)

31

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

32

Role of TPAs*

• Contributions• Reports• Hardship Distributions• Stopping Contributions• Exchanges

*See Monitoring Your TPA in Nov-Dec 2009 MASBO MATTERS

33

QUESTIONS?

34

35