RETIREMENT SOLUTIONS

Special Pay Plans

Unlock tax savings for public sector employees.

A Special Pay Plan is a 401(a), 403(b), or 457(b) retirement plan designed to handle special forms of compensation in a tax-advantaged manner for government and school district employees. Funded upon retirement, at separation from service, or while actively working, these forms of compensation typically include unused sick leave, unused vacation pay, and early retirement incentives.

These plans are among the best kept secrets in retirement savings for both employers and employees of school districts, community colleges, municipalities and public safety agencies. Organizations can save significant dollars through reduced taxes and reduced payroll costs — and offer an early retirement incentive to free up budget funds.

Essentially, the plan takes unused leave and places it into a tax-deferred 401(a), 403(b), or 457(b) plan upon an employee’s retirement (or during active employment for use upon retirement). The employee and the employer permanently save 7.65% in FICA taxes, meaning more money goes back to the organization and more money goes into the retiree’s pocket.

There is no additional enrollment for this type of plan. Contributions are often simply a function of payroll, depending on compensation type and payroll files.

Reduce your costs. Rather than paying your employees directly for their accumulated vacation and sick leave, you deposit an equivalent amount into the Special Pay Plan. Because these deposits are not paid as wages, you permanently save the Social Security and Medicare taxes that otherwise would be paid on the added wages.

Save FICA taxes and defer incomes taxes on their unused sick, vacation and other leave pay.

Your employees also do not pay Social Security or Medicare taxes on Special Pay Plan deposits, and they defer payment of income taxes until distributions are taken from the plan. Meanwhile, your employees can self-direct available investments to potentially grow their funds, and can roll over plan funds to an IRA or other investment accounts.

The mechanics of a Special Pay Plan

The Benefits:

Eliminates up to 7.65% in FICA taxes for retiree and employer
Greatly reduces administrative burden on payroll staff
Money can be used for any purpose once retired
Employee peace of mind that unused leave is deposited in tax-deferred account

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