The city of Phoenix Defined Contribution 401(a) Plan consists of three separate components:
- Special Pay – mandatory pre-tax deferrals of eligible accumulated sick leave payouts of retiring employees
- Non-Elective City Contribution (Fringe) – automatic pre-tax employer contributions
- Supplemental – voluntary irrevocable pre-tax employee contributions Special Pay is mandatory for all City employees, and the Non-Elective City Contribution (Fringe) is an automatic 401(a) contribution for eligible benefit categories. The Supplemental component is the only voluntary component.
Special Pay
The Special Pay component is mandatory for all city employees, therefore, it provides the benefit of no FICA taxes. All accumulated eligible sick leave payments for a retiring employee are paid on a pre-tax basis into the 401(a) Plan, up to the annual maximum allowable contribution as defined by the IRS. Any amount in excess of the 401(a) Plan annual limit will be paid into the 457(b) Plan up that Plan’s allowable limit.
Effective April 1, 2014, a more detailed calculation process, referred to as a “circular calculation” is applicable. It will allow for potentially greater contribution amounts of a retiring employee’s sick leave payout (Special Pay) to one or both Plans compared to the prior calculation method. After initial contributions to the 401(a) Plan and 457 Plan are determined, IRS rules provide that for every dollar of the remaining amount of sick leave payout which is counted as compensation, another dollar can be contributed to the Plans. This means that half of the remaining balance can be counted as compensation under the Plans. This results in an increased contribution limit to both Plans that would be applied to the balance of the sick leave payout, which would allow for a potential second round of contributions to one or both Plans, depending upon the allowable contribution limit for that employee to each Plan. The other half of the remaining balance of the sick leave payout could then be treated as additional contributions to those Plans, if those contributions would not result in exceeding the employee’s allowable contribution limit to one or both Plans. The initial and potential second contributions of the sick leave payout to the 401(a) Plan and the initial sick leave contributions to the 457 Plan all are mandatory and automatic employer contributions.
However, if a potential second contribution of the sick leave payout to the 457 Plan (“post severance deferral”) is determined as part of this new calculation process, it cannot be implemented by City Payroll unless the employee has elected it in advance. That election must be made via the appropriate section in Nationwide’s 457 Participation Agreement. Please contact your local Plan Service Representative.
IRS rules require that, IF an employee wishes to maximize deferral of their sick leave to the 457 Plan by utilizing that second calculation, he/she must make that election in the month prior to the month in which he/she is retiring. That election must be made by completing the appropriate section of Nationwide’s 457 Plan Participation Agreement. As stated on the form, IF that election form is not received by Nationwide by the 18th of the month prior to the month the employee is retiring (if 18th falls on a weekend, deadline is prior Friday), should the circular calculation result in an opportunity for a second contribution/deferral of an employee’s sick leave payout to the 457 Plan, that second contribution cannot be processed by City Payroll and would become taxable income. (However, the mandatory initial contribution of the sick leave payout to the 457 Plan determined as part of this calculation process would still take place.)
The allowable limit for each Plan is defined as the compensation you receive in the calendar year in which you retire through your retirement date or the annual maximum contributions allowed for that Plan in the applicable year, whichever is less. Vacation and compensatory leave time payout accumulated at the time of retirement are included as compensation, in addition to wages earned, when determining an employee’s allowable limit for sick leave payout contributions to the Plans. You can withdraw your money from your 401(a) Plan assets immediately upon retirement or separation from employment. It can be distributed as a lump sum, partial lump sum, installment payments, or annuity payments.
Non-Elective City Contribution (Fringe)
Effective January 1, 2008, all Fringe contributions for eligible employees are automatically deposited on a pre-tax basis into the 401(a) Plan. Because these deferrals are considered mandatory, FICA taxes are not applicable. Fringe deferrals cannot be divided between the city’s 457(b) and 401(a) Plans. However, if an employee should reach the annual Plan limit prior to the end of a given calendar year and he/she has not reached the Plan limit for 457(b) contributions, those “Fringe” contributions will automatically defer to the 457(b) Plan until that limit is reached or until the end of the year, whichever comes first. In that situation, contributions to the 401(a) Plan would automatically resume effective the first pay of the subsequent calendar year. Any Fringe contributions already in an employee’s 457/401(a) Plan’s account as 457(b) Plan assets will remain as such, they will not move to the 401(a) Plan.
Supplemental
You may make a one time, irrevocable election to contribute a percentage of your pay from 1–32%, or an escalating percentage based upon your years of service, to the Plan, up to the maximum annual limit allowed under the Internal Revenue Code. Your election must be made within 31 days of your hire date and is irrevocable. Although contributions are voluntary, once you make your election within the 31-day enrollment window, it cannot be changed or stopped throughout the duration of your career with the city. These are pre-tax contributions but since they are voluntary, they are not FICA-exempt.
Distributions made prior to 59½ may be subject to a 10% tax penalty. All taxable distributions at any age are subject to ordinary income tax, and surrender charges may apply.
Note: You may elect to defer vacation and compensatory time leave your 457(b) Plan less year-to-date contributions, not to exceed current year IRS contribution limits.
City of Phoenix 401(a) Audit
401(a) Plan Document
401(a) Plan Amendments
Investment Policy Statement