Deferred Compensation Plans
- Deferred Compensation plans have a tax-deferral benefit which means that no current taxes are due on the interest or earnings until money is actually withdrawn. Earnings compound without taxation, allowing a potentially greater savings accumulation over time.
- Employees/participants may allocate deferrals among any of the specific investment options currently made available through the Plan(s). Minimum deferral amounts are $30 monthly, $15 semi-monthly, $14 bi-weekly, or $7.50 weekly.
- To help defray the cost of administering the Plans, participant account(s) are subject to an asset fee. No state or other employers’ dollars are used to pay for administration of this program.
Supplemental Retirement Plans
The 457 Plan, offered since 1975, is a deferred compensation plan for Kentucky State Government, schools and universities, and local governments authorized by Section 457 of the U.S. Internal Revenue Code.
The 401(k) Plan, offered since 1985, is a cash or deferral arrangement authorized under Section 401(k) of the United States Internal Revenue Code. This plan is available to the same entities as the 457 Plan.
- Generally, participants may defer up to 100% of includible compensation, after deducting contributions to the state retirement plan(s). Participants must, however, also allow for the withholding of FICA, local, and similar taxes which do not recognize pre-tax contributions. There is an annual dollar limit of $15,500 in 2008.
- Deferrals and earnings are put in trust in participant’s name immediately after clearing the State Treasury and upon completion of the investment process.
- A special three-year “catch-up” provision (up to twice the annual maximum in deferrals per year) is available in the three calendar years prior to participant’s planned normal retirement age. A separate “Baby Boomer” catch-up may be available for participants age 50 and over, but cannot be used in the same year the three-year catch-up is used. This “Baby Boomer” catch-up is $5,000 in 2008 and increases the annual deferral limit to $20,500 for participants who are age 50 or older in 2008.
- Benefits must begin by April 1 of the calendar year after the calendar year in which participants reach age 70½.
- There is no penalty tax for early (before age 55) distributions upon termination of employment.
- “Rollovers” are permitted to a 401(a), 401(k), 403(b) Plan or IRA, and assets may be “transferred” to or from another 457 Plan. 457 Plan assets may be transferred to KERS, KTRS, or Judicial and Legislative Retirement Systems to purchase service credits for a $75 fee (including “air time”).
- Cafeteria Plan (or benefits) money cannot be invested in this Plan.
- Loan provisions and eligible unforeseen financial emergency withdrawals are available. The minimum loan amount is $1,000 (and the account balance must be at least $2,000). The maximum loan amount is 50% of participant’s eligible account balance (not to exceed $50,000 for all outstanding loans). Participants may borrow only against their before-tax account balance.
Benefits are available after the occurrence of a benefit event. The types of benefit events for those with 457 accounts are listed below:
- Severance from employment (not working for a participating employer in any capacity)
- Age 70½ (regardless of whether participants are still working). Benefits must begin by April 1 of the calendar year after the calendar year in which participants reach age 70½.
- Death or total disability
- Unforeseeable financial emergency. If it cannot be relieved by other means, participants may withdraw funds sufficient to cover:
- Uninsured medical cost to participants or participants’ legal dependents (see participants benefit payment options)
- Uninsured property damage to participant’s primary residence due to casualty or extraordinary and unforeseeable circumstances beyond participant’s control
- Unforeseeable loss of family income
- Funeral expenses for a family member
- Imminent foreclosure on, or eviction from, participant’s primary residence
- Minimum (De Minimus) account payout is also available for certain accounts to which no contributions have been made within the preceding 24 months.
Roth 401(k) Highlights
- If an employee is a participant in the Authority’s 401(k) Plan and are actively employed by a participating employer, they may elect to make designated Roth 401(k) contributions.
- Unlike a Roth Individual Retirement Account (IRA), a participant can elect to make Roth 401(k) contributions regardless of income level.
- Contributions are made through payroll deductions just like your other Authority accounts, except contributions are made “after-tax”.
- A participant may divide their contributions between Traditional and Roth 401(k) accounts but cannot re-characterize the assets in those accounts after initial designation of pre-tax or after-tax contribution is made.
- Because the Roth 401(k) contribution is taxed differently; participant’s Roth 401(k) contributions and any earnings are maintained in a separate account. The total combined amount a participant may contribute into traditional 401(k) and Roth 401(k) accounts is $15,500 in 2008 (unless one will be at least age 50 in which case the annual contribution limit becomes $20,500).
- Any matching employer contributions are always made on a pre-tax basis, regardless of whether a participant is contributing on a pre-tax or after-tax basis.
- Similar to traditional pre-tax 401(k) plan accounts, payout from a Roth 401(k) account may begin at 59½ or after retirement, whichever comes first. The difference is that no federal or potentially state taxes are due on the earnings if 1) the Roth 401(k) account has been in existence for a five-year period (five-year period begins Jan. 1 of the year participant first makes a Roth 401(k) contribution into the plan) and 2) the participant is age 59½, or has died or becomes disabled.
Required minimum distributions (RMD) begin at age 70½, unless the Roth 401(k) is rolled into a Roth IRA, which does not require minimum distributions, except to beneficiaries.
Generally, a Roth 401(k) account distribution is a qualified distribution if: 1) the Roth 401(k) account has been in existence for a five-year period (five-year period begins Jan. 1 of the year a participant first makes a Roth contribution into the plan), and 2) a participant is age 59½, or has died or become disabled under IRC Section 72(m) (7). Distributions made prior to these requirements being met are non-qualified distributions, and earnings could be taxable. Should a participant elect to establish a designated Roth 401(k) account, the account will not be subject to federal taxes. State taxes may apply.
- County Employee Retirement System
- State Police Retirement System
- Kentucky Teacher’s Retirement Systems
- Defined Benefit v. Defined Contribution
- Pension Reform Legislation