New Rules Impacting the Supplemental Retirement and Severance Pay Arrangements of School Corporations

Many school corporations have successfully "restructured" their supplemental retirement and severance pay arrangements over the last few years into qualified retirement plans under Internal Revenue Code Sections 403(b), 401(a) and 457(b). However, school corporations that did not bond for unfunded retirement obligations or were not able to reach agreement with their bargaining units may not have restructured these arrangements. Even those school corporations that did restructure their supplemental retirement and severance pay arrangements may not have done so for all employees or for all benefits - for instance, school corporations may have left employees who were under a certain age or retired before a certain date under the old arrangement, or may have restructured benefits for teachers and not for administrators or non-certificated employees, or may not have been able to reach agreement with their bargaining units as to a particular benefit, such as sick days.

Regardless of the reason, many, if not most, school corporations sponsor some type of supplemental retirement and severance pay benefit that is not paid through a qualified retirement plan. Effective January 1, 2005, a new federal tax law applies to all "non-qualified deferred compensation arrangements" - including these supplemental retirement and severance pay arrangements sponsored by school corporations. The new law contains rules restricting employees' ability to elect the form or timing of benefit payments, to change or accelerate these elections once made, and an employer's ability to distribute benefits. There are significant penalties for noncompliance with this new tax law.  Go here for a chart summarizing this new tax law and its impact on school corporations.  Go here for a recent Ice Miller presentation entitled "Supplemental Retirement and Severance Pay - How to recognize if your school - and your employees - have problems under the tax code and other federal laws."

If you have questions about the new law and how it may impact your organization, please call or e-mail your contact in Ice Miller's Employee Benefits Group. If you do not have a contact at Ice Miller, please contact Mary Beth Braitman, Tara S. Sciscoe, or Lisa Harrison, or visit us at www.icemiller.com to view a complete listing of our attorneys.