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Early Retirement Incentive


Scott
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A school district wants to set up an arrangement under which certain employees can agree to work for the remainder of the school year and then retire (prior to age 65) in exchange for a payment of 1 year's base salary. The benefit will be paid in quarterly installments over 4 years.

Is this a severance plan, in which case the benefit would be taxed as paid, or is this a deferred compensation plan under 457(f), in which case the entire benefit would be taxable on the last day of the school year?

To me, this "feels" like deferred comp, but TAM 199903032 states that "payments regarded as severance may also include payments made to employees who voluntarily terminate employment, most often before attainment of retirement age, as part of a window-type early retirement incentive program."

Any thoughts?

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  • 3 weeks later...

The arrangement cannot be a severance pay plan since it is paid over more than 2 years from the date of termination.

Whether it is a qualified deferred compensation plan, or a nonqualified DC plan would depend on the facts, the terms of the plan and the plan documents. The attorney who drafts the plan document should answer this question for you. It will be obvious if the benefit is provided as an amendment to a 401(a) plan, a 457 plan or otherwise.

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Does it matter where the payments come from? If the quarterly payments are from a retirement plan (perhaps in addition to a monthly annuity), how does that alter the analysis?

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I assume that the comment about "paid over more than two years" has some basis other than ERISA regulations, which would not apply to a school district that is a government ("district " is a clue) and would not be compelling for income tax purposes.

The time of payment is relevant and I am not suggesting that 4 years looks like severance. I merely want to know where the standards are coming from.

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Guest Harvey Carruth

Why not set this up as employer discretionary contributions to a 403(b) plan? An employer is allowed to make contributions on behalf of former employees for up to five years following severance from employment.

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