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Public School Early Retirement Incentive

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A broker I do some business with called me today to ask for some help with what he thinks is a 403(b) issue. I don't have much to do with 403(b)s and I really don't know how to help him.

A client of his is a public school teacher. She has been offerred an early retirement incentive. A part of the incentive is a $20,000 employer nonelective contribution to a 403(b). She currently has an employee funded 403(b) with Nationwide. Nationwide has informed her that she cannot deposit the nonelective contribution to that plan because it does not allow for employer contributions.

The 403(b) contracts are in separate accounts through different providers. The employees do not have to have a 403(b) - it is an individual decision and is in addition to the state retirement plan the employees are also covered by.

Only seven teachers are taking advantage of the early retirement incentive.

Does this teacher simply need to find another provider for this one-time nonelective contribution? Is the contribution subject to any kind of testing since only 7 out of who-knows-how-many teachers will receive this benefit?

I'm not sure if I am even asking the right questions here. Any advice would be greatly appreciated.

Kate Smith

Kate Smith

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I dont know who at nationwide told her that she cannot deposit the 20 k in the natonwide annuity but I never heard of an insurance co turning down a premium to a 403(b) annuity since all contributions are deemed employer contributions. If there is a problem then change the plan to permit er contributions. If the ins co refuses the funds then find another provider under the plan but be careful of the fees charged some annuity providers have steep up front fees. But the borker should know that. There are no nondiscrimination rules for 403(b) plans of public ers- only the 415 limits apply.


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Guest Harvey Carruth

I work with several Oregon public school districts and was surprised to learn that some investment companies do not allow employer discretionary or matching contributions to their 403(b) plans. For example, Janus sent out a letter to 403(b)(7) Plan Administrators on November 29, 2002 announcing that it would not accept employer contributions to its 403(b)(7) custodial account arrangements effective January 1, 2003. Initially Vanguard refused to accept such contributions, but later recanted. However, Janus maintains its position of not accepting employer contributions. Hence, participants on behalf of whom employer discretionary or matching contributions are made must specify some company other than Janus to receive the funds.

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Guest STLGiant

Kate, the reason may be that the early out may or may not be deemed a cash or deferred arrangement. The issue is whether or not the employee has "choice" to select the early out agreement, meaning, is this early out a mandate by the school district or a choice delivered to a district employee between getting an early out cash settlement or a non-elective contribution. Many companies, insurance/annuity and mutual fund companies are not jumping at this kind of opportunity, since if the agreement is not structured properly, it can result in a violation of IRC 402(g), from which even public schools are not exempt.

Furthermore, I thought I read in an earlier thread that there is still some unsettled issues if the early out is based on unused sick or vacation pay and is not paid out prior to actual separation of service. While contributions to a a 403(b) can be made up to five years after separation of service, I'm not sure if it can be based on unused sick or vacation pay. Perhaps somebody has more information that they can shed addl. light on the subject...

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  • 3 years later...
Guest Mpowers

The answer is two fold... most 403b plans are set up only for salary reduction and have to have separate accounts set up for an employer contributions. Having an existing provider not allow co-mingling is common.

I set up for accumulated sick or vacation pay a separate plan for " employer contributions ". Do dyou know that these employer contributions can be used also in a medcial trust for post retirement healthcare : tax free.

Mark Powers



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