Current Pension Topics: Can Shelter TWU Refunds

Current Pension Topics:
Can Shelter TWU Refunds

By JOEL L. FRANK

Q.: I'm a member of the Transport Workers' Union and am looking forward to getting a refund of my excess pension contributions. It will come to about $10,000 and I understand it will be taxable. Is there a way to alleviate this tax burden?

P.S.

A.: There sure is. Contribute $10,000 to the 457(b)/401(k) Plan.

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Q.: You mentioned in the Dec. 23 edition of The Chief that the new Roth 401(k) feature that the New York City Deferred Compensation Plan will begin offering this year will have a 10-percent penalty for withdrawals before age 59-1/2. The Tax-Deferred Annuity has the same restriction. But the TDA program makes an exception for withdrawing money for medical expenses, college tuition, or a down payment on a home, and waives the 10-percent penalty.

Will the Roth 401(k) also allow "hardship withdrawals" such as for a home down-payment and waive the 10-percent penalty?

P.A.

A.: The final Roth 401(k) regulations do not provide guidance with respect to the taxation of distributions of designated Roth contributions. These rules will be provided in the proposed regulations under Code section 402A which are to be issued in the near future. I will come back to your question after those regulations are issued. Please note that in-service hardship withdrawals prior to age 59-1/2 from a TDA are subject to the 10-percent penalty tax in addition to ordinary income tax.

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Q.: The current 8.25-percent fixed-interest rate guaranteed by the New York State Constitution (cannot go below 7.0 percent) applies to the Annuity Savings and Increased-Take-Home-Pay accounts of members of Tiers I and II of the five public employee retirement systems of the City of New York (Teachers, City Employees, Board of Education, Police, and Fire). Additionally, members of the Teachers' Retirement System and the Board of Education Retirement System, regardless of membership Tier, have the opportunity to voluntarily contribute pre-tax dollars to the TDA Programs operated by these two retirement systems and receive the same 8.25-percent interest-rate guarantee. I find this to be a gross inequity to all of us who are not members of the TRS or BERS. What are your thoughts?

S.O.

A.: I am in total agreement with you. In fact, Article V, Section 7 of the New York Constitution says: "After July first, nineteen hundred forty, membership in any pension or retirement system of the state or of a civil division thereof shall be a contractual relationship, the benefits of which shall not be diminished or impaired."

It was this clause that forced the city to establish, just for the unborn, new pension membership tiers with diminished or impaired benefits compared to the retirement benefits accruing to those already employed. If not for this Constitutional guarantee, all of us would be members of Tier 4 with its diminished or impaired benefits compared to Tier I.

In my view, the constitutional fixed-interest-rate guarantee never applied to the TDA Program because the TDA is strictly voluntary. It operates under section 403(b) of the Internal Revenue Code while the Qualified Pension Plans (TRS/BERS) operate under section 401(a). The constitutional guarantee was intended to apply to the pension benefits afforded under membership in the Qualified Pension Plan, not to membership in a voluntary/supplementary retirement savings program operated by the pension or retirement system.

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, by fax at (732) 536-7373, or via e-mail at rollover@optonline.net.