PURPOSE

 

The purpose of this staff report is to recommend that City Council approve revisions to the City�s �457 Deferred Compensation Plan and Trust to include a loan program that provides eligible participants the ability to borrow funds from their plan account balance.

 

BACKGROUND

 

On September 3, 1974, the City established a �457 Deferred Compensation Plan for its officers and employees with the adoption of Resolution No. 16,899.  The establishment of this deferred compensation plan, pursuant to regulations in �457 of the IRC, provides officers and employees the opportunity of saving for retirement by allowing them to defer a portion of their current earnings and associated taxes until retirement. 

 

On May 28, 2002, City Council adopted Resolution 26,240, approving revisions to the City�s �457 Deferred Compensation Plan and Trust to incorporate the provisions of the Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) which included: 

1. Increased contribution limits;

2. Increased catch-up limits;

3. New age-50 catch up limits;

4. Flexible distributions;

5. In-service transfer of assets to defined benefit plans;

6. Rollovers from employee-sponsored plans and IRAs; and,

7. Use of Qualified Domestic Relations Orders (QDRO) when processing divorce orders

Although some cities were beginning to implement the �457 Plan loan program as part of the EGTRRA provisions, it was staff�s recommendation to City Council to wait on adopting the �457 Plan loan program until the IRS had issued final regulations on the program. 

 

ANALYSIS

 

The IRS has issued final regulations, outlining the criteria for �457 Deferred Compensation Plans to make loans to participants without causing a taxable distribution to occur.  So staff would now like to recommend that the City Council approve the inclusion of a loan program in the City�s �457 Plan. The Loan Policy (Attachment B) describes these following loan provisions in detail:

 

     Eligibility to Participate

 

Eligibility would be limited to employees who are actively employed with the City and who work 30 or more hours per week.  Employees working less than 30 hours per week, temporary employees, and seasonal employees would not be eligible to participate since their fluctuating work hours make them a high risk of defaulting on their loan.

 

Loan Limits

 

The minimum loan amount available would be $1,000.  The maximum loan amount would be � of the participant�s total vested deferred compensation account balance, not to exceed $50,000.  To facilitate administration of the program, participants would only be allowed to have one loan in the Plan at a time.

 

Loan Fees

 

Participants may be charged fees including a one-time loan origination fee and/or an annual loan maintenance fee. All fees associated with the loan will be paid for by the participant requesting the loan.

 

Repayment of the Loan

 

Loan payments must be made through payroll deduction.  Loans shall bear an interest rate at prime rate (as published in the Wall Street Journal the first business day of each month) plus 0.5% and will be fixed for the life of each loan.  All interest paid is credited to the participant�s account. The loan must be repaid within 5 years unless it is for the purchase of a primary residence, which allows for 15 years.  Upon termination of employment, participants would have ninety days to pay any unpaid balance on the loan.  If the participant fails to do so, the outstanding balance of the loan would be treated as a taxable distribution to the participant.

 

FISCAL IMPACT

 

Adoption of these changes to the City's �457 Deferred Compensation Plan and Trust will have no financial impact on the City. 

 

RECOMMENDATION

 

Staff recommends that City Council approve the Resolution entitled: �A Resolution of the Council of the City of Burbank Approving Revisions to the City of Burbank �457 Deferred Compensation Plan and Trust to Include a Loan Program.�