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HomeMy WebLinkAbout11.a. Amend/restate 457 Deferred Comp Plan to include Roth provisionsCentral Contra Costa Sanitary District ' BOARD OF DIRECTORS POSITION PAPER Board Meeting Date: August 4, 2011 subject: ADOPT RESOLUTION AMENDING AND RESTATING THE 457 DEFERRED COMPENSATION PLAN TO INCLUDE NEW ROTH PROVISIONS Submitted By: Debbie Ratcliff, Controller Initiating Dept /Div.: Administrative / Finance and Accounting REVIEWED AND RECOMMENDED FOR BOARD ACTION: D. Ratcli 1X0 M graves Ames M. 911Y, 1%eneral Manager ISSUE: Board authorization is needed to adopt the Roth provisions for the District's 457 Deferred Compensation Plan. RECOMMENDATION: Approve a Board Resolution that amends and restates the 457 Deferred Compensation Plan to include the new Roth provisions. FINANCIAL IMPACTS: None. ALTERNATIVES /CONSIDERATIONS: The Board could decide not to add the Roth provisions to the 457 Deferred Compensation Plan as these new provisions are optional. BACKGROUND: The District established a Section 457 Deferred Compensation Plan covering all full -time employees in January 1976. The Plan is administered by the District's Deferred Compensation Plan Advisory Committee. The Small Business Jobs Act of 2010, which was signed into law on September 27, 2010, made Roth provisions available in 457 plans beginning in 2011. The District's three providers have only recently begun offering the Roth option in their Plans. The new Roth provisions provide 457 deferred compensation plan participants with additional tax - advantaged retirement savings opportunities: - Roth deferrals are after -tax deferrals which when withdrawn, the deferral and the earnings are tax -free. - Roth 457 plans allow higher after -tax contribution limits than Roth IRAs - A participant's eligibility to make Roth contributions is not restricted by income, unlike Roth IRAs - Having both pre -tax and after -tax assets available at retirement can be a valuable benefit to participants. The addition of Roth deferrals has no impact on the plan's fees. The payroll system would require a minor modification and the Accounting Technician III would need to NAADMINSUP\ADMIN \RATCLIFF\Roth Provision 08- 04- 11.doc Page 1 of 2 POSITION PAPER Board Meeting Date: August 4, 2011 subject. ADOPT RESOLUTION AMENDING AND RESTATING THE 457 DEFERRED COMPENSATION PLAN TO INCLUDE NEW ROTH PROVISIONS monitor this provision. The Resolution is attached, as well as a question and answer document providing details of the Roth Provisions. RECOMMENDED BOARD ACTION: Approve a Board Resolution that amends and restates the 457 Deferred Compensation Plan to include the new Roth provisions. NAADMINSUP\ADMIN \RATCLIFF\Roth Provision 08- 04- 11.doc Page 2 of 2 RESOLUTION NO. 2011 -034 A RESOLUTION OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT TO AMEND THE SECTION 457 DEFERRED COMPENSATION PLAN WHEREAS, the Employer has employees rendering valuable services; and WHEREAS, the Employer has established a Section 457 Deferred Compensation Plan for such employees that serves the interest of the Employer by enabling it to provide reasonable retirement security for its employees and by assisting in the attraction and retention of competent personnel; and WHEREAS, the Employer has determined that the continuance of the Section 457 Deferred Compensation Plan will serve these objectives; and NOW, THEREFORE, BE IT RESOLVED THAT THE Board of Directors of the Central Contra Costa Sanitary District ( "District ") hereby amends and restates the Deferred Compensation Plan (the "Plan ") incorporating the Roth amendment to the 457 Deferred Compensation Plan. PASSED AND ADOPTED this 4t" day of August 2011, by the Board of Directors of the Central Contra Costa Sanitary District by the following vote: AYES: Members: NOES: Members: ABSENT: Members Barbara D. Hockett President of the Board of Directors Central Contra Costa Sanitary District County of Contra Costa, State of California COUNTERSIGNED: Elaine R. Boehme, CMC Secretary of the District Central Contra Costa Sanitary District County of Contra Costa, State of California Approved as to form: Kenton L. Alm, Esq. Counsel for the District 1. What are Roth deferrals? The new Roth elective deferral provision allows participants to make Roth (after -tax) deferrals to your existing ICMA -RC 457 plan. Roth deferrals and associated earnings can be withdrawn tax -free if certain criteria are met. ICMA -RC will provide separate accounting for Roth assets within participant accounts. 2. When can Roth assets ('r.e., Roth deferrals and associated earnings) be withdrawn tax -free? In order for Roth deferrals and associated earnings to be withdrawn tax -free, the requirements for a "qualified distribution" must be met. Distributions of Roth assets are qualified if: • a period of five taxable years has passed since January 1 of the year of the participant's first Roth deferral; and • at least one of the following also applies: • the participant is at least 59'/2 years old; • the participant is disabled; or • the funds are being paid to the participant's beneficiary. 3. What if the requirements for a qualified distribution of Roth assets are not met? The Roth deferrals can be withdrawn tax free, but the earnings portion of the distribution will be taxable as income and may also be subject to a 10 percent early withdrawal penalty. 4. What is an "in -plan Roth conversion" and who is eligible to take advantage of the provision? This provision permits participants who are eligible to withdraw assets from the plan, as part of an eligible rollover distribution, to convert their pre -tax assets to Roth assets through an in -plan rollover (currently, participants must roll their assets from the plan to a Roth IRA to perform this type of conversion). Participants will be subject to income taxes on the amount they convert. However, distributions of Roth assets are tax -free if the requirements for a qualified distribution are met. Note. Ifyou wish to make this provision available, your plan must also allow for Roth deferrals. 5. How will the addition of the new Roth provisions benefit plan participants? Adding the Roth provisions to your plan provides participants with additional options for their retirement savings. Other potential benefits include: • Higher after -tax contribution limits than Roth IRAs — 457 plans allow for greater after -tax savings. • Eligibility at all income levels — Unlike Roth IRAs, a participant's eligibility to make Roth contributions to the 457 plan is not restricted by income. • Tax-free distributions — Qualified distributions of Roth assets (i.e., contributions and associated earnings) are not subject to taxes. • Tax planning— Having both pre -tax assets and Roth assets available in retirement can be a valuable benefit to participants, allowing them to choose the source of funds most advantageous to their situation at the time of distribution. ROTH (ONTRIBUTIONS 6. How do participants elect to make Roth deferrals? Existing participants can use the deferral change form and new hires can use the enrollment form to indicate whether they want to make pre -tax deferrals, Roth deferrals, or a combination of both. If permitted by your plan, deferral changes can also be done online through ICMA -RC's Account Access website or through an Investor Services representative. 7. How do participants know whether Roth or regular pre-tax contributions will be more advantageous? Participants will need to consider both their current income tax bracket and their expected income tax bracket in retirement. Roth deferrals may be most appropriate for participants expecting to be in a higher tax bracket in retirement, allowing them to pay taxes on the contributions now, at a lower tax rate, and receive tax -free distributions in retirement. A Roth Analyzer tool will be available on the ICMA -RC website at www.icmarc.org to help participants evaluate whether making Roth or pre- tax contributions will be most beneficial. & What is the contribution limit for Roth deferrals to a 457 plan? The same annual limitations that currently apply to your 457 plan will apply to the combination of all contributions to the plan, including Roth deferrals. 9. Can participants make both pre -tax and Roth deferrals? Yes. Participants can make both types of deferrals, up to the annual contribution limit in effect for the year. 10. When can participants withdraw Roth assets from the 457 plan? Roth assets can be withdrawn whenever a distribution of non -Roth assets is permitted under your plan (e.g., retirement, termination, emergency situations). Pre -tax assets will be distributed prior to Roth assets, unless otherwise elected by the participant. 11. Why are pre -tax assets distributed prior to Roth assets, unless otherwise elected by the participant? This helps to ensure that participants are maximizing the tax benefits associated with their Roth contributions. ICMA -RC wants to make certain that Roth assets are not distributed prior to the time when the distribution will be qualified (tax- free), unless specifically requested by the participant. 12. Do required minimum distribution (RMD) rules apply to Roth assets in the 457 plan? Yes. The same RMD rules that apply to other assets in your plan also apply to Roth assets. Distributions from the 457 plan must generally begin in the year the participant reaches age 701/2 or separates from service, whichever occurs later. ROLLOVERS OF ROTH ASSETS 13. Can Roth assets be rolled over from the 457 plan to another plan? Generally, yes. However, the receiving plan must be able to accept and provide recordkeeping for Roth assets (e.g., a 457 plan with a Roth deferral provision, or a Roth IRA). 14. How do rollovers of Roth assets from other retirement plans impact the five -year period used in determining whether or not withdrawals from the plan are qualified? The five -year period is calculated using the year of the participant's first Roth deferral to the plan from which assets are being rolled out of or rolled to, whichever is earlier. For example, if a participant rolls over Roth assets from a previous employer's retirement plan where the participant began making Roth deferrals prior to making Roth deferrals in your plan, the earlier date will be used to determine when the participant is eligible to receive qualified distributions of Roth assets from your plan. 15. How will a rollover to a Roth IRA impact the five -year period for calculating qualified distributions of Roth assets? Regardless of the date of the initial Roth deferral in the 457 plan, the date of the first Roth IRA contribution is used to determine whether distributions from the IRA are subject to taxes. 16. Can a Roth IRA be rolled over to a 457 plan that allows Roth contributions? No. A Roth IRA cannot be rolled over to a 457 plan, even if the plan allows for Roth contributions. 17. How do participants request an in -plan Roth conversion? Participants should contact ICMA -RC and request the In -Plan Roth Conversion Form. 18. Will an in -plan Roth conversion impact the five - taxable -year period used to determine 0 distributions of Roth assets will be qualified (i.e., tax free)? Yes. If the participant had not previously made Roth contributions to the plan, January 1 of the year in which the conversion takes place will be used as the date of his/ her first Roth contribution. 19. What are the federal income tax implications of converting pre -tax assets to Roth assets? Participants will be subject to income taxes on the taxable amount they convert to the Roth source, and the amount of taxes they owe will be calculated based on a participant's marginal income tax bracket. This can result in a significant tax liability (no taxes are withheld as part of the conversion). ICMA -RC recommends that participants consult with a qualified tax advisor before requesting an in -plan Roth conversion. 20. (an participants convert pre -tax amounts to Roth amounts through a rollover to a Roth IRA, rather than an in -plan conversion? Yes. 457 plan assets are eligible for a direct rollover to a Roth IRA. 21. Are there any advantages to rolling the assets to a Roth IRA instead of doing an in -plan Roth conversion? Yes. If participants do a direct rollover to a Roth IRA, they can change their mind and reverse the conversion by moving the assets to aTraditional IRA through a process known as a recharacterization. This must be done by the participant prior to the deadline for filing his /her tax return for the year in which the conversion took place (generally, October 15 of the year following the calendar year in which the conversion took place). 22. How do Roth deferrals to a 457 plan tGffer from Roth IRA contributions? While Roth deferrals within a 457 plan and Roth IRA contributions provide similar benefits, they differ in certain important ways, such as: • Higher contribution limits: 457 plans allow for greater after -tax savings. • No income limits: All participants are eligible to make Roth contributions to a 457 plan, regardless of income. • Distribution rules: While Roth IRA assets can generally be withdrawn at any time, participants can only withdraw funds from your 457 plan when permitted by the plan (e.g., at separation, emergency). Additionally, Roth IRA assets are not subject to required minimum distributions. 23. (an participants in our 457 plan who elect to make Roth deferrals still open and contribute to a Roth IRA? Yes. Making Roth deferrals to a 457 plan does not limit a participant's eligibility to participate in a Roth IRA in any way. Participants can contribute the maximum amount to both a Roth IRA and a 457. 24. (an individuals have a Roth IRA and still make Roth deferrals to a 457 plan? Yes. Contributions to a Roth IRA do not reduce the amount of Roth deferrals that a participant can make to a 457 plan. 25. Why is I(MA -R( offering the Roth provisions? The new Roth provisions provide 457 plan participants with additional tax - advantaged retirement savings opportunities. Making the provisions available is consistent with ICMA -RC's mission to assist public sector employees in building retirement security. 26. When did the Roth provisions become available in 457 plans? The Small Business Jobs Act of 2010, which was signed into law on September 27, 2010, made Roth provisions available in 457 plans beginning in 2011. 27. Are Roth assets in our 457 plan eligible for management under Managed Accounts, ICMA -RC's comprehensive ongoing professional account management service? Yes. Provided that your plan has adopted the Roth elective deferral provision and Managed Accounts, a participant's Roth assets are eligible to be included in Managed Accounts. 28. How do we add the Roth deferral and in -plan Roth conversion provisions to our 457 plan? Adding the Roth provisions to your 457 plan is easy, and ICMA -RC can help walk you through the process. We suggest that you review the information in the 457 Plan Roth Provisions Plan Document Implementation Package and follow the instructions in the package. 29. Are there any additional fees associated with making Roth deferrals available? No. The addition of Roth deferrals to your 457 plan has no impact on the plan's fees. 30. When will participants be eligible to begin taking advantage of the new Roth provisions? ICMA -RC anticipates the new Roth provisions first being operational, in plans that elect to offer them, in the second quarter of 2011. You can elect to add the provisions to your plan at that time or any time thereafter. 31. If I want additional information on the Roth provisions or about the adoption process, who should I contact? Please contact your ICMA -RC Client Services team at 800 - 326 -7272. ICMA-RC I(MA RETIREMENT (ORPORATION 777 NORTH (APITOL STREET, NE WASHINGTON, D( 20002 -4240 800 - 669.7400 PARA ASISTEN(IA EN ESPANOL LLAME AL 800. 669 -8216 WWWI(MAR(.ORG AC 0111.4549