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457 and 401(a) combination as a Social Security alternative


Guest Dan McCauley

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Guest Dan McCauley

Our county mental health was recently dissolved from co. dept to an Authority. As a new Govt entity we can opt out of Soc.Sec. (except Medicare portion) if we have a Qualified Retirement Plan. Our current plan is a EE 457 and ER 401(a) match up to 5% of what EE contributes. Plan is optional, but over 70% of employees contribute 5% and get 5% match. First, does our plan "qualify"; and secondly, is there a minimum EE and/or ER contribution percentage requirement to be out of Soc. Sec. I've heard 7.5% minimum. Where does that come from? Can that be a combination of EE and ER?

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The problem with using voluntary employee contributions to meet the requirements is that Social Security must be paid on each employee who does not accrue the necessary benefit under the employer's plan. Thus, you would still have to contribute to Social Security for those employees who elected not to participate. Moreover, it may be difficult to persuade employees to continue to contribute if they realize that failing to contribute will result in their receiving the benefit of employer contributions toward Social Security which are higher than the employer match they could get in the plan.

The 7.5% figure comes from Treas. Reg. § 31.3121(B)(7)-2(e)(2)(iii)(A). You can view Treas. Reg. § 31.3121(B)(7)-2 in text format by clicking here, and in PDF format (requires the free Adobe Acrobat Reader) by clicking here. (These pages take a LONG time to load!)

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Employee benefits legal resource site

[This message has been edited by CVCalhoun (edited 03-08-2000).]

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Guest Ralph Amadio

Dan, the program that requires 7.5% is typically an alternative to Social Security for a special class of employees. These are part-time, seasonal and temporary employees. If you are in a state that allows new entities to opt out of Social Security, you should first look to what your state views as a "public retirement system". Some don't even recognize DC plans as a retirement system. Secondly, as Carol said, review the benefits shown in the 3121(B)(7)(F)regulations to determine whether a DB or DC makes sense for your agency, with special attention to vesting requirements if any part timers are involved, and then utilize your preferred plan. I strongly recommend 401(a)due to its "bright-line" ability to get a ruling from the Service as not only a qualified plan, but also as qualifying as a Social Security alternative. Please feel free to contact me. I'll help as much as I can. (Currently consult to over 100 of these types of SS alternatives)

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Guest Dan McCauley

Carol and Ralph; Thanks so much for your help. Ralph, I may be contacting you in the future as additional questions come up. Once again, thanks for everything. Dan

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