Frequently Asked Questions about Deferred Compensation
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What is a deferred compensation plan?
A deferred compensation plan (DCP) is a voluntary retirement savings plan available to employees of a state or local government. The Plan is governed by Section 457(b) of the United States Internal Revenue Code.
How mach can I contribute?
The maximum you can contribute to your Plan Account is limited by federal tax law. Normally, the limit is the lesser of about 25 percent of your salary or $8,500 [2001]. The Economic Growth and Tax Relief Reconciliation Act of 2001 provides higher contribution limits beginning January 1, 2002. The $8,500 limit is indexed following the Consumer Price Index, but is not the same as the elective deferral limit that applies to 403(b) or 401(k) arrangements. If you’ve already worked long enough to qualify for regular retirement under your basic pension plan and haven’t contributed maximum amounts in the past, higher limits may be available.
What happens to the money that is withheld from my paycheck?
When you become a participant in the Deferred Compensation Plan, you have a choice of many professionally managed investment options, including a stable value fund and several mutual funds. More complete information can be found in the investment options guide, which is included with this Information Kit. You should carefully read any prospectus and other relevant investment information before you select your Plan investment options.
Can I change the amount I save?
Yes. You may change the amount of your contributions at any time, subject to Plan rules.
What happens if I discontinue contributions?
Your Plan Account will continue to enjoy tax-deferred earnings and you will continue to enjoy the same benefits as other participants.
May I split my contributions among the different investment options?
Yes. You may allocate your contributions in whole percentages among the various Plan investment options.
Once I am enrolled in the Plan, how may I transfer or reallocate amounts from one investment option to another?
A transfer or allocation change can be requested through VoiceCONNECT, the automated Voice Response System, or by speaking to a HELPLINE Counselor. You may also use the Plan’s Web site to transfer account balances among the fund options or reallocate contributions.
What if I take a job with another employer?
If you take a job with another employer that maintains a Section 457(b) eligible deferred compensation plan, you may elect to have all or a portion of your Plan Account balance transferred directly to that employer’s eligible deferred compensation plan, as long as the other plan will accept the transfer. In the case of such a transfer, the amount transferred will not be treated as currently taxable income by the IRS.
When do I receive my Plan money?
Because your Plan is designed to help you save for your retirement, the tax law imposes certain restrictions on withdrawals. You can’t withdraw from your Plan until after you permanently terminate your employment, including death or termination due to total permanent disability. The only exception is money you need for an approved financial hardship. Because of this, you shouldn’t participate in this Plan if you don’t have enough savings for regular expenses.
What qualifies as a financial hardship?
The federal tax regulations impose strict rules defining what kind of financial emergency can be an approved hardship. A hardship must be an emergency expense for which you could not have planned. For example, uninsured medical expenses from an accident or a sudden illness are probably valid hardships, but buying a home or sending your children to college is never a hardship expense. You also have to prove that you don’t have any other means to pay your hardship expense.
What is separation from service?
Separation from service occurs due to your voluntary termination, involuntary termination, or death. A leave of absence or suspension from employment is not a separation from service. However, if you are on unpaid leave for six consecutive months, you will be considered separated from service.
Is there a time when I must receive payments from the Plan?
Yes, just like IRAs or other retirement plans, you must begin receiving payments starting with the year after you reach age 70 ½. But if you’re still working when you reach 70 ½ you won’t have to begin receiving payments until the year after you actually leave work. These payments must satisfy certain minimums based on your life expectancy.
How am I taxed on my Plan money?
Each Plan payment is taxed as ordinary wage income when you receive it.
What are my benefit payment options?
You may elect to have your benefits paid in a:
· lump sum, or
· monthly, quarterly, or annual basis in substantially equal installments over a number of years that does not exceed your life expectancy, or
· partial lump sum followed by periodic payments.
Can I roll over my Plan Account value into an IRA?
No. The Internal Revenue Code does not permit distributions from an eligible deferred compensation plan to be rolled over to an IRA.
Am I still eligible for an IRA deduction?
If you’re “covered” under a pension plan or any qualified retirement plan, you’ll be eligible for a full IRA deduction only if your modified adjusted gross income (before the IRA deduction) is no more than $32,000 [2001] if you’re single or $52,000 [2001] if you’re married filing a joint return. Since a 457(b) eligible deferred compensation is not a qualified retirement plan, contributing to your DCP won’t change your eligibility for an IRA deduction.
Does contributing to the Deferred Compensation Plan affect my eligibility for a Roth IRA?
No. Participation in the Deferred Compensation Plan does not affect your eligibility for a Roth IRA because contributions to a Roth IRA are not deductible for federal income tax purposes.
Do my DCP contributions affect my pension benefits?
Almost all defined benefit pension plans are based on measuring compensation before DCP salary reduction contributions. Likewise, almost all defined contribution retirement plans that provide an employer contribution calculate the contribution based on compensation before DCP salary reduction contributions. So choosing to save in your DCP shouldn’t reduce your other pension and retirement benefits.
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