1. Different Benefit Plans – 401(a), 403(b), 457 and 529 Plans Picking the Right Plan for Your District Presented by: Kades-Margolis Corporation 998 Old Eagle School Road, Suite 1220 Wayne, PA 19087 800 433-1828 March 2003

2. Economic Growth and Tax Relief Reconciliation Act of 2001 EGTRRA changed all retirement plans –Increased contributions by employer and employees for all types of plans –Multiple plan options available for employees of public schools –Simplified compliance for 403(b) and 457(b) plans EGTRRA also significantly improved opportunities for education savings plans

3. Retirement Benefits More opportunities to accumulate retirement income Changes to 403(b), 457(b) and 401(a) plan requirements Provides more opportunities for employer contributions New types of employer retirement contributions

4. 403(b) Plans Higher contribution limits –Employee limits increased –Employer limits increase New opportunities for employer contributions –Supplemental retirement plan –Post-employment contributions –Replacement for “termination pay,” early retirement incentives, retention incentives, severance programs, etc.

5. Higher Employee Deferral Limits New 402(g) limit for salary reduction contributions is $15,000 –Effective in $1,000 increments 20022003200420052006 $11,00012,00013,00014,00015,000

6. Special Aged 50+ “Catch Up” For any individual who is aged 50 or older during the calendar year, the deferral limit is increased by the following amounts: 20022003200420052006 $1,000$2,000$3,000$4,000$5,000

7. New 403(b) Employee Deferral Limits Through 2006 20022003200420052006 Normal Limit $11,000$12,000$13,000$14,000$15,000 15 YOS “catch up” $ 3,000 Aged 50+ “Catch up” $ 1,000$ 2,000$ 3,000$ 4,000$ 5,000 Maximum Employee Contribution $15,000$17,000$19,000$21,000$23,000

8. Employer Contributions New limit is lesser of 100% of “includible compensation” or $40,000 –415 limit applies to sum of employer and employee contributions –$40,000 limit only applies if employer contributes

9. Special Note… Compensation for all 403(b) purposes means gross income (reduced by PSERS contributions) paid to employee for services performed over the “most recent period that counts as one year of service” –For full time employee, “period of service” is calendar year –For part time employees, “period of service” is aggregated service over multiple years to equal one year –For terminating and retiring employees,”period of service” is the most recent 12 months measured from final date of service

10. New Employer Contributions… Employers may make contributions for a period of up to 5 years into 403(b) plans of employees who have severed their employment –No post employment employer contributions into 457(b), 401(k) or 401(a) plans Can contribute up to $40,000 (or 100% of final 12 months pay, if less) in each of the five years –Maximum opportunity $40,000 in final year of service, plus $200,000 over next 5 years

11. Advantages of Employer 403(b) Contributions Cheaper than cash –No FICA or Medicare withholding for employer or employee –No PA state income tax Replace more expensive cash benefit programs –Termination pay at retirement –Early retirement incentives –Severance plans –Option for deferred compensation when cash not available Saves district FICA/Medicare costs and defers payment to future date

12. 457 Plans…More Retirement Savings Opportunities Because of changes under EGTRRA, 457 plans are more attractive to school districts and other governmental employers Similar to 403(b) plan, but not a retirement plan Employee or employer can contribute up to $12,000 (in 2003); $14,000 if aged 50+ –In addition to 403(b) plan and 401(a) plan –No offsets against other plans Distributed after severance from employment –NO 10% penalty if received before age 55

13. Possible Deferred Compensation Scenarios Using 403(b) Plans… –Employer funds up to $40,000 per year –Employer may fund $40,000 per year for up to 5 years after retirement Add 457(b) plan… –Employer or Employer could fund up to deferral limit RESULT? For 2002 retiree, possible $252,000 For 2006 retiree, possible $260,000

14. 401(a) Plans Traditional type of retirement plan (like PSERS) but sponsored at the district level Employers can fund up to the lesser of $40,000 or 100% of salary Now being established as “special pay” plans Employer contributes value of termination pay into 401(a) plan –Employer saves FICA and Medicare –Employee defers taxes until withdrawn from plan Separate $40,000 limit from 403(b) plan –Could have 403(b) and 401(a) and set aside up to $80,000 per employee

15. Summary of Retirement Plan Options Install 457(b) program –Employees could double deferral opportunities and establish early retirement fund (not subject to 10% penalty tax) –Employers could fund as supplemental benefit Make employer contributions into 403(b) accounts –Up to $40,000 per year (reduced by employee deferrals into 403(b) plan Have employer contribute to 403(b) accounts of retirees for 5 years after retirement Establish 401(a) plan to receive termination pay contributions from employer –Up to $40,000 per employee

16. How to Implement Programs? Need Board approval Contract modifications –CBAs –Act 93 –Executive contracts Need written plan document for 401(a) and 457(b) plans Trust requirement for 401(a) and 457(b) plans –Annuity contracts and mutual fund custodial accounts satisfy trust requirement for 457(b) plans Participation/enrollment forms –Usually provided by vendors

17. Tax Reporting and Withholding Withholding –Employee 403(b) deferrals and Employer and Employee 457(b) contributions PA income tax FICA and Medicare –Employer 403(b) and 401(a) contributions NONE Reporting –All employee deferrals reported on Employee’s W2 403(b) and 457 deferrals have separate codes –Employer contributions to 403(b) and 401(a) not reported

18. Legal Concerns Anything in state or local law to prohibit? When structuring benefit, avoid “constructive receipt” issues –No employee choice to receive cash or employer contribution –Potential problem with “individually negotiated” contract exception Avoid “choice” between benefits –Except under cafeteria plan

19. Education Savings Opportunities Enhanced opportunities to save for education costs NOT necessary for plans to be offered through employer –Employees may set up programs for themselves After home and retirement, college savings most important goal

20. Education IRAs Individuals may make after-tax contributions into Coverdell IRAs Proceeds tax free if used to pay for qualified educational expenses Contribution limit increased from $500 to $2,000 per year Proceeds may be used for qualified expenses at public and private K-12 schools as well as higher education AGI limits for joint filers: $190,000-$220,000 AGI limits for single filers$95,000-$110,000

21. Section 529 Savings Plans Individuals may make after tax deposits into 529 qualified tuition programs –Contributions made into account usually managed by a mutual fund company or insurance company for the benefit of a designated beneficiary –No tax on earnings during accumulation period –Distributions are now tax free if used to pay for qualified higher education expenses of the beneficiary 10% penalty if proceeds not used for qualified education expenses

22. 529 Tuition Savings Plans Individuals may deposit up to $11,000 per year per beneficiary –Amounts over $11,000 subject to gift tax –Maximum limit based on anticipated college expenses May deposit one time contribution up to $55,000 with no contributions thereafter for 4 years and avoid gift tax

23. Education IRAs Advantages –Available for K-12 expenses –Broader selection of investment options No “approved” plans May use any market product –Distributions are not subject to sunset provisions –Can deposit through tax filing due date Disadvantages –Lower contribution limit $2,000 per year per beneficiary –Can’t fund after beneficiary is 18 years old –At age 30, unused amounts are automatically distributed to beneficiary –AGI limits on eligibility –Counts as “student” asset for FAFSA purposes

24. 529 College Savings Plans Advantages –Higher contribution limits –Unused amounts can be transferred to another beneficiary –Counts as parents asset on FAFSA form –No age limit on contributions or distributions –No AGI limits on contributions –Easy to set up as “payroll deduction” plan Disadvantages –More investment restrictions –Not available for K-12 expenses –Distributions are subject to “sunset” provisions of new bill

25. Thank You Kristi Cook, JD For Kades-Margolis Corporation Any Questions?