Accumulated Sick & Vacation Pay

[Guest Brownlaw]

Municipal Police employees in New Jersey are allowed to

accumulate sick and vacation days that are payable at the time they retire (included in various collective bargaining agreements).

For example, a police officer with 25 years service has 250

days for a payout of either $50,000, $75,000 or $100,000.

The employer has no written plan other than paying this

officer his accumulated days at retirement.

Any ideas, as to how these police officers can avoid receiving the cash and paying substantial income taxes upon receipt at retirement.

Can any plans be suggested to the employer and employee

on this type of situation.

[Ron Snyder]

Since I spend a significant amount of my time on setting up these kinds of plans, I would like to tell you to call me and I'll help you out. However it is not appropriate to solicitations, so I'll give you two direct answers:

I suggest you read PLR 2003-10132 issued by IRS earlier this year. Many of the "secrets of the castle" are contained in that ruling.

2. We commonly set up such arrangements so that employees have their choice between a 401(a) (profit sharing) plan (or a 457 plan) and a VEBA. In either event both employer and employee save FICA (where applicable) and Medicare taxes. If the participant desires his money in cash and is willing to pay income taxes on it, he can elect to participate in the 401(a) or 457 plan that permits post-termination distributions. If the participant desires to receive his money tax-free he may elect to participate in the VEBA, where funds can be used (pursuant to the new HRA rulings) to reimburse medical expenses.

The key here is that the employee does not have to right to choose how much goes where, because that would be a cafeteria plan election and subject the amount to the use it or lose it requirement, or result in immediate taxation. The employer must be the one who changes the policy: "we no longer cash out benefits in excess of $x" and adopts the plans. The employee is limited to a choice: do you wish to participate in plan A, plan B or both.

For more info, contact me off board.

[mbozek]

The maximum deferral in a qualfied DC plan is the lesser of 40k or 100% of comp and the max deferral in a 457 plan is 14k for an over 50 employee. The total deferral is 54 k in 2003. The plan generally requires that the employee cannot elect to receive "excess" vacation pay in cash upon termination- but must elect between a forefeiture and a transfer to a 401(k) plan or 457 plan. Setting up a plan may require changes in municipal law so you wll need to consult counsel.