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Employers

Employer Bulletin

All WRS Employers
Vol. 19, No. 2
January 23, 2002

Implementation of Changes Resulting From Federal Pension Legislation Delayed

The Wisconsin Deferred Compensation Program (WDC) is an Internal Revenue Code Section 457 deferred compensation plan. All WRS employers are eligible to adopt this plan for their employees. Over 550 local government and school district employers currently have elected to offer the WDC to their employees. Employers interested in this program should call the WDC office at 800-257-4457 or 608-256-6200

There will be a delay in the implementation of changes to the Wisconsin Retirement System (WRS) and the Wisconsin Deferred Compensation Program (WDC) that were anticipated as a result of federal legislation passed last June (the Economic Growth and Tax Relief Reconciliation Act of 2001 - EGTRRA).

The changes to both the WRS and WDC were expected to become effective January 1, 2002. However, the Department of Employee Trust Funds recently discovered that legislation is needed to bring Wisconsin income tax statutes into conformance with the January 1, 2002 Internal Revenue Code (IRC) before the changes to the WRS or the WDC can be implemented. The Department of Revenue expects to introduce legislation in January 2002 to bring state income tax laws into conformance with the IRC as amended by EGTRRA.

Please note that this delay in implementation has no effect on additional contributions that participants or employers made to the WRS for calendar year 2001.

An article explaining how the state income tax laws impact the implementation of EGTRRA provisions in the WRS and WDC has been placed on the Department's Internet site, etf.wi.gov. You'll find Implementation of Changes Resulting from Federal Pension Legislation Delayed by navigating to the "Hot Topics" menu.

How does this impact your employees?

The attached two charts illustrate the EGTRRA changes and how delayed implementation of this provision will impact participants of the WRS and the WDC. (Note: Separate chart for WRS and WDC.)

If you have questions related to the Wisconsin Deferred Compensation Program, please call the plan's administrative office toll free at 1-800-257-4457 or (608) 256-6200, if calling from the Madison area.

If you have questions regarding the Wisconsin Retirement System, please contact the ETF Employer Communication Center at (608) 264-7900.

WISCONSIN RETIREMENT SYSTEM (WRS)
  2002 EGTRRA CHANGE IMPACT OF DELAYED EFFECTIVE DATE
NEW ROLLOVER PROVISIONS Eligible distributions from the WRS can be rolled into a Section 403(b) tax sheltered annuity plan or Section 457 deferred compensation plan. This is in addition to the current (pre-EGTRRA) ability to roll these distributions to an individual retirement account (IRA), Section 401(a), and Section 401(k) retirement plan account. Participants who choose to roll their eligible WRS distribution into a 403(b) or 457 plan could be subject to state income tax on the rollover amount if Wisconsin income tax laws are not amended before the end of 2002 to recognize this transaction as a rollover.
  The investment in contract (IIC) of the WRS account, which is the amount of after tax contributions that have been made to the WRS, can be rolled (as a direct transfer) into the same accounts that can accept the pre-tax contributions. Under pre-EGTRRA laws, participants who wish to roll their WRS distribution receive the IIC balance as a separate check that cannot be transferred into another account. Until the statutes are amended to conform to EGTRRA, state income tax laws do not recognize this as a rollover transaction. Therefore, any investment earnings that are applied to the IIC rollover amount could be subject to state income tax.
  Spouse beneficiaries will be eligible to roll death benefit distributions into their own IRA, qualified plan account as well as their 403(b) or 457 plan account. Today, they can only roll this benefit amount into a separate IRA account. State statutes would not recognize this as a rollover transaction and the spouse beneficiary may be subject to state income tax on the distribution.
CONTRIBUTION AND BENEFIT LIMIT PROVISIONS The maximum total employee and employer contribution that could be made to the WRS increased from $35,000 or 25% of compensation, whichever is less, to $40,000 or 100% of compensation. The increased limits will not be implemented for the WRS until the state income tax laws are amended to recognize the EGTRRA changes. Participants wishing to make after tax additional deposits to the WRS will need to calculate the maximum amount that can be contributed based on the 2001 pre-EGTRRA limits ($35,000 up to 25% of compensation).
  The annual maximum WRS formula benefit is increased from $140,000 to $160,000 for 2002. The delay of implementing this increased benefit amount will have little (to no) impact on WRS participants today as there have been no formula benefits that have been reduced because of the $140,000 benefit limit.
  The annual income that can be used to calculate a WRS formula benefit (which is reported by the employer) increased from $170,000 to $200,000 in 2002. Since employers do not report income for 2002 until 2003, there will be no impact to participants on the delayed implementation date of this increased limit if state income tax laws are amended before the end of 2002.

 

WISCONSIN DEFERRED COMPENSATION PROGRAM (WDC)
  2002 EGTRRA CHANGE IMPACT OF DELAYED EFFECTIVE DATE
CONTRIBUTION LIMITS The maximum annual deferral amount to a Section 457 plan was increased from 33 1/3 of includible compensation** up to $8,500 per year to 100% of compensation up to $11,000 in 2002. The maximum amount that can be deferred during the catch-up period was also increased from $15,000 to 2 times the annual maximum (or $22,000 in 2002). Until the state income tax laws are amended, you will not be able to defer more than the current maximum of $8,500 or 25% of taxable income; whichever is less, to the WDC. If you have increased your deferral to take advantage of the increased EGTRRA limits, you can maintain your deferral amount until you reach the pre-EGTRRA limit. If the Wisconsin laws are not amended, you may be required to stop your WDC deferrals once you reach the annual maximum limit.
  If you participate in more than one retirement savings plan, the coordination of deferrals with other plan types [Section 403(b), a 401(k), a SEP or a SIMPLE plan] was repealed. If you participate in more than one plan type, under Wisconsin income tax laws you must continue to coordinate the contributions between the plans. If you exceed the limits imposed in 2001, the amounts contributed in excess of this limit may be subject to state income tax if Wisconsin laws are not amended to conform to EGTRRA. If you do not have sufficient state income tax withheld from your paycheck, you may also be subject to a state income tax penalty.
  EGTRRA offered an additional contribution opportunity to participants who are age 50 and older. In 2002, this contribution limit is $1,000. You cannot make this older worker contribution to the WDC during a year that you use the 457 catch-up. This additional deferral opportunity will not be offered in the WDC until state income tax laws are amended.
** Includible compensation is calculated by deducting any pretax contributions to any benefit/savings plan before determining the 33 1/3 percent of income. This normally equals approximately 25% of taxable income.

 

WISCONSIN DEFERRED COMPENSATION PROGRAM (WDC)
  2002 EGTRRA CHANGE IMPACT OF DELAYED EFFECTIVE DATE
DISTRIBUTION OPTIONS EGTRRA repealed the distribution rules that required you to elect:
  • a distribution date within 60 days after separation from service that can only be changed one-time to a later date
  • a form of payment and maintain this same payment option until your account balance is depleted
  • a form of payment that does not have substantially increasing payments.
Until state laws are amended, if you elected a distribution date or are receiving payments from your account, you will not be able to:
  • cancel your current elected distribution date, however you will be able to postpone your 2002 distribution date to a later date, unless you have already used your one-time change option
  • change the form of distribution that you are currently receiving from the WDC
  • select a distribution option that has substantially increasing payments

Note: If you were expecting to increase your payments in 2002 and this delay will now cause you a financial hardship, please contact the administrator for information on the emergency withdrawal provision.
  EGTRRA provided an opportunity for you to roll your eligible WDC distributions into an IRA, a 401(k) and a 403(b) and/or to roll dollars distributed from these plans into the WDC. Eligible distributions are single or partial lump sum payments and periodic payments that will liquidate your account in 10 years or less. The WDC will not accept dollars rolled-in from another plan type until the state income tax laws are amended. As to eligible distributions that you roll to another plan or IRA, you need to be aware that these amounts may be subject to state income tax for 2002.

 

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