Compliance December 16, 2011

IRS Saver’s Credit Helps Workers Save for Retirement

December 16, 2011 (PLANSPONSOR.com) – The Internal Revenue Service (IRS) has issued a reminder for taxpayers to take advantage of the saver's credit for 2011. 
 
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The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2011 tax return. People have until April 17, 2012, to set up a new individual retirement arrangement or add money to an existing IRA and still receive a credit for 2011. However, elective deferrals must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees and the Thrift Savings Plan for federal employees.

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The saver’s credit can be claimed by:

•  Married couples filing jointly with incomes up to $56,500 in 2011 or $57,500 in 2012;

•  Heads of Household with incomes up to $42,375 in 2011 or $43,125 in 2012; and

•  Married individuals filing separately and singles with incomes up to $28,250 in 2011 or $28,750 in 2012.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000—$2,000 for married couples—the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

•  Eligible taxpayers must be at least 18 years of age;

•  Anyone claimed as a dependent on someone else’s return cannot take the credit;

•  A student cannot take the credit. A person enrolled as a full-time student during any part of five calendar months during the year is considered a student; and

•  Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2011, this rule applies to distributions received after 2008 and before the due date, including extensions, of the 2011 return. Form 8880 and its instructions have details on making this computation.

The saver’s credit was started in 2002 as a temporary provision. It was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annualy to keep pace with inflation. For more information on the credit, visit www.IRS.gov. 

Administration December 16, 2011

PERS Study Examines All Facets of Miss. Pension Program

December 16, 2011 (PLANSPONSOR.com) – The Mississippi Public Employees’ Retirement System (PERS) Study Commission released a report with recommendations to protect the plan. 
 
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The Commission, created by Mississippi Governor Haley Barbour in August to study the state’s retirement system, created a report offering recommendations, including several investment, management and policy changes to protect the longer-term solvency of the state’s public pension system. The report also includes a legal analysis of benefit modifications.

The PERS Study Commission reviewed nearly all facets of the state’s retirement program. Some of the report findings include:

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•  The PERS Board should reconsider lowering its investment return assumption from 8% to 7.5% as recommended by PERS’ own actuary, Cavanaugh MacDonald. Over the last 10 years, PERS has achieved a 5.41% investment return. Many states are lowering their investment return assumptions to more accurately reflect market conditions.

•  The Legislature and/or PERS Board should continue studying the issue of adding a defined contribution component in the state’s overall retirement program. There is no recommendation that PERS be converted to a defined contribution plan. 

•  The Legislature should consider revising the make-up of the PERS Board to include more financial subject matter experts and include non-participant taxpayer members.

•  While the ultimate determination of the legality of any changes to PERS will rest with the state judicial system, the legal subcommittee believes the following modification tiers are allowable: new hires are subject to any new standards of retirement; current employees are subject to changes for future accruals, but no changes to benefits already earned for previous service; and retirees are only subject to changes in future accruals of the COLA.

 Retirement Age and Tiers for Drawing Benefits 

The report recommends the Legislature should provide that 62 is the normal retirement age with the following tiers for drawing retirement:

•  Eligible to draw full retirement at age 62 if vested;

•  Eligible to draw full retirement at age 55 with 30 years or more of service, but with no cost-of-living adjustment until age 62; or

•  Eligible to draw an actuarially reduced benefit before age 55, after completing 30 years of service.

Implementing these changes (effective for current members’ future service and all new hires) would:

•  Decrease the employer contribution rate by 1.61%;

•  Increase the plan’s funded status to 64%; and

•  Produce a cost-savings of $92.8 million.

COLA

The report found the COLA is one of the costliest benefit provisions in the PERS plan, accounting for an estimated 25% of the plan’s payout during a single year. The current COLA is 3% simple until age 55; the COLA is compounded after age 55. 

A statutorily fixed cost-of-living adjustment does not provide a mechanism for ensuring COLA payments track inflation. 

•  For example, PERS beneficiaries received at least a 9% (or higher) COLA from 2008-2011. During this same time period, inflation rose half that amount (4.54%) based on the latest Consumer Price Index (CPI) data available. 

•  Additional study by the actuarial consulting firm GRS found PERS pays out approximately $10 million more in COLA benefits each year than it would if the COLA program were indexed to the CPI. This means some members are, on average, receiving more in COLA than they actually lost through inflation.

The Study Commission did not recommend elimination of the COLA or any changes to the current option to take the COLA as a lump sum payment. However, the Commission recommends freezing the COLA for three years and thereafter tying the COLA to the CPI with a cap of  3%. (For retirees, COLA payments would continue but just not increase for three years. For individuals not yet retired, no COLA would be received for three years after retirement.) Implementing these changes for future accruals of current members and retirees, as well as all new hires, would result in:

•  Reduction in contributions by 2.12%;

•  Estimated funded status of 67%; and

•  Reduction in first year employer contributions of $122.2 million.

Other recommendations include lowering the vesting period from eight to four years and continued study of SLRP (since the Legislature must address the question of whether it’s appropriate to have an additional benefit for members of the Legislature and the Lieutenant Governor).

"Mississippi has a retirement plan that is underfunded by more than $12 billion – a figure that has only worsened over the past decade despite hikes in taxpayer and employee contributions," said Governor Haley Barbour. “In 2001, PERS had a funded status of 88% of assets needed to fund its liabilities; today, that level has dropped to 62%, far below the level recognized for such plans. Taxpayers are putting in about 50% more than they once were, but the system continues to fall farther behind. We must reverse this trend to protect our retirees and taxpayers future.

"The PERS Study Commission has presented reasonable recommendations, and I appreciate their hard work," he added. "Neither I nor the Commission can implement any changes. It is up to the next administration and the Legislature to reform the system and ensure PERS remains solvent."

The Commission is comprised of current and former public employees, businesses leaders and individuals with expertise in pension issues.

To view the full study results, visit http://www.governorbarbour.com/features/PERS/PERS%20report%2012.2011.pdf. 

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