HomeMy WebLinkAbout8.b. Deffered Compensation Program / Social Security TaxesCITY OF ROSEMOUNT
EXECUTIVE SUMMARY FOR ACTION
CITY COUNCIL MEETING DATE: OCTOBER 1, 1991
AGENDA ITEM: DEFERRED COMPENSATION PLAN/
AGENDA SECTION:
SOCIAL SECURITY TAXES
NEW BUSINESS
PREPARED BY: SUSAN M. WALSH, CITY CLERK
AGENDA i�.E
_M # 8a_
ATTACHMENTS: MEMO, SAMPLE OF FORM TO
APPROVED BY:
EMPLOYEES, BROCHURE, RESOLUTION
The purpose of this agenda item is to request Council's consideration to
allow part-time employees, who had to start paying Social Security taxes on
July 1, 1991, to enroll in the United States Conference of Mayors Deferred
Compensation Program in lieu of paying social security taxes.
It` -has been determined that the city's deferred compensation plan qualifies
as a retirement plan if the employee contributes a minimum of 7.5% of
his/her annual salary. Employees may defer up to 25% of their salary.
If Council approved this proposal, the following groups of employees would
be enrolled in the program as follows;
(1) Firefighters: Effective with their November, 1991 paycheck,
firefighters would participate in the deferred comp plan and would be
allowed to chose the fixed account or variable account options.
(2) Part-time, Seasonal Employees, and Student Interns: This group of
employees, who are not eligible for PERA, would participate effective
January 1, 1992 and be enrolled in the fixed account only.
(3) Appointed Officials: Appointed commission and committee members who
receive a salary, would participate effective January 1, 1992 in the
fixed account only.
RECOMMENDED ACTION: MOTION TO ADOPT A RESOLUTION AUTHORIZING` EXPANSION
OF THE UNITED STATES CONFERENCE OF MAYORS (USCM) DEFERRED COMPENSATION
PROGRAM TO INCLUDE ALL CITY OF ROSEMOUNT"EMPLOYEES
COUNCIL ACTION:
0-
V,,/TIY of Rosemount
PHONE (612) 423-4411 2875 - 145th Street West, Rosemount, Minnesota MAYOR
FAX (612) 423-5203 Mailing Address: Vernon Napper
P. O. Box 510, Rosemount, Minnesota 55088-0510 COUNCILMEMBERS
Sheila Klassen
John Oxborough
Harry Willcox
TO: Mayor Napper Dennis Wippermann
Councilmembers Willcox, Wippermann, Oxborough, Klassen ADMINISTRATOR
Stephan Jilk
FROM: Susan Walsh, City Clerk
DATE: September 26, 1991
RE: Deferred Compensation Plan
The Omnibus Budget Reconciliation Act of 1990 (OBRA) expanded Social
Security coverage to include all state and local government employees
unless they are covered by the employer's retirement system. The City of
Rosemount's retirement system is, of course, PERA. Prior to July 1, 1991,
if an employee was not eligible for PERA membership, he/she was exempt from
paying Social Security taxes.
Effective July 1, 1991, all city employees who were not a member of PERA
had to begin paying 6.2% of their gross salary for Social Security taxes.
The affected group of employees include part-time and seasonal employees
who work in the parks and recreational programs or in the maintenance
departments, election judges, interns, firefighters and appointed
positions. It is this group of employees who will be affected by the
following proposal.
In June of this year final regulations for OBRA were issued by the
Department of Treasury. These regulations have been interpreted to state
that a deferred compensation plan under Section 457 of the Internal Revenue
Code (457 Plan) met the definition of a retirement system if contributions
to the employee's account were at least 7.5% of his/her gross salary. For
your information, Section 457 plans were designed and enacted in 1979 for
public sector employees who wanted supplemental retirement programs.
In 1983 the City Council authorized employees to participate in the United
States Conference of Mayor's (USCM) deferred compensation plan. This plan
is currently offered to regular full-time and regular part-time employees;
and the participation by this group of employees is at approximately 60
percent.
Our customer service representative from Public Employees Benefit Services
Corporation (PEBSCO), who administers the plan for USCM, approached me to
see if the city would be interested in having the category of part-time
employees, who had to begin paying Social Security taxes on July 1, 1991,
contribute to the City's 457 Plan in lieu of paying social security taxes.
Our initial discussion centered on firefighters, but further discussions
led us to include other employees who began paying social security on July
1, 1991.
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I contacted the League of Minnesota Cities. Scott Riggers from LMC had
some "arm waving concerns" as he referred to.them, but informed me he just
didn't have enough information on this concept. Vic Sannes from the tax
department of Boeckermann, Heinen & Meyer, had no reservations of going
with the 457 Plan. Cathy Sibbald from Internal Revenue Service in
Washington, D.C. informed me a 457 Plan meets the criteria if (a) employee
is immediately vested; (b) contributes at least 7.5% of salary; and (c)
employee's contribution is 100% non -forfeitable.
Initial staff discussions concluded that it either be an all or none
situation; i.e. either all firefighters would participate in the 457 Plan
or all would pay Social Security taxes.
We tested the waters on this concept with the firefighters. In order to
get a sense of whether our firefighters would rather contribute to the 457
Plan or to Social Security, we invited the city's PEBSCO representative to
attend the September 10 fire department meeting and explain the program.
100% of the members in attendance indicated they preferred the deferred
comp plan over social security. The firefighters were also given
enrollment forms which are to be returned by October 1st. Fire Chief Aker
advised the fire department's participation in the deferred plan was
subject to Council approval.
Why would the employees choose a deferred comp plan over social security?
I will list some points that I feel are advantages:
(1) Employees would receive back whatever amount was put into the 457
Plan. With Social Security taxes, employee would not receive
that exact amount; and in many instances may never receive what
they contribute to Social Security.
(2) Employees can designate a beneficiary and contingent beneficiary
with the 457 Plan. This option does not exist with Social
Security.
(3) Employees will appreciate tax advantages with the 457 Plan.
Federal and State taxes will be deferred on the amount designated
to be contributed to the 457 Plan. If employee earns $2,000 and
defers 10% or $20, federal and state taxes would be computed on
the net amount or $1980.
(4) Employees can have the funds they deferred if they terminate
their employment with the City, retire, or in the event of death,
the beneficiary would receive the funds. Employees could
withdraw the funds while still employed with the City if they
experienced a qualifying unforeseeable emergency. These options
are not available with Social Security. (For those born after
1959, full retirement benefits from Social Security will not be
available until age 67.)
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(5) No cost to the employee. Prior to October 1, 1991, PEBSCO
charged a $12 per year per participant. This fee has now been
dropped.
Why would the City consider allowing "part-time" employees to contribute to
a deferred comp plan rather than Social Security?
(1) Cost savings -- For 1992, it estimated the city would save
approximately $5,000 if the fire department membership used the
457 Plan; and an additional $10,000 to $20,000 for the other
part-time employees. This projected savings would be realized in
social security taxes the city would not have to pay.
(2) This would allow the City to offer, what I personally feel, is a
benefit to our employees. For our young adults who work in our
part-time and seasonal positions, they will be able to get their
money back at a time in their lives when they have limited
incomes. It is also a way for the City to provide a pension
program to our part-time employees who want to take advantage of
it.
Are there any disadvantages or drawbacks of the 457 Plan? There are only
two minor drawbacks that I can foresee:
(1) If a part-time employee became a full-time employee, that
employee would not be allowed to withdraw the money he/she
deferred as a part-time employee unless he/she terminated his/her
employment with the city (except for a qualified emergency).
(2) Increase of staff time, yes; but the overall savings to the city
far exceeds the amount of increased staff time.
Here's a summary on how the plan would work:
(1) All city employees who are not eligible to belong to PERA would enroll
in the USMC Deferred Compensation Program.
(2) These employees, because of their enrollment in the USMC Deferred
Program would not pay Social Security taxes.
(3) These employees must defer at least 7.5% but will be allowed to defer
up to 25% of their gross earnings.
(4) The fire chief will coordinate the enrollment/termination procedure
for fire department employees. The city clerk will coordinate the
enrollment/termination for all other part-time employees.
(5) Firefighters will be offered funding options -- either a fixed option
with a guaranteed rate of return (3rd quarter of 1991 was 8.25$); or
the option of selecting up to 10 different common stock funds, 2 bond
funds and one money-market fund.
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(6) Part-time and seasonal employees and student interns will only be
allowed to enroll in the fixed account. There are a couple of reasons
for only offering the fixed account:
(a) Mutual funds are generally utilized for long-term investments.
As a rule of thumb, the investment period should be at least
three years. I feel most of the part-time employees would
withdraw their money before three years; and in most instances as
soon as they cease working for the city. Most of our part-time
employees work less than one year; and I foresee them withdrawing
their money at the end of their employment.
(b) For administrative ease in enrolling part-time and seasonal
employees, it would be much simpler and less confusing to the
employee to only offer the fixed account option.
(7) PEBSCO, who administers the plan for USCM, doesn't care if an employee
only works one day or two weeks or a year -- when an emloyee
terminates employment with the city, I will provide him7her with a
form which allows them to submit for a refund from PEBSCO.
(8) Appointed positions. The city's commission and committee members
would be enrolled into the fixed account, but be allowed to defer from
7.5% up to 25% of their annual salary. It would be difficult to get
all members of this group of employees together for explaining the
variable account options. I, therefore, propose they be offered the
fixed account deferment only.
(9) Election judges is our last category of employees to address.
Election judges who earn less than $100 in a year are exempt from
paying social security and medicare taxes. Because it is hard to
determine whether or not an election judge will go over $100, the
payroll department withholds social security and medicare on any
amount.
Although my contacts in this matter have encouraged me to include all
employees in the policy, this is one group of part-time employees I
would exempt from the deferred comp program. Enrollment would be
difficult. In odd -numbered years for our city elections, I do not
train the judges except for the captains. Therefore, I do not see
these people until election day which would be the day I would have to
take time and enroll them. If there was only one election in a
particular year, I would be enrolling them and terminating them from
the deferred comp program at the same time. It would be processing
approximately 40 applications in one day and would be very time
consuming on my part.
There are strong lobbying efforts going on right now to exclude
election judges from social security taxes or to increase the level of
income so that they would be exempt. I am hopeful this will occur.
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In the meantime, I feel it would be burdensome, time consuming and not
very cost effective from the city's stand point to enroll the election
judges in a deferred comp program.
(10) To meet Internal Revenue regulations, this proposal must be in place
by December 31, 1991. If Council approves this proposal, I would
suggest that firefighters be allowed to enroll and defer into the plan
with their November, 1991 paycheck (salary for last six months).
I would recommend that this proposal for the other group of part-time
employees take effect on January 1, 1992. This date will allow staff
time to gear up for the comp program and enroll employees.
(11) Members of the Council would not be affected by this proposal, since
you were already paying Social Security taxes prior to July 1, 1991.
w The 457 Plan is available to any member of the Council if you would be
interested in deferring a percentage of your salary.
Council action would simply allow PEBSCO to add an additional entity number
for deferments received from this group of employees. This would be known
as the OBRA account. This means that all funds put into this account would
be separate from the account to which full-time employees contribute.
Council action to approve the deferment plan for the above -referenced part-
time employees would be done by adopting the attached resolution.
For you information, I have attached a sample of a form which explains the
above process called, USCM Deferred Compensation (OBRA), which we are
trying to even get onto one page.
Also, I've attached a brochure which explains deferred compensation.
If you have any questions, please feel free to contact me at my direct
number, 322-2002.
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CITY OF ROSEMOUNT
DAKOTA COUNTY, MINNESOTA
RESOLUTION 1991 -
A RESOLUTION AUTHORIZING EXPANSION OF THE
UNITED STATES CONFERENCE OF MAYORS (USCM)
DEFERRED COMPENSATION PROGRAM TO INCLUDE
ALL CITY OF ROSEMOUNT EMPLOYEES
WHEREAS, the City Council of the City of Rosemount adopted
Resolution 1983-26, A RESOLUTION AUTHORIZING PARTICIPATION IN THE
UNITED STATES CONFERENCE OF MAYORS DEFERRED COMPENSATION PROGRAM
(Exhibit A); and
WHEREAS, the City Council of the City of Rosemount has considered
offering this Deferred Compensation Program to all eligible City
employees and elected officials pursuant to federal legislation
permitting such plans; and
WHEREAS, certain substantial tax benefits could accrue to
employees and elected officials participating in said Deferred
Compensation Plans; and
WHEREAS, such benefits will act as incentives to City employees
to voluntarily set aside and invest portions of their current
income to meet their future financial requirements and supplement
their City retirement and Social Security (if applicable), at no
cost to the City; and
WHEREAS, The U.S. Conference of Mayors has established a master
prototype deferred compensation program for cities and political
subdivisions permitting its member cities and their employees to
enjoy the advantages of this program;
WHEREAS, The U.S. Conference of Mayors, as Plan Administrator,
agrees to hold harmless and indemnify the City, its appointed and
elected officers and participating employees from any loss
resulting from the U.S. Conference of Mayors or its Agent's
failure to perform its duties and services pursuant to The U.S.
Conference of Mayors Program;
NOW, THEREFORE, BE IT RESOLVED, by the City Council of the City
of Rosemount:
(1) The City Council hereby adopts the U.S. Conference of Mayors
Deferred Compensation Program and its attendant investment
options and hereby establishes the City of Rosemount
Deferred Compensation Plan for the voluntary participation
of all eligible City employees and elected officials; and
(2) The City Administrator or his designee are hereby authorized
to execute for the City, individual participation agreements
with each said employee requesting same, and to act as the
"Administrator" of the Plan representing the City, and to
execute such agreements and contracts as are necessary to
implement the Program. It is implicitly understood that
other.than the incidental expenses of collecting and
disbursing the employee's deferrals and other minor
administrative matters, that there is to be no cost to the
city for the Program.
(3) The Mayor and City Clerk are hereby authorized to execute
the necessary documents to allow the City of Rosemount to
expand its Deferred Compensation Program with United States
Conference of Mayors for the inclusion of all City
employees.
ADOPTED this 1st day of October, 1991.
ATTEST:
Susan M. Walsh, City Clerk
Motion by:
Voted in favor:
Voted against•
Vernon J. Napper, Mayor
Second by:
"EXHIBIT A"
CITY OF ROSEMOUNT
RESOLUTION 1983-26
A RESOLUTION AUTHORIZING PARTICIPATION IN THE UNITED STATES
CONFERENCE OF MAYOR'S DEFERRED COMPENSATION PROGRAM
WHEREAS, the City has considered the establishment of a Deferred
Compensation Plan to be made available to all eligible City
employees, elected officials, and independent contractors
pursuant to the newly passed Federal legislation permitting such
Plans; and
WHEREAS certain substantial tax benefits could accrue to
employees, elected officials, and independent contractors
participating in said Deferred Compensation Plans; and
WHEREAS, such benefits will act as incentives to City employees
to voluntarily set aside and invest portions of their current
income to meet their future financial requirements and supplement
their City retirement and Social Security (if applicable), at no
cost to the City; and
WHEREAS, the U.S. Conference of Mayors has established a master
prototype deferred compensation program for cities and political
subdivisions permitting its member cities and their employees to
enjoy the advantages of this program;
NOW THEREFORE, THE CITY COUNCIL OF THE CITY OF ROSEMOUNT DOES
HEREBY RESOLVE AS FOLLOWS:
The City Council hereby adopts the U.S. Conference of Mayors
Deferred Compensation Program and its attendance investment
options and hereby establishes the City of Rosemount Deferred
Compensation plan for the voluntary participation of all eligible
City employees, elected officials and independent contractors.
The City Clerk is hereby authorized to execute for the City,
individual participation agreements with each said employee
requesting same, and to act as the "Administrator" of the plan
representing the City, and to execute such agreements and
contracts as are necessary to implement the Program. It is
implicitly understood that other than the incidental expenses of
collecting and disbursing the employee's deferrals and other
minor administrative matters, that there is to be no cost or
contribution by the City to the Program.
Adopted this 5th day of July,, -1983.
Leland S. Knutson, Mayor
USCM DEFERRED COMPENSATION (OBRA)
The Omnibus Budget Reconciliation Act of 1990 (OBRA) expanded Social
Security coverage to include all state and local government employees
unless they are covered by the employer's retirement system. Final
regulations interpreting the new law were recently issued by the
Treasury Department.
The regulations specifically state that a plan operated in accordance
with the provisions of Section 457 of the Internal Revenue Code
(deferred compensation) will meet the definition of a retirement
system if contributions to participant's accounts are at least 7.5%
of compensation. (This would be paid instead of the 7.65% to Social
Security.) Both the employer and the employee still contribute the
1.45% Medicare portion of Social Security.
Deferred compensation is a plan that allows you to set aside part of
your salary on a regular basis, through convenient payroll deduction.
Federal and state income taxes on what you've deferred plus earnings
are postponed until you withdraw the money, usually when you retire
or terminate. And when you start taking payouts from your account,
you will pay taxes only on the amount you receive in any given year.
Since your deferrals are made with pre-tax dollars (coming off the
top, from your gross pay), you get the immediate benefit of a reduc-
tion in your current state and federal income taxes.
Under OBRA, you are required to defer 7.5% of your annual salary and
you may choose to defer as much as the annual maximum of 25% of your
adjusted gross salary, not to exceed $7500 per year. As your
financial circumstances change, you may change the amount you defer -
as often as your employer permits.
The USCM Plan has up to 14 different fixed and variable investment
choices available; you may defer into either or both of two options:
1. FIXE ION - features a yearly guaranteed minimum rate of
return as well as a quarterly rate, which may exceed but won't
!be lowerkhan the annual guaranteed rate. (8.05% - 1991 guar;
8.25% - rd quarter.)
2` VARIABLE OPTION - consists of up to 10 different common stock
Unds, 2 bond funds and one money-market fund. (Please see me
for fund management results and prospectuses on the individual
mutual funds.)
The money in your deferred compensation account is payable to you (or
your designated beneficiary) when you retire, leave employment,
experience an IRS -defined "unforeseeable emergency" or die. Payout
options include lump sum, designated amount, fixed time period, or a
variety of annuities including life income payment certain, joint and
last survivor and designated period. Payments may be made monthly,
quarterly, semi-annually or annually.
There .is NO administration fee, NO deferred sales charges or any
required minimum years of participation in this program. If you
select the Variable Option, there is an annualized asset management
fee of .0095.
Deferred compensation for public employees falls under Internal
Revenue Code Section 457. The USCM Plan, administered by PEBSCO
(Public Employees Benefit Services Corporation), is in full
compliance with these regulations.
max Imemeem1^°8 CWWWWW ALICE BEIHL
� Area Director
A P.O. Box 21401
W Eagan. MN 55121-0401
6121456.9361
Deferred Compensation Plan Administrators
U.S. Conference of Mayors . National Association of Counties
Securities offered thru PEBSCO Securities Corp.
9339 Calumet Avenue Suite C Munster, IN 46321
2191836-8213 Customer Service: 1-8001848.6104