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Pension Benefits Administration

Pension Benefits Administration. Article 3 Police Pension Funds Article 4 Firefighters’ Pension Funds. Illinois Public Pension Fund Association Certified Trustee Program . Presented by Allison R. Barrett , Partner. Pension Benefits Administration. Calculation of Benefits (tab 1)

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Pension Benefits Administration

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  1. Pension Benefits Administration Article 3 Police Pension Funds Article 4 Firefighters’ Pension Funds Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  2. Illinois Public Pension Fund Association Certified Trustee Program Presented by Allison R. Barrett, Partner Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  3. Pension Benefits Administration • Calculation of Benefits (tab 1) • Service Purchases(tab 1) • IRS Reporting (tab 2) • Contributions(tab 3) • QILDROs (tab 3) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  4. Pension Benefits Administration • Calculation of Benefits - COMPONENTS • Benefit is a percentage of salary • Retirement: percentage is determined by length of creditable service • Disability: percentage is fixed, regardless of length of service • Salary = “Pensionable Salary” (see IDOI webpage) • Includes - base salary attached to rank, longevity • Excludes – clothing or car allowances, spikes • ??? – Holiday pay, overtime • Creditable Service • “Give to Get” theory • Excludes some unpaid leaves of absence • Felony conviction Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  5. Pension Benefits Administration • Calculation of Benefits – CALCULATOR • IDOI web page • Requires input of components • Exceptions • Dependent benefits for Fire (Duty or Occupational Disease Disability) • Conversions Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  6. Pension Benefits Administration • Calculation of Benefits – THINGS TO KNOW • Tier 1 versus Tier 2 • Member FIRST HIRED by a pension fund under this article after 01/01/11 = Tier 2 • Subsequent slides reference Tier 1 Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  7. POP QUIZ!! Q: TRUE or FALSE? You must be 50 years old and must have completed 20 years of active service to be eligible for a retirement pension Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  8. Pension Benefits Administration A: False • Police • 8 – 19 years of service • Age 60 • Fire • 10-19 years of service • Age 60 Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  9. POP QUIZ!! Q: TRUE or FALSE? A line of duty disability pension is granted at 65% of pensionable salary Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  10. Pension Benefits Administration A: False • GREATER OF • 65%, or • The retirement amount the member is eligible for at time of disability (max 75%) • REMEMBER • First 65% is tax-free; anything above 65% is taxable • Fire: Additional benefit paid for dependent • Benefit paid directly to member but • Report on IDOI report under dependent Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  11. Pension Benefits Administration • Calculation of Benefits – THINGS TO KNOW • Nonduty Disability Pension • 50% of pensionable salary • Taxable Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  12. Pension Benefits Administration • Calculation of Benefits – THINGS TO KNOW • Initial Increases • Retirement • Effective: Later of month after turn 55 or month after retired for one year • Amount: (1/12) of (3% of original benefit) times (# of full months between retirement date and effective date of initial increase) • Disability • Effective: January 1st after reach age 60 • Amount: (3% of original benefit) times (# of full years between disability date and effective date of initial increase) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  13. Pension Benefits Administration • Calculation of Benefits – THINGS TO KNOW • Subsequent Increases (COLAs) • Retirement • Effective: Every January 1st after the initial increase has been received • Amount: 3% compounded • Disability • Effective: Every January 1st after the initial increase has been received • Amount: 3% of original benefit Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  14. Pension Benefits Administration • Calculation of Benefits – THINGS TO KNOW • COLAs • Spousal – NONE! • Dependents for Fire • Duty or Occupational Disease Disability • 3% compounded • Every January, regardless of age of pensioner Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  15. Pension Benefits Administration • Calculation of Benefits – THINGS TO KNOW • Survivor benefits • Eligible Spouse • Police – married at time pension began • Fire – married at least one year prior to death • Dependent Child(ren) • Under age 18 • Legally handicapped (mentally or physically) – for life • Dependent Parent(s) • Estate • if pension withdrawn is less than contributions made Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  16. Pension Benefits Administration • Calculation of Benefits – THINGS TO KNOW • Minimum Gross Benefit • Police - $1,000 (01/01/01) • Fire - $1,159.27 (07/01/08) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  17. Pension Benefits Administration • Calculation of Benefits – CONVERSIONS • “Disability Pension Option” • Requirements • Age 50 • 20 years of service (active or active+disability) • Initial benefit should be calculated using statute in effect at time of disability • SALARY???? - if at least 20 years of active service, use salary at time of conversion • Calculator not available - ask IDOI for assistance • Consider taxability (gross may be more but net may be less) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  18. POP QUIZ!! Q: TRUE or FALSE? Pension benefits should be paid monthly at any time during the month Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  19. Pension Benefits Administration A: False • Department of Insurance written opinion • Fiduciary responsibility not to prepay benefits • Should be paid on last business day of month for the month (August benefits paid 08/31) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  20. Pension Benefits Administration • Service Purchase – Disability Buy Back • Up to 3 years of disability time • Must pay contributions that would have been withheld • Using salary at time of disability • Interest – 6% compounded from each missed pay date to repayment date • Must return to active service for a period of time equal to the time being purchased Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  21. Pension Benefits Administration • Service Purchase – Military Service (after hired) • Can purchase up to 5 years (if hired before 07/01/73, no limit) • Must pay full contributions due as if remained active employee • Employer pays difference between full wages and military wages • Employer can withhold full contributions, partial contributions, or no contributions • NO INTEREST! Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  22. Pension Benefits Administration • Service Purchase – Military Service (before hired) • Can purchase up to 24 months • Must pay full amount of new unfunded liability • Use salary at date of hire • Employee AND Employer contributions, using “Percent of Total Normal Costs” from tax levy • Interest • Reserve time? • Document procedures in your Rules & Regs!!! Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  23. Pension Benefits Administration • Service Purchase – PORTABILITY (police only) • Article 3 to Article 3 • “Moves” service time • Must have at least 2 years of service with Prior Fund • Unless left due to lay-off • Unless left prior to 08/17/97 • Must transfer 100% of service time Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  24. Pension Benefits Administration • Service Purchase – PORTABILITY (continued) • 3 calculations • Repay contribution refund, plus 6% interest (Prior Fund does) • Prior Fund sends to Current Fund (Prior Fund does) • A. Employee contributions • B. Interest calculation – 6% from date of each payroll deduction to date of transfer (THIS IS NOT THE SAME INTEREST CALC AS #1 ABOVE!) • C. Match of A and B • True Cost calculation (by certified actuary) (Current Fund does) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  25. Pension Benefits Administration • Service Purchase – PORTABILITY (continued) • If True Cost is greater than amount from Prior Fund • Option #1 • Officer pays difference to Current Fund (within 5 years) • Receives credit for 100% of Prior Fund service • Option #2 • Officer pays nothing to Current Fund • Receives partial credit (amount from Prior Fund divided by Total True Cost) • If True Cost is less than amount from Prior Fund, Current Fund keeps difference Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  26. Pension Benefits Administration • Service Purchase – PORTABILITY (example) • Option #1 – example • Prior Fund service time 4 years, 2 months, 18 days • Prior Fund sends $63,800 • True Cost is $145,000 • Balance due to Current Fund from officer • $145,000 – $63,800 = $81,200 • Lump sum or installments (within 5 years) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  27. Pension Benefits Administration • Service Purchase – PORTABILITY (example) • Option #2 – example • Prior Fund service time 4 years, 2 months, 18 days (= 50.6 months) • Prior Fund sends $63,800 • True Cost is $145,000 • 63,800 / 145,000 = .44 • .44 x 50.6 months = 22.27 months • Additional service granted of 1 year, 10 months, 8 days • No additional cost to officer Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  28. Pension Benefits Administration • Service Purchase – RECIPROCITY (fire only) • Article 4 • “Combines” service time – does not “move” • Must have at least 1 year of service with Prior Fund(s) • Must have at least 3 years of service with Final Fund • Must be 50 years old and have at least 20 years of service between funds • If hired after 07/01/04, must notify funds of intent within 21 months Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  29. Pension Benefits Administration • Service Purchase – RECIPROCITY – cost to member • 3 calculations • Repay contribution refund (to all Prior Funds) • Plus 6% interest • 10 years to repay • Additional 1% contribution (to all Prior Funds) • 6% interest • Lump sum / installments • Additional 1% contribution (to Current Funds) • 6% interest prior to “Declaration Date” • Employer withholds additional 1% from paycheck as of “Declaration Date” Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  30. Pension Benefits Administration • Service Purchase – Reciprocity – PENSION BENEFIT • Retirement • Prior Fund(s) • 1/12 of 2.5% of final monthly salary for each month of service in that fund(s) • Final Fund • Calculate benefit as if ALL service was with this fund, using salary of this fund • Subtract amount(s) paid by prior fund(s) • Mutliple 1099R forms Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  31. Pension Benefits Administration • Service Purchase – Reciprocity – PENSION BENEFIT • Nonduty Disability, Duty Disability • Full benefit paid by Current Fund • Occupational Disease Disability • Benefit paid by all funds to whom payment has been completed • Each fund pays a prorated share based upon length of service Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  32. Pension Benefits Administration • Service Purchases – Final Thoughts • Credit received once all payments made by all parties • Good record keeping is a must! • Deductions made from payroll for purchase of service must be AFTER-TAX (even if regular contributions are pre-tax) • Update Department of Insurance Report • Status • Hire Date • Length of Service • COST PROHIBITIVE!! Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  33. Pension Benefits Administration • HELPS (“Healthcare Enhancement for Local Public Safety) • Effective January 2007 • Reduce taxable earnings by $3,000/year • Insurance premiums • Deducted from pension check • Paid directly to provider • Do not withhold pre-tax (limits pensioner’s filing options on their 1040 form) • DO NOT REFLECT ON 1099R FORM!!!! Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  34. Pension Benefits Administration • Social Security • Windfall Elimination Provision • Spousal / widow benefits • Contact local SSA office • www.ssa.gov (calculator) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  35. Pension Benefits Administration • Taxability of Pension Benefits - REPORTING • New pensions first paid after 12/31/97 • Replaces Safe Harbor Method with “Simplified Method” • Divide total after-tax contributions by the number of months of life expectancy • Number of months provided by one of two IRS tables (marital status) • Pension Fund responsible for reporting taxability on 1099R form Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  36. Pension Benefits Administration • Taxability of Pension Benefits - REPORTING • Taxability of pension transfers to spousal pension • Tax-free pensions should not be reported to the IRS • Killed in the line of duty • 65% duty/occupational disease disability • If awarded for cancer (4-110.1) – IS taxable Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  37. Pension Benefits Administration • Taxability of Pension Benefits – TAX FORM #1 • SS-4 – Application for Employer Identification Number • IRS needs to know pension fund is a separate entity from municipality/district • www.ssa.gov Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  38. Pension Benefits Administration • Taxability of Pension Benefits – TAX FORM #2 • W-4P – Withholding Certificate for Pension or Annuity Payments • Determines the amount of federal tax to withhold from pension check • Marital status / number of exemptions • Cannot request a flat dollar amount! Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  39. Pension Benefits Administration • Taxability of Pension Benefits – TAX FORM #3 • 945 – Annual Return of Withheld Federal Income Tax • Pension Fund lists tax liability dates and amounts due • IRS uses to reconcile against tax deposits to determine if paid timely • Due February • 945-A may be required Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  40. Pension Benefits Administration • Taxability of Pension Benefits – TAX FORM #4 • 1099R • In lieu of W-2 • Taxable pension payments • Contribution refunds • Due January 31st to payee; due February 28th to IRS Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  41. Pension Benefits Administration • Taxability of Pension Benefits – TAX FORM #5 • 1099MISC • Vendor payments • All legal services • All medical services • All non-incorporated vendors to whom paid at least $600 during the calendar year • Due January 31st to payee; due February 28th to IRS Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  42. Pension Benefits Administration • Taxability of Pension Benefits – TAX FORM #6 • 1096 – Annual Summary and Transmittal of U.S. Information Returns • “Cover page” • Use with 1099R and 1099MISC forms • Due February 28th to IRS Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  43. Pension Benefits Administration • Taxability of Pension Benefits – TAX NOTES • Circular E (Publication 15) • Federal tax withholding tables • Deposit schedule (safest  pay taxes on pay day!) • EFTPS (www.eftps.gov) • Tax liabilities • Federal withholding tax – yes • IL withholding tax – no • Other state withholding tax – maybe • Social Security / Medicare – no Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  44. Pension Benefits Administration • Coalition for Qualified Plan Status • AFFI / IGFOA / ILFOP / IMTA / IPFA / IPPFA / MAP (IDOI, Lauterbach & Amen) • To maintain “Qualified Plan” status with IRS • Tax-free pension benefits • Pre-tax contribution deductions / roll-overs • No tax due on interest from investments • IRS grants “Determination Letter” • 5-year cycle • IDOI webpage • Cost savings • As individual pension fund = $40,000+ • As part of Article 3 or Article 4 = $400 (did you contribute?) • Annual review of IL statutes to ensure compliance with IRS code Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  45. Pension Benefits Administration • Contributions – EMPLOYER PICK-UP PLAN • Option presented by IRS in mid-1980’s • Pre-tax contribution deductions (increases net pay) • Employer Resolution • Determination Letter covers Fund • Irrevocable • Not required for employer, but if implemented, mandatory participation by employees Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  46. Pension Benefits Administration • Contributions – Rates • Police • 9.91% • Effective 01/01/01 • Fire • 9.455% • Effective 07/01/04 • Additional 1% for reciprocity • Pensionable earnings ONLY Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  47. Pension Benefits Administration • Contributions – Refunds • After-tax contributions • Paid directly to member • No taxes withheld • Pre-tax contributions • Paid directly to member • Must withhold 20% in federal tax • IRS notification of potential penalties / taxes when file 1040 • Roll-over to another Qualified Plan • No tax withheld • Payable and sent to Qualified Plan (not member) • Reflect refund on 1099R Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  48. Pension Benefits Administration • QILDRO • Qualified Illinois Domestic Relations Order • Effective 07/01/06 • Only applicable against contribution refund or retirement pension • 3 pieces • All must be filed in court • Have Board Attorney review before implementing • Available on DOI webpage (with reference manual) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  49. Pension Benefits Administration • QILDRO – Components • QILDRO Order • Names parties • Allocates benefit as a percentage of the “marital portion” of the pension • Consent To Issuance form • Required if hired prior to 07/01/99 • Calculation Form • Completed by member, ex-spouse, their attorneys • Can’t be completed until creditable service is done Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

  50. Pension Benefits Administration • QILDRO – Taxability • 1099R Reporting • Alternate Payee • List benefit as fully taxable • Member • Gross benefit (Box 1) - no effect • Taxable benefit (Box 2a) – reflect QILDRO paid in this box • Gross less QILDRO (less recovered after-tax contributions) Lauterbach & Amen, LLP 630.393.1483 * www.lauterbachamen.com

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