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 and �457P Deferred Compensation Plan and Trust to comply with final regulations issued by the Internal Revenue Service (IRS) regarding distributions of account balances of less than $5,000.

 

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 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 December 17, 1991, the City established a �457P Deferred Compensation Plan for part-time, temporary, and seasonal employees with the adoption of Resolution No. 23,495.  The purpose of this Plan is to provide these employees with a sound retirement program with contributions of 7.50 percent of salary, as required by the Federal government. 

 

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) was passed.  On September 28, 2004, the Internal Revenue Service (IRS) issued final regulations regarding terminating participants with account balances of less than $5,000.  According to these final regulations, plan sponsors could no longer force a cash-out of small account balances when participants severed employment unless the account balance was less than $1,000.

 

ANALYSIS

 

Prior to the issuance of these final regulations, account balances of less than $5,000 were automatically distributed when a participant severed employment with the City.  The primary purpose for cashing-out small account balances was to ensure that the City was able to successfully distribute these small balance accounts to terminating employees.  Past experience had shown that as time went by, the majority of terminating employees with the small account balances were increasingly difficult to locate as they frequently re-located and left no forwarding address.

 

However, the IRS final regulations now require that these practices be changed and that plan documents be revised to reflect these changes.  Thus, staff has amended both the City�s �457 Deferred Compensation Plan and Trust (Attachment A) and the �457P Deferred Compensation Plan and Trust (Attachment B) to comply with these IRS final regulations. 

 

These proposed amendments will only allow an automatic cash-out of account balances of less than $1,000 upon severance of employment.  In addition, the plan documents will no longer allow automatic distributions of account balances of $1,000 or more to participants severing employment with the City.  Instead, terminating participants with account balances of $1,000 or more will be allowed to leave their account balance in the plan until the earlier of when they request a distribution or the attainment of age 70 �.

 

These proposed amendments bring the two plans into compliance with IRS regulations.

 

FISCAL IMPACT

 

Adoption of these changes to the City's �457 Deferred Compensation Plan and Trust and the �457P 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�s Deferred Compensation Plans and Authorizing and Directing the Financial Services Director to Prepare Revisions.�