What is the Special Pay Plan?

The Special Pay Plan is a mandatory 403(b) retirement plan to faculty and staff employees funded through accrued annual, sick and compensatory leave cash-outs at the time of separation and/or DROP participation or when transferring out of an annual leave accruing position.

The plan year is July 1 – June 30.

Faculty, A&P and Support Personnel employees who are 40 years or older and receive an annual, sick and/or compensatory leave cash-out of $1,000 or more as a result of termination, retirement, enrollment in DROP, or transferring out of an annual leave accruing position, are compulsory participants in the Special Pay Plan.

This plan provides the maximum tax advantages on accrued leave payments for both the employee and the University.

• Plan contributions are exempt from FICA Social Security and Medicare taxes.
• Plan contributions are tax deferred. Federal income taxes are not paid on the contributions until a plan distribution is received.

Employees will continue to have the option to receive a cash-out of annual leave at the time of enrollment in DROP that will be included in the employee’s compensation for FRS retirement benefits calculation purposes, or employees may choose to receive payment at the end of their DROP participation. Regardless of the option chosen, payments of annual leave for DROP employees are subject to the Special Pay Plan provisions.

An employee participating in DROP will have a percentage of their accumulated sick-leave pay balance deposited into their account at the beginning of each year of DROP participation. The percentage is determined by the participant’s DROP year.

EXAMPLE: An employee participating in DROP for a period of five (5) years will have terminal-sick-leave pay deposited as follows:

EXAMPLE: An employee participating in DROP for a period of two (2) years will have terminal-sick-leave pay deposited into their account as follows:

Combined contributions to the Special Pay Plan and other 403(b) plans in 2010 cannot exceed 100% of the Plan Year Salary or $49,000 – whichever is less. The maximum limit is indexed each year.   Leave payments that exceed the maximum contribution limit will be provided to the employee as a cash payment.

Investment and Plan Questions

VALIC is the Plan Administrator and Investment Provider. For more information about Special Pay Plan investment options, participants may contact VALIC at 1-800-448-2542 or by accessing their web site http://www.valic.com/AIG-Retirement_82_8630.html.

Withdrawals from the plan may be made at the following times:

• Separation/termination of employment,
• Retirement ,
• After age 70 ½ or retirement, if later, when the IRS requires that minimum distributions be made to the participant each year,
• Participant’s total disability, or
• Participant’s death.

Distributions from the plan can be requested by the participant by contacting VALIC.

Withdrawals from the Plan may be made in a lump-sum cash payment or plan balances may be rolled over to an IRA or other eligible retirement plan with no penalty. Contributions may also remain in the account after separation from the University or taken in periodic payments.

An employee who has separated from employment and requests a withdrawal of funds from Special Pay Plan and is not at least age 55 on December 31 of the year of separation, may be assessed a 10% tax penalty by the IRS on these funds. The University provides a “make whole provision” to offset the 10% tax penalty. The make whole provision is applicable to those participants who receive a distribution from the plan within 90 calendar days of his/her date of termination.

Under the make whole provision, the University will reimburse the participant the 10% IRS tax penalty less the employee’s share of Social Security and Medicare tax savings as a result of the Special Pay Plan. The percentage paid to the employee will typically be 2.35% of the original contribution amount unless the employee has reached the maximum limit for Social Security taxes. In that case, the percentage paid to the employee will be 8.55% of the original contribution amount. The make whole payment amount is grossed up to cover the applicable taxes related to this payment.

The make whole provision only applies to employees under 55 years of age on December 31 of the year of separation. Employees 55 or older who receive a distribution from the Special Pay Plan are not subject to the 10% IRS excise tax.