1. Illinois ASBO May 18. 2011 1 Creating Cost Savings and Tax Efficient Retirement Incentives Illinois ASBO 60 th Annual Conference May 18, 2011

2. Illinois ASBO May 18. 2011 2 Creating Cost Savings and Tax Efficient Retirement Incentives Wayne McClain Senior Counsel, Retirement Services Tax, VALIC Edie Russo VP, Retirement Savings, AXA Equitable Christopher Zingaro VP, Relationship Management, AXA Equitable

3. Illinois ASBO May 18. 2011 3 Creating Cost Savings and Tax Efficient Retirement Incentives 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

4. Illinois ASBO May 18. 2011 4 Creating Cost Savings and Tax Efficient Retirement Incentives 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)

5. Illinois ASBO May 18. 2011 5 Creating Cost Savings and Tax Efficient Retirement Incentives 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

6. Illinois ASBO May 18. 2011 6 Creating Cost Savings and Tax Efficient Retirement Incentives 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

7. Illinois ASBO May 18. 2011 7 Creating Cost Savings and Tax Efficient Retirement Incentives 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

8. Illinois ASBO May 18. 2011 8 Creating Cost Savings and Tax Efficient Retirement Incentives 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.

9. Illinois ASBO May 18. 2011 9 Creating Cost Savings and Tax Efficient Retirement Incentives 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

10. Illinois ASBO May 18. 2011 10 Creating Cost Savings and Tax Efficient Retirement Incentives 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.

11. Illinois ASBO May 18. 2011 11 Creating Cost Savings and Tax Efficient Retirement Incentives 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.

12. Illinois ASBO May 18. 2011 12 Creating Cost Savings and Tax Efficient Retirement Incentives 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.

13. Illinois ASBO May 18. 2011 13 Creating Cost Savings and Tax Efficient Retirement Incentives 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).

14. Illinois ASBO May 18. 2011 14 Creating Cost Savings and Tax Efficient Retirement Incentives 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.

15. Illinois ASBO May 18. 2011 15 Creating Cost Savings and Tax Efficient Retirement Incentives 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.

16. Illinois ASBO May 18. 2011 16 Creating Cost Savings and Tax Efficient Retirement Incentives 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)

17. Illinois ASBO May 18. 2011 17 Creating Cost Savings and Tax Efficient Retirement Incentives 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

18. Illinois ASBO May 18. 2011 18 THANK YOU! Questions??