1. Pension Benefits Administration
10/7/2010
Pension Benefits Administration
Article 3 Police Pension Funds
Article 4 Firefighters’ Pension Funds
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2. Illinois Public Pension Fund Association Certified Trustee Program
Presented by
Allison R. Barrett, Partner
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3. Pension Benefits Administration
Calculation of Benefits (tab 1)
Service Purchases (tab 1)
IRS Reporting (tab 2)
Contributions (tab 3)
QILDROs (tab 3)
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4. Pension Benefits Administration
Calculation of Benefits - COMPONENTS
Benefit is a percentage of salary
Retirement: percentage is determined by length of creditable service
Disability: percentage is fixed, regardless of length of service
Salary = “Pensionable Salary” (see IDOI webpage)
Includes - base salary attached to rank, longevity
Excludes – clothing or car allowances, spikes
??? – Holiday pay, overtime
Creditable Service
“Give to Get” theory
Excludes some unpaid leaves of absence
Felony conviction
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5. Pension Benefits Administration
Calculation of Benefits – CALCULATOR
IDOI web page
Requires input of components
Exceptions
Dependent benefits for Fire (Duty or Occupational Disease Disability)
Conversions
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6. Pension Benefits Administration
Calculation of Benefits – THINGS TO KNOW
Tier 1 versus Tier 2
Member FIRST HIRED by a pension fund under this article after 01/01/11 = Tier 2
Subsequent slides reference Tier 1
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7. POP QUIZ!! Q: TRUE or FALSE? You must be 50 years old and must have
10/7/2010
POP QUIZ!!
Q: TRUE or FALSE?
You must be 50 years old and must have
completed 20 years of active service to be
eligible for a retirement pension
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8. Pension Benefits Administration
A: False
Police
8 – 19 years of service
Age 60
Fire
10-19 years of service
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9. POP QUIZ!! Q: TRUE or FALSE? A line of duty disability pension is
10/7/2010
POP QUIZ!!
Q: TRUE or FALSE?
A line of duty disability pension is
granted at 65% of pensionable salary
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10. Pension Benefits Administration
A: False
GREATER OF
65%, or
The retirement amount the member is eligible for at time of disability (max 75%)
REMEMBER
First 65% is tax-free; anything above 65% is taxable
Fire: Additional benefit paid for dependent
Benefit paid directly to member but
Report on IDOI report under dependent
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11. Pension Benefits Administration
Calculation of Benefits – THINGS TO KNOW
Nonduty Disability Pension
50% of pensionable salary
Taxable
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12. Pension Benefits Administration
Calculation of Benefits – THINGS TO KNOW
Initial Increases
Retirement
Effective: Later of month after turn 55 or month after retired for one year
Amount: (1/12) of (3% of original benefit) times (# of full months between retirement date and effective date of initial increase)
Disability
Effective: January 1st after reach age 60
Amount: (3% of original benefit) times (# of full years between disability date and effective date of initial increase)
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13. Pension Benefits Administration
Calculation of Benefits – THINGS TO KNOW
Subsequent Increases (COLAs)
Retirement
Effective: Every January 1st after the initial increase has been received
Amount: 3% compounded
Disability
Amount: 3% of original benefit
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14. Pension Benefits Administration
Calculation of Benefits – THINGS TO KNOW
COLAs
Spousal – NONE!
Dependents for Fire
Duty or Occupational Disease Disability
3% compounded
Every January, regardless of age of pensioner
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15. Pension Benefits Administration
Calculation of Benefits – THINGS TO KNOW
Survivor benefits
Eligible Spouse
Police – married at time pension began
Fire – married at least one year prior to death
Dependent Child(ren)
Under age 18
Legally handicapped (mentally or physically) – for life
Dependent Parent(s)
Estate
if pension withdrawn is less than contributions made
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16. Pension Benefits Administration
Calculation of Benefits – THINGS TO KNOW
Minimum Gross Benefit
Police - $1,000 (01/01/01)
Fire - $1, (07/01/08)
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17. Pension Benefits Administration
Calculation of Benefits – CONVERSIONS
“Disability Pension Option”
Requirements
Age 50
20 years of service (active or active+disability)
Initial benefit should be calculated using statute in effect at time of disability
SALARY???? - if at least 20 years of active service, use salary at time of conversion
Calculator not available - ask IDOI for assistance
Consider taxability (gross may be more but net may be less)
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18. POP QUIZ!! Q: TRUE or FALSE? Pension benefits should be paid monthly
10/7/2010
POP QUIZ!!
Q: TRUE or FALSE?
Pension benefits should be paid monthly
at any time during the month
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19. Pension Benefits Administration
A: False
Department of Insurance written opinion
Fiduciary responsibility not to prepay benefits
Should be paid on last business day of month for the month (August benefits paid 08/31)
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20. Pension Benefits Administration
Service Purchase – Disability Buy Back
Up to 3 years of disability time
Must pay contributions that would have been withheld
Using salary at time of disability
Interest – 6% compounded from each missed pay date to repayment date
Must return to active service for a period of time equal to the time being purchased
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21. Pension Benefits Administration
Service Purchase – Military Service (after hired)
Can purchase up to 5 years (if hired before 07/01/73, no limit)
Must pay full contributions due as if remained active employee
Employer pays difference between full wages and military wages
Employer can withhold full contributions, partial contributions, or no contributions
NO INTEREST!
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22. Pension Benefits Administration
Service Purchase – Military Service (before hired)
Can purchase up to 24 months
Must pay full amount of new unfunded liability
Use salary at date of hire
Employee AND Employer contributions, using “Percent of Total Normal Costs” from tax levy
Interest
Reserve time?
Document procedures in your Rules & Regs!!!
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23. Pension Benefits Administration
Service Purchase – PORTABILITY (police only)
Article 3 to Article 3
“Moves” service time
Must have at least 2 years of service with Prior Fund
Unless left due to lay-off
Unless left prior to 08/17/97
Must transfer 100% of service time
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24. Pension Benefits Administration
Service Purchase – PORTABILITY (continued)
3 calculations
Repay contribution refund, plus 6% interest (Prior Fund does)
Prior Fund sends to Current Fund (Prior Fund does)
A. Employee contributions
B. Interest calculation – 6% from date of each payroll deduction to date of transfer (THIS IS NOT THE SAME INTEREST CALC AS #1 ABOVE!)
C. Match of A and B
True Cost calculation (by certified actuary) (Current Fund does)
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25. Pension Benefits Administration
Service Purchase – PORTABILITY (continued)
If True Cost is greater than amount from Prior Fund
Option #1
Officer pays difference to Current Fund (within 5 years)
Receives credit for 100% of Prior Fund service
Option #2
Officer pays nothing to Current Fund
Receives partial credit (amount from Prior Fund divided by Total True Cost)
If True Cost is less than amount from Prior Fund, Current Fund keeps difference
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26. Pension Benefits Administration
Service Purchase – PORTABILITY (example)
Option #1 – example
Prior Fund service time 4 years, 2 months, 18 days
Prior Fund sends $63,800
True Cost is $145,000
Balance due to Current Fund from officer
$145,000 – $63,800 = $81,200
Lump sum or installments (within 5 years)
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27. Pension Benefits Administration
Service Purchase – PORTABILITY (example)
Option #2 – example
Prior Fund service time 4 years, 2 months, 18 days (= 50.6 months)
Prior Fund sends $63,800
True Cost is $145,000
63,800 / 145,000 = .44
.44 x 50.6 months = months
Additional service granted of 1 year, 10 months, 8 days
No additional cost to officer
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28. Pension Benefits Administration
Service Purchase – RECIPROCITY (fire only)
Article 4
“Combines” service time – does not “move”
Must have at least 1 year of service with Prior Fund(s)
Must have at least 3 years of service with Final Fund
Must be 50 years old and have at least 20 years of service between funds
If hired after 07/01/04, must notify funds of intent within 21 months
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29. Pension Benefits Administration
Service Purchase – RECIPROCITY – cost to member
3 calculations
Repay contribution refund (to all Prior Funds)
Plus 6% interest
10 years to repay
Additional 1% contribution (to all Prior Funds)
6% interest
Lump sum / installments
Additional 1% contribution (to Current Funds)
6% interest prior to “Declaration Date”
Employer withholds additional 1% from paycheck as of “Declaration Date”
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30. Pension Benefits Administration
Service Purchase – Reciprocity – PENSION BENEFIT
Retirement
Prior Fund(s)
1/12 of 2.5% of final monthly salary for each month of service in that fund(s)
Final Fund
Calculate benefit as if ALL service was with this fund, using salary of this fund
Subtract amount(s) paid by prior fund(s)
Mutliple 1099R forms
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31. Pension Benefits Administration
Service Purchase – Reciprocity – PENSION BENEFIT
Nonduty Disability, Duty Disability
Full benefit paid by Current Fund
Occupational Disease Disability
Benefit paid by all funds to whom payment has been completed
Each fund pays a prorated share based upon length of service
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32. Pension Benefits Administration
Service Purchases – Final Thoughts
Credit received once all payments made by all parties
Good record keeping is a must!
Deductions made from payroll for purchase of service must be AFTER- TAX (even if regular contributions are pre-tax)
Update Department of Insurance Report
Status
Hire Date
Length of Service
COST PROHIBITIVE!!
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33. Pension Benefits Administration
HELPS (“Healthcare Enhancement for Local Public Safety)
Effective January 2007
Reduce taxable earnings by $3,000/year
Insurance premiums
Deducted from pension check
Paid directly to provider
Do not withhold pre-tax (limits pensioner’s filing options on their 1040 form)
DO NOT REFLECT ON 1099R FORM!!!!
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34. Pension Benefits Administration
Social Security
Windfall Elimination Provision
Spousal / widow benefits
Contact local SSA office
(calculator)
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35. Pension Benefits Administration
Taxability of Pension Benefits - REPORTING
New pensions first paid after 12/31/97
Replaces Safe Harbor Method with “Simplified Method”
Divide total after-tax contributions by the number of months of life expectancy
Number of months provided by one of two IRS tables (marital status)
Pension Fund responsible for reporting taxability on 1099R form
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36. Pension Benefits Administration
Taxability of Pension Benefits - REPORTING
Taxability of pension transfers to spousal pension
Tax-free pensions should not be reported to the IRS
Killed in the line of duty
65% duty/occupational disease disability
If awarded for cancer ( ) – IS taxable
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37. Pension Benefits Administration
Taxability of Pension Benefits – TAX FORM #1
SS-4 – Application for Employer Identification Number
IRS needs to know pension fund is a separate entity from municipality/district
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38. Pension Benefits Administration
Taxability of Pension Benefits – TAX FORM #2
W-4P – Withholding Certificate for Pension or Annuity Payments
Determines the amount of federal tax to withhold from pension check
Marital status / number of exemptions
Cannot request a flat dollar amount!
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39. Pension Benefits Administration
Taxability of Pension Benefits – TAX FORM #3
945 – Annual Return of Withheld Federal Income Tax
Pension Fund lists tax liability dates and amounts due
IRS uses to reconcile against tax deposits to determine if paid timely
Due February
945-A may be required
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40. Pension Benefits Administration
Taxability of Pension Benefits – TAX FORM #4
1099R
In lieu of W-2
Taxable pension payments
Contribution refunds
Due January 31st to payee; due February 28th to IRS
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41. Pension Benefits Administration
Taxability of Pension Benefits – TAX FORM #5
1099MISC
Vendor payments
All legal services
All medical services
All non-incorporated vendors to whom paid at least $600 during the calendar year
Due January 31st to payee; due February 28th to IRS
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42. Pension Benefits Administration
Taxability of Pension Benefits – TAX FORM #6
1096 – Annual Summary and Transmittal of U.S. Information Returns
“Cover page”
Use with 1099R and 1099MISC forms
Due February 28th to IRS
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43. Pension Benefits Administration
Taxability of Pension Benefits – TAX NOTES
Circular E (Publication 15)
Federal tax withholding tables
Deposit schedule (safest  pay taxes on pay day!)
EFTPS (
Tax liabilities
Federal withholding tax – yes
IL withholding tax – no
Other state withholding tax – maybe
Social Security / Medicare – no
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44. Pension Benefits Administration
Coalition for Qualified Plan Status
AFFI / IGFOA / ILFOP / IMTA / IPFA / IPPFA / MAP (IDOI, Lauterbach & Amen)
To maintain “Qualified Plan” status with IRS
Tax-free pension benefits
Pre-tax contribution deductions / roll-overs
No tax due on interest from investments
IRS grants “Determination Letter”
5-year cycle
IDOI webpage
Cost savings
As individual pension fund = $40,000+
As part of Article 3 or Article 4 = $400 (did you contribute?)
Annual review of IL statutes to ensure compliance with IRS code
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45. Pension Benefits Administration
Contributions – EMPLOYER PICK-UP PLAN
Option presented by IRS in mid-1980’s
Pre-tax contribution deductions (increases net pay)
Employer Resolution
Determination Letter covers Fund
Irrevocable
Not required for employer, but if implemented, mandatory participation by employees
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46. Pension Benefits Administration
Contributions – Rates
Police
9.91%
Effective 01/01/01
Fire
9.455%
Effective 07/01/04
Additional 1% for reciprocity
Pensionable earnings ONLY
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47. Pension Benefits Administration
Contributions – Refunds
After-tax contributions
Paid directly to member
No taxes withheld
Pre-tax contributions
Must withhold 20% in federal tax
IRS notification of potential penalties / taxes when file 1040
Roll-over to another Qualified Plan
No tax withheld
Payable and sent to Qualified Plan (not member)
Reflect refund on 1099R
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48. Pension Benefits Administration
QILDRO
Qualified Illinois Domestic Relations Order
Effective 07/01/06
Only applicable against contribution refund or retirement pension
3 pieces
All must be filed in court
Have Board Attorney review before implementing
Available on DOI webpage (with reference manual)
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49. Pension Benefits Administration
QILDRO – Components
QILDRO Order
Names parties
Allocates benefit as a percentage of the “marital portion” of the pension
Consent To Issuance form
Required if hired prior to 07/01/99
Calculation Form
Completed by member, ex-spouse, their attorneys
Can’t be completed until creditable service is done
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50. Pension Benefits Administration
QILDRO – Taxability
1099R Reporting
Alternate Payee
List benefit as fully taxable
Member
Gross benefit (Box 1) - no effect
Taxable benefit (Box 2a) – reflect QILDRO paid in this box
Gross less QILDRO (less recovered after-tax contributions)
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51. Pension Benefits Administration
QILDRO – Cessation
If Alternate Payee dies
If Member dies
Not applicable to survivor pension
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52. Allison R. Barrett Lauterbach & Amen, LLP 27W457 Warrenville Rd Warrenville, IL /