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HomeMy WebLinkAboutWaddell & Reed Comments rage 1 or ¿ bate: Fri, 20 Dec 200216:41:00 -0600 From: "Allan Browns" <Abrowns@waddell.com> To: <dougbeehler@wradvisors.com> Cc: "David Latlip" <dlatlip@waddell.com> Subject: Re: Fwd: City Deferred Comp Plan ** High Priority ** Doug, I wanted to bring you up to speed with regard to the regulations surrounding 457 Plans. The IRS has not set any formal date for these plans to be restated to current regulations. I am waiting on a call from our document designer to determine when we might see the new document. With the 457 Plan being a non-qualified deferred compensation plan, there is typically not much formal information issued by the IRS, however, with such sweeping changes made by EGTRRA, I suspect we will see something in the future, With all this being said, when new laws pass and no formal guidance is given as it pertains to restatement to the new regulations, the organizations are to make a good faith effort to comply with the new regulations. If Mr. Corrie needs further clarification, I would be more than happy to discuss this further with him. If you have any other questions, please feel free to contact me, Thanks, Allan Allan D. Browns, QP A, QKA Director, RetirementPlans Operations Waddell & Reed Services Company, Inc. 6300 Lamar Avenue Overland Park, KS 66202 (913)236-1540/(913)236-1599 abrowns@WaddelLcom »> <dougbeehler@wradvisors.com> 12/19/02 02:09PM »> ---------Included Message---------- >Date: Tue, 17 Dec 2002 15:47:53 -0700 >From: "Anita Overlin" <overlina@meridiancity,org> >To: <dougbeehler@wradvisors.com> >Cc: "Janice Smith (Janice Smith)" <smithj@ci.meridian.id.us> >Subject: City Deferred Comp Plan > >Dear Doug, >The City of Meridian is reviewing and updating the current resolutions. >Resolution # 142 needs updated to conform to current federal deferred >compensation requirements. >To meet our current objective we need to revise the Deferred https://sndspinb.waddell.cornlsmms/1040661387/Read/46 12/23/2002 ragt ¿. 01 ¿. >Compensationl'hl1ll. >Please provide the City a copy of your plan document for Deferred >Compensation Plan that meets current federal regulations. >Your immediate attention is requested. >Thank you, >Mayor Robert Corrie > > ---------End of Included Message---------- David, I have been waiting for updated 457 plan documents for quite some time and now I need them for one of my clients as you can see from the enclosed email. Please get back to me as soon as possible on this matter. You can reach me on my cellphone at 208-866-0311. Thanks, Doug https://sndspinb.waddell.cornlsmms/l04066l387/Read/46 12/2312002 Section 457 Plan . What is it? . When can it be used? . Strengths . Tradeoffs . How to do it . Tax considerations . Questions & Answers What is it? A Section 457 plan is a nonqualified deferred compensation plan for governmental units, governmental agencies, and non-church-controlled tax-exempt organizations. In 2002, an employee may defer the lesser of $11 ,000 or 100 percent of the employee's taxable compensation to one of these plans. This contribution limit will further increase in $1.000 annual increments from 2003 through 2006. At that point, the maximum employee pretax contribution for Section 457 plans will reach $15,000 per year and be indexed for inflation thereafter. In addition. a "catch-up" retirement savings provision for those age 50 and over allows these individuals to contribute $12,000 pretax in 2002, increasing $2.000 per year until their contribution limit reaches $20,000 in 2006, Because governmental employers and church-controlled organizations are not subject to the complicated federal requirements of the Employee Retirement Income Security Act (ERISA), their Section 457 plans are not subject to ERISA. Nevertheless, most nongovernmental. tax-exempt organizations are subject to ERISA. Consequently. their Section 457 plans will be subject to the requirements under ERISA, specifically those that apply to nonqualified deferred compensation plans for taxable employers. Such plans. however, can avoid the ERISA rules if they are structured to take advantage of specific ERISA exemptions. For example. unfunded plans covering only a select group of management or highly compensated employees (the "top-hat" group) are exempt from ERISA requirements. Section 457 plans can be structured to fit this exemption. When can it be used? You are a governmental organization You are a state, a political subdivision of a state (e.g., a city or a township), and any agency or instrumentality of a state or a political subdivision of a state (e.g.,a school district or a sewage authority). You are a nongovernmental, tax-exempt organization ,...IIM' ",monl.n' ;nt..m"~n. p"v~" ", In'..m.",,' .n' """,.,,,., P"""" .Ny N.""" hoof_1d In.. n..' ""'Advl...- P"'~" ~"" "" ."un". ....Imonl ....... .."Iso .nd'.,"~ 001 ,. ..".d"", """,cO ""po"'. PI.." ,.. 01..,..... P.,.... ,r.tA..~..,- waddell & Reed. Inc. 01/09/03 """"""'°01""..."."100."""",."",,, Page 1 of6 You are any organization exempt from federal income lax, except for a church or synagogue or an organization controlled by a church or a synagogue. Strengths Investment earnings accrue tax deferred Investment earnings accumulate tax deferred and are not taxed to your employees until the benefits are paid. Employee contributions are made with pretax dollars The amount each employee defers to the plan is not includable in the employee's income. As a result, the deferral is not subject to income tax. The plan may allow elective withdrawals before the participant otherwise is entitled to a distribution Generally, plan distributions may not be made before: . The calendar year in which the participant attains age 70Y., . The date the participant separates from service, or . The date the participant is faced with an "unforeseeable emergency" (See below for the definition of an "unforeseeable emergency.") Employees may qualify for a tax credit One provision of the 2001 Tax Relief Act allows certain low- and middle-income taxpayers to claim a partial income tax credit for contributions made to IHAs and certain employer-sponsored retirement plans. The amount of the credit (if any) is based on the employee's annual income and federal income tax filing status. For details, see Tax Credit for IRAs and Retirement Plans. Tradeoffs The annual salary reduction amount is limited In 2002, the maximum amount an employee can defer under a Section 457 plan is the lesser of $11,000 or 100 percent of the employee's taxable compensation. The $11,000 limit is applied on a per-individual, not a per-plan, basis. If an individual is employed by two different governmental employers, the individual's total annual deferral from both employers cannot exceed $11,000. As ,.,....... ......t .nd In!..m.tlon . p"""" ,.. Iot..m.'",' .n. ,"'~lioo.1 P"""" .",. N".." """", Ino."" 'MAAd.""- "..~.. -,oj. "".100""",,. Io........t ",'h""'."""'ho."'notb",n".,.n"'"."'"",,", PI.... ,.. D'..I."", ,." '" 'MAAd...,- 01/09/03 Waddell & Reed, Inc. c.",.." 10200' bY"".'" 100. AI "'Ø-U Re","" Page 2 of 6 stated, the $11,000 limit win further increase in $1,000 annual increments from 2003 through 2006. In addition, a "catch-up" retirement savings provision exists for those age 50 and over, Example(s): Ricky is employed by both New York City and Los Angeles. He earns $40,000 per year from New York City and $12,000 per year from Los Angeles. Ricky participates in a Section 457 plan with both employers. In 2002, he defers $6,500 to his plan with Los Angeles. As a result, he may only defer a maximum of $4,500 to his plan with New York City. The maximum deferral amounts can be increased for participants nearing retirement age. See below for details on how this can occur. Distributions from Section 457 plans are not eligible for special averaging treatment Distributions from Section 457 plans are not eligible for favorable lump-sum averaging treatment that may be available for some participants in qualified plans. How to do it Adopt a written plan You must adopt a written plan that describes the provisions of the plan, Most likely, you will need the assistance of a retirement-planning specialist. Provide forms to participants for salary reduction elections Generally, an agreement providing for deferral must be entered into before the beginning of any calendar month for which compensation is to be deferred. A new employee, however, can defer compensation during the first month of his or her employment as long as the employee enters into an agreement to defer compensation on or before his or her first day of employment, even if that day is after the first day of the month. Tax-exempt organizations subject to ERISA must follow the ERISA requirements that apply to nonqualified deferred compensation plans Unless their Section 457 plan is structured to take advantage of specific ERISA exemptions, nongovernmental, tax-exempt organizations will be required to follow the requirements of ERISA. These requirements include vesting, fiduciary, minimum funding, and reporting and disclosure provisions. If the Section 457 plan were required to comply with all of these requirements of ERISA anyway, the organization might be better off choosing another option, such as a qualified plan (e.g., a profit-sharing plan). F.,""'~' ",.ton' ..d'.fœ""Io. . "..in., ,., ó.,.",,"..f ,.d ..""ti..""".... .NY. N.;"'.. F.....1d t... no, FMAA_.,N "..in.. ..~. lox. "'.".". Iomf.,ont ., .1.. ,d";,, ,.. ,...in .01'. ..fin'.,.. to,.."" "',.'n. PI.... 'M 01,..."". "" '" F"AAd~",N Waddell &: Reed. Inc. 01/09/03 """"...ID'OOtbyF.....IdIno.AI".-,UR..""" Page30f6 Tax considerations Income Tax Deductibility is not an issue for employers with a Section 457 plan If you are an employerwho is eligible to have a Section 457 plan, you do not pay federal income taxes. Consequently, deductibility of contributions is not an issue for you. In addition, payments to exempt governmental deferred compensation plans may be exempt from both Federal Insurance Contributions Act and FUT A. Investment earnings accrue tax defe"ed Investment earnings accumulate tax deferred and are not taxed to your employees until the benefits are paid. Employee contributions are made with pretax dollars The amount each employee defers to the plan is not includable in the employee's income. As a result, the deferral is not subject to income tax. Questions & Answers What income is eligible for deferral under a Section 457 plan? Compensation eligible for deferral includes all compensation for services performed that the participant receives from the eligible employer that currently is includable in the individual's gross income. What employees must be allowed to participate in a Section 457 plan? There are no specific coverage requirements for Section 457 plans. For a governmental organization, the plan can be offered to all employees or to any group of employees, even a single employee. Individuals who perform services for the employer are eligible to participate. This includes employees as well as independent contractors. As for nongovernmental, tax-exempt organizations, most are subject to the Employee Retirement Income Security Act (ERISA). The funding requirements of ERISA may conflict with Section 457 requirements, and this is problematic. A tax-exempt organization can resolve this conflict by limiting its Section 457 plan coverage to a select group of management or highly compensated employees (top-hat plan). F.,.."", .."'~t 00' '.'.,m,'Ic. . p'.VIo" I., ,.f.,m".'" 00' ,,",,."..,, p"",.,ø .'" Noil'" F..oflold I"" .., F"'A,.I",~ p.""",, 10,... t,.. "'"",0<, "...tm~1 ...",..,...,..""",."Io,"'o"'Io"'p..fo"".'pu".,ø. PIo..o...DI"Ic""o".."'F"A_..,~ Waddell & Reed, Inc. 01/09/03 too..",.. "01 'y Fo".'" """ AI AI"'.. Ros"..' Page4of6 Can your employees contribute to any other pension plan in addition to a Section 457 plan? Yes, and their Section 457 contribution limit for 2002 and later years will not be reduced by contributions made to other types of pension plans. Prior to 2002, Section 457 plan contributions had to be coordinated with contributions to other types of pension plans. What is an "unforeseeable emergency" that would allow an early distribution of the plan's funds? An "unforeseeable emergency" is defined as: . Severe financial hardship to the participant resulting from a sudden and unexpected illness or accident of the participant or a dependent . A loss of the participant's property due to casualty . Other similar extraordinary and unforeseeable circumstances caused by events beyond the control of the participant Are the maximum deferral amounts ever increased for participants? Yes, The Tax Relief Act of 2001 increased the annual amount of compensation employees may defer under a Section 457 plan from $8,500 in 2001 to $11,000 for 2002. The act further increases that amount in $1,000 annual increments from 2003 to 2006. At that point, the maximum employee pretax contribution for Section 457 plans will reach $15,000 per year and be indexed for inflation thereafter, In addition, the act provides a "catch-up" retirement savings provision for those age 50 and older. These individuals may contribute $12,000 pretax in 2002, increasing $2,000 per year until their contribution limit reaches $20,000 in 2006. Can funds in Section 457 plans be rolled over to other types of plans (or vice versa)? Starting in 2002, the Tax Relief Act generally permits rollovers of eligible rollover distributions between employer-sponsored qualified retirement plans, Section 403(b) annuities, governmental Section 457 plans, and IRAs. However, these expanded rollover rules do not apply to Section 457 plans maintained by tax-exempt organizations. '...II"d'. ..ntool ,,' '.'..m.".. ,...~" ,.. '.'..m"...I..' """'...0",,.... ."". N,'th.. ,...,.,ldl... .,,""'A'.,...~ "...~.. ~.".I... ,""",.". "'mOm..' ...th..."'i"."".h."~."b'..""",..fo,..",...,,..... """",""""",,".,"'fMA""'...~ Waddell & Reed. Inc. 01/09/03 c."",.""200lbV""",IdI..."Rloj>""""'" Page50f6 Wadde1l & Reed, Inc. DISCLOSURE PAGE FOR FMA ADVISOR (IMPORTANT - PLEASE READ) , The accompanying pages have been developed by an independent third party. Waddell & Reed is not responsible for their content and does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific financial planning and investment needs, please discuss your individual circumstances with your Financial Advisor. The accompanying pages may include information regarding retirement plans, estate planning, business planning or a variety of other topics that involve tax and legal issues beyond the scope of Waddell & Reed's area of practice and expertise. Such information is intended to explain or illustrate planning topics, options or strategies that you may wish to consider in advance of, or at the time of, seeking the assistance of legal and/or tax advisors in implementing your plans and should not be considered as an authoritative or comprehensive explanation of any of the particular planning topics, options or strategies described, The information in the accompanying pages describes the general aspects of various planning topics, options or strategies but does not necessarily address all the pertinent facts and issues of your personal situation. Waddell & Reed does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. The selection of appropriate planning options or strategies should be made onan individual basis after consultation with appropriate legal, tax and financial advisors. It is important that you retain the services of legal counsel to plan and implement any legal documents that you may require and that you consult a tax advisor for an explanation of the tax effects of any particular planning options or strategies on your personal financial situation. ,..",."', ,,"on' ,,' ,,1.,m,I'." . ".vld., 1M ~f.,m"....' "d .",,0,",1,..,.... .~y. N.dho' ,."Ii." '",.""' ""'Advl,.,w ,,"'... ~.,. "x, ~'"""", ~""mon' ., .to" ""'" ,"" ,0,,1d "01'. "I;,. "" ~, ",0 ..".m. PI.... ,.. 01",."". ...."" FMAAd...,w 01/09/03 Waddell & Reed. Inc. 'c.o",.~ <112001 'v ,."... 100, AI "'<1'" A.."... Page 6 of 6