HomeMy WebLinkAbout1991-06-25; City Council; 11214; ESTABLISHMENT OF A QUALIFYING RETIREMENT STSTEM FOR PART-TIME EMPLOYEES AND COUNCIL MEMBERS NOT PARTICIPATING IN PUBLIC EMPLOYEES' RETIREMENT SYSTEMAB # .m. T% ESTABLISHMENT OF A QUALIE’YING RETIREMENT
DEPT. HR RETIREMENT SYSTEM
MTG. 6/25/91 SYSTEM FOR PART-TIME EMPLOYEES AND COUNCIL
MEMBERS NOT PARTICIPATING IN PUBLIC EMPLOYEES’
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f’ CIT~F CARLSBAD - AGEN~BILL
RECOMMENDED ACTION:
City Council adopt Resolution No. 71 - (5 I
of a qualifying retirement system for part-time employees
ITEM EXPLANATION:
Effective July 1, 1991, Section 11332 of the Social Security Act ar
Section 3121 of the Internal Revenue Code have been amended, and
now mandates that state and local government employees not
covered by a “qualifying
Social Security (FICA).
Part-time employees.
In early April, 1991, the Treasury Department issued guidelines
clarifying how an alternative retirement plan could qualify as an
exception to coverage under FICA. The Guidelines specifically
require :
approving establishment
retirement plan,” must participate in
This change has directly affected the City’
0 A minimum contribution to participants account equal to 7.59
of the employee’s salary
0 Immediate and full vesting of participant’s account
Additionally, the guidelines require that the City establish its inti
to implement a “qualifying retirement plan” before July 1, 1991.
the plan commences after July 1, retroactive contributions on be!
of qualifying employees are required.
In effort to fully evaluate the City’s options staff has conducted E
thorough analysis of the fiscal impact and the advantages and
disadvantages to the City and its employees of various “qualifyin!
retirement plans.” The results of the analysis conclude that the
most advantageous alternative to FICA would be the utilization of
Section 457 Deferred Compensation Plan as a “qualifying retirem
plan.”
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A 457 Plan arrangement is recommended for the following reasons:
b Ease of ad m in is t rat io n
Little or no direct administration cost to the City
Minimizes the fiscal impact to the City
Minimizes the fiscal impact on employees take-home pay
Enables the City to predict and control costs
Offers a definite benefit to the employee
b
b
b
b
Participation in a Section 457 Plan cannot be mandatory. Should ar
employee prefer to participate in Social Security , that option is
available. For some employees it may be advantageous to
participate in Social Security.
their current earnings represent a significant portion of their
highest 40 quarters and they are less than 20 years from normal
retirement age.
Several companies were evaluated to determine their ability to, an
interest in, administrating a Section 457 Plan as an alternative to
FICA. Companies evaluated included the two current administrato
of the City’s deferred compensation plan, ICMA and Aetna Life
Insurance Company, and Lincoln National Life Insurance Company
(Lincoln). To date, Lincoln is the only company to state that they
are prepared to administer a “qualifying retirement plan” for the
City’s part-time employees.
administer a 457 Plan for part-time employees, but the cost to do
so has not been established.
Contributions to the participant’s account would be via payroll
deduction. As required by the guidelines, these contributions mus
be immediately and fully vested.
Any employee electing not to participate in the 457 Plan will be
subject to FICA effective July 1, 1991.
may always elect to participate in FICA at a later date.
However, this would only be true if
ICMA has announced they will
Participants in the 457 P
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FISCAL IMPACT:
Based upon an estimated payroll of $1.4 million for part-time
employees, the estimated cost to the City would range from $73,00
if all part-time employees participated in a Section 457 Plan, to
$107,000 if all part-time employees were covered by FICA. The
ultimate cost will depend on what choices are made by part-time
employees on an individual basis. Funds to pay retirement costs fo
part-time employees are included in the 1991 -92 operating budget.
The establishment of a retirement plan separate from the PERS
system covering all full-time employees carries certain fiscal risl
and responsibilities. First, the City mitigated these risks by a)
providing each part-time employee the opportunity to elect to be
covered by the FICA retirement system or the optional 457 plan
retirement program. The employee has the power and ability to
make the final selection.
Also, in selecting the 457 plan option that would be offered to the
employees the City had to consider a variety of factors. Exhibit C
attached to this agenda bill summarizes these factors. Cost to the
City and the employee were certainly important considerations.
However, staff also considered several other factors such as the
current availability of the plan and the financial risks associated
with other options.
1991 may be of interest at a later date, but our initial decision to
offer a retirement plan must be made prior to the end of June. In
addition, staff has had to become satisfied that any proposed plan
will have the ability to meet all IRS tests for a “qualifying” plan
when the rules are finally distributed later this year.
One final concern is that any plan that we offer should be reasonat
sound financially. Of the four alternate plans that are immediate1
available, the 457 plan comes closest to minimizing these risks.
That is not to say that the 457 plan is risk free. On the contrary,
the recommended plan is provided through an insurance company
A plan that becomes available after July 1,
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that is operating in a volatile market. The health of the insurance
industry on a whole is no better than the health of the banking and
financial industry in general. Lincoln National has an excellent
rating from all insurance company rating services at this time.
However, the Council must retain full control over this plan
including the option to cease offering the Lincoln National program
and to transfer all assets, without charge, to another provider in thc
event the City is dissatisfied with the service, fiscal health or
rating of the company.
The staff's recommendation is to proceed with offering both the
FICA and 457 plan retirement program options with the
understanding that staff will report back to the Council if there is
any change in the IRS rules, fiscal condition of the providers, or
other viable options presented to the City at a later date.
EXHIBITS:
1.
2. Attachment A
3. Attachment B
4. Attachment C
Resolution No. q/- 19 /
4.
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RESOLUTION NO. 91-191
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
’ CALIFORNIA, FOR APPROVING ESTABLISHMENT OF A QUALIFYING
RETIREMENT SYSTEM FOR PART-TIME EMPLOYEES AND COUNCIL
MEMBERS NOT PARTICIPATING IN PUBLIC EMPLOYEES RETIREMENT
SYSTEM.
WHEREAS, Section 11 332 of the Omnibus Budget Reconciliation
Act of 1990 (OBRA) amended the Internal Revenue Code under
Section 3121 to mandate coverage of state and local government
employees under Social Security if they are not covered by a
qualifying retirement system; and
WHEREAS, the City of Carlsbad has in its employ part-time
employees; and
WHEREAS, the City Manager recommends and the City Council
concurs, that the City establish a qualifying retirement system
through the use of a 457 Plan as established under Section 457 of
the Internal Revenue Code.
NOW, THEREFORE, BE IT RESOLVED by the City Council of the
City of Carlsbad, California, as follows:
1. That the above recitation is true and correct.
2. That in compliance with OBRA of 1990, the City Council
authorizes and directs the City Manager to establish a 457 Plan as I
qualifying retirement system for part-time employees and council
members not covered under PERS.
3.
execute Participation Agreements with eligible officers, officials
and employees, and all other Documents and Agreements necessary
to implement and administer the Plan.
That the City Manager is hereby appointed to administer and
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PASSED, APPROVED, AND ADOPTED at a regular meeting of the
Carlsbad City Council held on the 25th day of June I
1991, by the following vote, to wit:
AYES:
NOES: None
ABSENT: Council Member Nygaard
Council Members Lewis, Kulchin, Larson, and Stanton
&4&---- CLAUDE A. L WIS, Mayor
ATTEST:
&&-&:rad ALETHA L. RAUTENKRANZ, 7 City Cler __-_-
(SEAL)
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e ATTACHMENT A.
THE CITY OF CARLSBAD
FISCAL IMPACT OF RETIREMENT SYSTEMS
a
FOR PART-TIME EMPLOYEES
Estimated Part -Ti me Pay r o I I : $1,400,000
Estimated number of Part-Time in a year: 400
Citv's Cost EE Cost
$107,10 -------- -------- $107,100 --_____---_ 1. FICA Cost (1) -----------
2. PARS
-PARS Contribution @ 3.75% (City & EE) $52,500 $52,5C
-Medicare Rate @ 1.45% $20,300 $20,3r
$72,8C
-Administration Fee - first year (2) $9.600
$82,400 -------- -------- ----------- ----------- TOTAL
3. PERS (Determined to be non-qualifying)
-Employer rate @ 9.497%; EE @ 7% (3) $1 32,958 $98,0(
-Medicare Rate @ 1.45% $2o.300 $20.3(
$1 18,3( - - - - - - - - -------- $153,258 ----------- ----------- TOTAL
4. 457 Plan/Lincoln National
-Contribution @ 3.75% (City & EE) (4) $52,500 $52,5(
-Medicare Rate @ 1.45% $20,300 $20,31
-Administration Fee &Q
$72,8( $72,800 -------- -------- ----------- ----------- TOTAL
5. 457 Plan/lCMA
-Contribution @ 3.75% (City & EE) (4) $52,500 $52,5(
-Medicare Rate @ 1.45% $20,300 $20',3
&Q $7.7
$72,800 ' $80,5
-Ad m in i s t ra t io n Fee (est i rn a t e)
-------- -------- ----------- ----------- TOTAL
NOTES:
(1) Includes current Medicare rate of 1.45% which is required of all participants.
(2) Estimated: .25% of Assets; 2% of Contributions; $25 Annual charge;
$1.50/EE Monthly fee. Additional $1 575 to set up.
(3) Rate effective 7/1/91; City rate likely to vary/rise
(4) The City's portion increases Employees pay. Total contribution
is via payroll deduction of 7.5%.
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e AITACHMENT B.
THE CITY OF CARLSBAD
CITY AND EMPLOYEE CONTRIBUTIONS
m
SOCIAL SECURITY AND SECTION 457 PLAN
Em p I o yees'
City's Rate Rate of
of Contribution Contribution
1. FICA (Social Security):
a. Old Age, Survivors and
Disability Insurance (OASDI) . . . . 6.20% 6.20%
b. Hospital Insurance (HI). . . . 1 .45% 1.45%
7.65% 7.65% ------- ------- ------- ------- TOTAL
2. Section 457 Plan as "Qualifying Retirement Plan":
a. Proposed Contributions. . . . 3.75% 3.75%
b. Hospital Insurance (HI). . . . 1.45% 1 .45%
5.20% - - - - - - - - - - - - - - 5.20% ------- -------
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