Special Pay Plan

Since implementing one of the first-ever Special Pay Plans in 2000, Precision Retirement Group (PRG) has implemented this type of employer plan across the country, with various city, county, and school district employers. Our Special Pay Plan offers government employers and employees a unique option in handling special forms of compensation (or distributions) at retirement.

These special forms of compensation are not as special as they should be when FICA, Medicare, and other taxes are allowed to diminish the value of this important employee benefit.

Normally, special forms of compensation are paid out as taxable earned income that is reported on the standard W-2 form. PRG's Special Pay Program converts that special form of compensation to an employer-defined contribution plan at the time of retirement or termination - with all of the tax benefits that go along with a qualified plan.

Special forms of compensation that are eligible for our Special Pay Program include:

  • accumulated sick leave
  • vacation pay
  • retirement stipends pay outs
  • paid time off (PTO)
  • early retirement incentives
Precision Retirement Group's Special Pay Plan offers a unique feature for the employer and employee by offering a generic plan that is not company specific. With this employer/employee friendly plan, all funds are deposited into a group fixed annuity that's completely liquid and/or transferrable by the participant/retiree, and free of any costs to both the employer and employee!

Special Pay Plan employee benefits:

  • Deferral of federal and state income taxes
  • Immediate liquidity
  • No sales or surrender charges
  • No FICA or Medicare tax; which equates to a 7.65% increase in benefits!
  • Control the timing of the taxation on the distribution
Once the employer deposits the funds into a Special Pay Plan, the employee can:
  • Stay invested and enjoy tax-deferred growth.
  • Withdraw money at retirement and pay regular income taxes.
  • Transfer account balances to another tax-qualified plan, such as an IRA or TSA (Tax Sheltered Annuity)
  • Receive quarterly statements that summarize all account activity.
  • Access their account online 24 hours a day, 365 days a year, from anywhere.

Types of tax-qualified plans that can make up a Special Pay Plan

Precision Retirement Group's Special Pay Plan offers an employer several types of plans based on the government entity's designation.

For city and county governments, plans can include a 401(a) tax-qualified plan. This type of plan can also be designed to complement the agency's existing deferred compensation plan (457 plans), allowing for the most-possible deferral to the employee/retiree.

For school districts and higher education institutions (including all not-for-profit or 501c (3) organizations) our Special Pay Plan offers a 403(b) tax-qualified plan. This type of plan also can be used to complement the employer's existing 403(b) and 457 plan offerings for maximum tax deferral for both the employer and employee/retiree.

The tax-qualified plans offered above (the 401(a) and 403(b)), through plan designed; would be

The first plans funded by the employer to maximize the greatest savings (FICA and Medicare tax) to both the employer and employee/retiree are those using the tax-qualified plans mentioned above (the 401(a) and 403(b)).

Next, Precision Retirement Group would work with the employer to best determine the maximum benefit possible by looking at how other existing company plans would work best in coordination and implementation with the Special Pay Plan.

Different Special Pay Plan Design Options for Different Employers

IRC section 401(a) benefits:

This Special Pay Plan option allow government entities - in most states - to contribute up to 100% of the employee's last full year's compensation, or $56,000, whichever is less, to the employee's 401(a) plan in a way that it will become an employer-qualified plan at retirement.

The benefits to both the employer and employee are the savings of FICA and Medicare taxation (7.65%). The maximum contribution to the 401(a) account does not affect employer contributions to other types of qualified benefit plans because the maximum contributions are treated separately under the limits established by IRC Section 415.

IRC section 403(b) benefits:

This Special Pay Plan option allows qualified educational institutions and other not-for-profit entities to make contributions into an employer-sponsored 403(b) plan of 100% of the employee's final year compensation of $56,000 (effective as of 2019), whichever is less. The amount of these contributions must be reduced by the employee voluntary salary reductions into their personal 403(b) plans in the current year; it must be coordinated. The 403(b) plan contributions can continue up to as much as $56,000 a year for up to an additional five years after an employee has terminated employment, enabling the employee to shelter as much as $280,000 from federal, state (if applicable), FICA, and Medicare taxes!

Additional IRC qualified options (Section 457):

An additional Special Pay Plan option allows municipalities, school districts, qualified educational institutions, and certain other not-for-profit entities to make contributions into an employer-sponsored 457 plan up to 100% of the employee's final year compensation, or $38,000, whichever is less. The amount of these contributions must be reduced by any employee voluntary salary reductions into their personal 457 plans in the current year. (Please note: contributions to 457 plans do not reduce the FICA tax obligations for the employer and employee.)

Salary $50,000 401(a) 403(b) 457 Total
Maximum Contribution $56,000 $56,000 $56,000
Less Individual 403(b) Salary Reductions ($19,000) ($19,000)
Eligible 1st Year Contributions $56,000 $38,000 $38,000 $132,000
Five years additional 403(b) contributions (5 x $56,000) = $280,000 $412,000

Maximize shelter potential by combining 401(a) and 403(b) options: To get the most benefit from the Special Pay Plans, we recommend that educational institutions that provide multiyear payout options combine the use of a 401(a) plan along with a 403(b) plan. By implementing a 401(a) plan for the final year of employment and a 403(b) plan starting the first year immediately after termination, employers can avoid unnecessary maximum contribution calculations and employees can achieve the maximum shelter potential.

Summary of Special Pay advantages:

Employer:

  • Immediate tax savings of 7.65% when combining 401(a) & 403(b) plans
  • Reduced administrative time
  • No cost to implement
Employee:
  • Enjoy immediate tax savings of 7.65%
  • Liquidate the Special Pay Plan account(s) and pay regular income tax
  • Remain invested in the Special Pay Plan and enjoy continued tax deferral
  • Roll over to another plan, such as an IRA or TSA
  • Know there are no sales, surrender, or rollover charges
Your employees deserve every hard-earned benefit dollar when they retire. Help them maximum the value of their benefits with a Special Pay Plan.

For more information on creating a custom plan and to learn how your organization can benefit from a Special Pay Plan, please contact us.