MEMORANDUM

DATE: 08-20-02

TO:  Dr. David Bosserman, Interim Vice-President for Business and Finance, and Controller

FROM:  Greg Fox, Chair, Flexible Compensation Benefits Committee

SUBJECT:  Recommendation for 457(b) Retirement Plan

The Flexible Compensation Benefits Committee is recommending OSU's adoption of an IRC , Section 457(b) plan. A Section 457(b) Plan would offer an additional means for tax sheltering federal and state income tax with earnings tax-deferred until retirement. This would be in addition to the current options available under IRC Section 403(b) plans. Previous required offsets for participation in both plans are no longer in effect. Thus, an OSU employee could contribute approximately $11,000-$12,000 more to retirement. This could increase individual contributions to as much as $24,000 per year. The attached information sheet summarizes key points of this type of retirement vehicle.

Section 457(b) Retirement Plans were significantly altered in the Economic Growth and Tax Relief Reconciliation Act of2001 (EGTRRA) and proposed regulations were released in May 2002. Many comparable higher education institutions have already adopted plans.

Offering a 457(b) plan does require additional administrative oversight. A plan document is required and must be filed with the IRS.  In addition, there is the administrative processing of salary reduction agreements and providing supporting services to employees.  The benefits to individual employees, however, are significant.  We estimate approximately 200 employees currently contribute the maximum allowable amount to a 403(b) plan.

We would hope such a plan could be in place by the beginning of the next calendar year.  If you have any questions, please let me know.

457(b) Deferred Compensation Plans

Possible Addition to OSU's Offerings

 ·   Similar to our existing TDA plan. Use a Salary Reduction Agreement form. Tax shelters federal and state income tax. Earnings are tax-deferred.

·   New laws now make it possible to maximize contributions on our TDA plan and also allow before-tax contributions to a 457(b). The former provision
     requiring offsets of the two types of plans is no longer in force.

·   Limits this year are $11,000 or $12,000 if age 50+. The previous limit was $8,500.

·   Catch-up limits available of up to twice the regular limit if the employee is within 3 years of retirement and has not maximized contributions in past years. Unlike
     the TDA 403(b) plan, there is no 15-year catch up provision.

·   No 10% tax penalty if withdrawing prior to the age 55 or age 59 1/2 rules.

·    A negative consideration when comparing the plan to the TDA 403(b) plan is the fact that at this point in time, no loan provisions are available.

·    Unlike the TDA 403(b) plan, hardship withdrawals would probably not be available for the 457(b) plan.

·   The IRS requires a Plan Document for a 457(b) plan; a 403(b) plan does not.

·   Recent legislative changes have resulted in greater flexibility for rollovers, resulting in enhanced portability. Rollovers can now occur between 403(b), 401(a),
     401 (k), and 457(b) plans. However, rollover of 457(b) funds to another plan type will lose 457(b) status, which would likely make the funds subject to the 
    10% tax penalty rules.  457(b) accumulations can be rolled over to an IRA.