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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: What is a special pay plan?
Answer: Special pay plans are a unique category of pre-tax retirement savings programs available to government entities and certain non-profits.
Normally, compensation paid to employees is taxable earned income that is reported on the W-2 form. When an employee retires, amounts that are paid in cash due to things like accumulated sick pay or vacation pay are taxable to the employee.
Under a special pay plan, that compensation can be converted to an employer defined contribution plan at the time of retirement. An employee’s accumulated sick leave, vacation pay and other retirement payments can be eligible for deposit into a sick pay plan—deferring the income tax hit associated with the payments.
Special pay plans are in the nature of Section 401(a), Section 403(b) or Section 457(b) plans, depending on the employer’s choice. The overall Section 415 contribution limit of $50,000 (2012) applies to contributions to such plans. For certain special pay plans, the Section 415 limit may be reduced by employee elective deferrals to other qualified plans.
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