MASA 2007 Winter Conference

1. Place Client logo here, if available. Delete placeholder by clicking on bounding box and pressing the delete key. MASA 2007 Winter Conference Superintendent Contract and Pre-retirement Planning Pre-Conference January 23, 2007 Deferred Compensation Plans Images can be replaced using images from the Graphic Images library. Drop image over the current one and send to back. Then delete the old image. Bruce Delbecq 248.375.7276

2. Summary of Session Topics Show Me What I Can Do With the Money Where is This Money Going to Come From Supplemental Tax Efficient Retirement Savings • 401(a) Plans • 403(b) Plans • Eligible 457 Plans Purchase MPSERS Service Credit Employment Contracts-A few thoughts

3. Show Me What I can do with the money • Mortgage is paid-off • The kids are on their own • I am getting killed by taxes • Retirement is a few years away • Exactly How much can be contributed Pre-tax for Retirement in 2007?

4. Show Me What I can do with the money *One combined limit ** Extra catch-up for 457 is possible

5. Where is the money going to come from • Salary Reduction contributions • Contract negotiation to reclassify cash compensation to a promise to make retirement contributions • Contract negotiation to reclassify terminal leave payments, such as banked vacation from cash payment to a retirement contribution • Other contract compensation that may not be MPSERS eligible compensation such as car allowance or FICA gross up reclassified as retirement contribution

6. 401(a) Plans A 401(a) plan is a tax qualified plan under the Internal Revenue Code Examples: • MPSERS is a qualified plan • 401(k) plans of for-profit organizations are qualified plans

7. 401(a) Plans • Advantages of a tax qualified plan include: • Contributions are tax deductible by sponsor (irrelevant for governmental entities) • Contributions are tax deferred until withdrawal by participant • Earnings on accounts are tax deferred until withdrawal by participant

8. 401(a) Plans • Annual contribution limit from all sources is $45,000 (2007, indexed) • This $45,000 limit is over and above the 403(b) $45,000 limit and the 457 limit • All employer contributions (since an employee salary reduction contribution would be a 401(k) contribution, prohibited by governments, unless grandfathered.)

9. 401(a) Plans • School would be deemed to be the sponsor of a 401(a) plan and generally the plan administrator • Technically the District is responsible for maintaining the qualification of the plan and for adhering to all IRS mandates • Practically, the District may delegate most administrative functions to a third party administrator (TPA), but the District is still primarily responsible • Same liberal portability as 403(b) and 457 plans

10. 401(a) Plans In-service distributions are possible, once contribution is in the plan for 2 years or the individual has been participant for 5 years. Distributions maybe subject to 10% excise tax if made before attaining age 59 ½ 401(a) Plans may be used for Employer Contributions in addition to Employer Contributions to a 403(b) Plan Beware of 401(a) Plans where the only contributions made are for “Special Pay Plan” purposes (terminal leave/sick pay/vacation pay/or ERI payments) Superintendent could be the only participant. Regular contributions are required

11. 403(b) Plan-Defined • Deferred compensation plan • Generally, employees elect to contribute tax-deferred amounts to be received at a later time • Contributions can also include employer matching or non-elective amounts (sometimes called Board Paid Annuities), which are not taxable until withdrawn • Account grows tax-deferred (investment income taxable when withdrawn)

12. 403(b) Salary Reduction • Basic Salary reduction limit of $15,500 for 2007 • Age 50 catch-up of $5,000 for 2007 (increases the $45,000 limit) • Traditional catch-up provisions, employees with 15 or more years of service, increase by lesser of: • - $3,000 • - $15,000 less prior years catch-up (lifetime maximum), • - $5,000 times years of service minus prior year salary reductions • - Traditional catch-up contributions are included in $45,000 limit

13. 403(b) Proposed Regulations • Proposed 403(b) Regulations were issued late in 2004 – the first comprehensive guidance relating to 403(b) plans in over 40 years! • Final regulations are expected in early 2007 • IRS has indicated that the new rules will generally not be effective earlier than January 1, 2008

14. 403(b) Proposed Regulations • General “theme” of the Proposed Regulations is to bring 403(b) requirements closer to those of 401(k) plans • What does that mean? • More employer involvement • Increased administrative and oversight responsibility for employers • Previously almost entirely placed on vendor(s) • Generally, limited day-to-day changes will occur

15. 403(b) Proposed Regulations Implementation Considerations • Written Plan Document required • District will have ultimate responsibility to ensure that the plan is administered in accordance with the Plan Document and the 403(b) rules • Prune vendors - assess employee satisfaction, participation levels, etc. (start now!) • Consider current solicitation policy and making any modifications • Attempt to maintain one plan document – minimize differences between vendors to minimize errors and confusion • Invoke a comprehensive vendor agreement

16. Eligible 457 Plans • Deferred compensation plan • Contributions can be salary reduction, employer matching, or employer non-elective • Generally not the best vehicle for Employer contributions because Employer contributions to an eligible 457 plan are subject to FICA (not true with 403(b) or 401(a)) • 457 contributions are independent of 403(b) contributions • Originally not found in school environment since 403(b) plan were more advantageous at the time, advantageous beginning in 2002

17. Eligible 457 PlansContribution Limits • Basic Salary reduction limit of $15,500 for 2007 • Age 50 catch-up $5,000 for 2007 • The contribution limit ($15,500 for 2007) is doubled in last 3 years before normal retirement age (e.g. in 2008 elect retirement in 2011, double up in 2008, 2009 and 2010 • Not to exceed foregone prior year 457 contributions • Using the doubled limit replaces the $5,000 age 50 catch-up (can’t make both in same year)

18. Eligible 457 PlansImplementation and Compliance • 403(b) and Eligible 457 plan documents are the first step to demonstrate that the plan satisfies the various requirements • Written policies and procedures are critical to ensure proper plan operation and compliance • Plan administration and Vendor agreements should be revisited when implementing the new 403(b) rules

19. Employees Can Consolidate Various Plans • As of 2002, a 401(a), 403(b) and 457 plan can accept roll-over contributions from and roll funds over to: • 403(b) • 401(a) • 457 • IRA • Increased Portability! • Generally, in-service distributions before age 59 ½ are prohibited

20. Purchasing MPSERS Service Credit • MPSERS Allows the Purchase of Service Credit • Purchase price is a percentage of pay, based on age and service

21. Purchasing MPSERS Service Credit • Methods of Purchasing Service Credit • After-tax – Employee writes a check • Non-taxable – transfer of 401(a), 403(b), or 457 plan assets • Tax Deferred Payment (TDP)

22. Purchasing MPSERS Service Credit TDP • Allows the purchase of service credit on an installment basis, as an IRC 414 pick-up • Irrevocable (unless termination of employment) • $50 minimum per pay period • No interest on agreements made pre-2004 • 8 percent interest on agreements made after 2003

23. Purchasing MPSERS Service Credit TDP • Payments are deducted from paycheck by Employer. • Pre-tax income taxes • Subject to FICA

24. Superintendent’s Compensation-Creating MPSERS Retirement Eligible Compensation • Proper wording is important • The placement or position in the contract is important • Plan ahead • Design is an art not a science

25. Superintendent’s Compensation-Creating MPSERS Retirement Eligible Compensation The following, for example, are not Considered eligible MPSERS compensation (these are select items not an exhaustive list) • Payments for unused sick or vacation time • Fringe Benefits • Payments for the specific purpose of increasing final average compensation

26. Superintendent’s Compensation-Creating MPSERS Retirement Eligible Compensation Unused Sick or Vacation • Consider a capped bank with pruned vacation in the contract after the cap is reached • Make a retirement contribution for the equivalent of the pruned vacation • Example: Once bank reaches 30 days, next contract will reduce vacation by one week and a board paid 403(b) annuity contribution will be made instead • Goal: Reduce unpaid bank

27. Superintendent’s Compensation-Creating MPSERS Retirement Eligible Compensation Fringe Benefits • Taxable car allowance will never be considered MPSERS eligible compensation • Consider another line in contract under compensation for an additional x per month • Goal: Reclassify amounts considered as fringe benefits

28. Superintendent’s Compensation-Creating MPSERS Retirement Eligible Compensation Payments for the specific purpose of increasing final average compensation • Catch-all used by MPSERS to disallow compensation • Plan ahead • For instance, instead of receiving $30,000 purchase one year of service in each of your last two years, receive an employer board paid annuity contribution of $15,000 for the last 4 years and transfer to MPSERS to purchase the credit. No guarantees that it will be MPSERS considered compensators, but sure feels better

29. Plante & Moran, PLLCEmployee Benefits Consulting THANK YOU! Bruce Delbecq 248.375.7276 bruce.delbecq@plantemoran.com