Overview of Deferred Compensation Plans in New York State

Public employers in New York State may sponsor deferred compensation plans for their employees as permitted by Section 457 of the Internal Revenue Code. Section 457 deferred compensation plans permit employees to defer a portion of their salary earnings on a pre-tax basis and, beginning in 2011, to a Roth 457 account within the deferred compensation plan.

Pre-tax deferrals provide that the salary amount that is deferred is not included in the employee's federal or New York state taxable income in the year it is deferred. The practical result of pre-tax deferrals is that the amount of salary that is deferred is greater than the employee's reduction in take-home-pay because federal and New York state income taxes are not withheld from the amount that is deferred.

Roth 457 contributions are deferred from the employee's salary on an after tax basis. Income taxes are paid on this portion of the deferral in the year of the deferral. However, distributions of the amount deferred to the Roth 457 portion of an employee's account will be exempt from additional income taxation. Earnings related to the distributions from a Roth 457 account that are deemed to be a "qualified distribution" will also be exempt from additional income taxation.

Section 457(b) of the Internal Revenue Code and related IRS Regulations govern public employer deferred compensation plans and outlines the general requirements to sponsor a plan, establishes the maximum salary amount that may be deferred in each year, when the employee has access to his or her salary deferrals, the ability to roll assets between eligible retirement plans and deferred compensation plans, and other technical requirements.

Section 5 of the State Finance Law authorizes deferred compensation plans in New York State and established the New York State Deferred Compensation Board. The Board enacted Rules and Regulations related to deferred compensation plans in the State. An explanation of Section 5 and the Board's Rules and Regulations follows.

Section 5 of the State Finance Law

Created a deferred compensation board to consist of three members, one each to be appointed by the governor, Majority Leader of the Senate, and the Speaker of the Assembly (subd. 1)
Required the deferred compensation board to establish a deferred compensation plan for all state employees (subd. 2.a)
Required the deferred compensation board to establish rules and regulations regarding the standards for selecting investment providers to deferred compensation plans (subd. 2.c)
Permits every public employer to establish its own deferred compensation plan for its employees in accordance with the rules established by the board or participate in the plan for state employees. (subd.3.a)
Provided that employees represented by a union may participate in a deferred compensation plan after participation is authorized in a collective bargaining agreement (subd. 4 and 5)

Rules and Regulations of the New York State Deferred Compensation Board

The Rules and Regulations of the New York State Deferred Compensation Board (Sections 9001 – 9006 of the Official Compilation of Rules and Regulations of New York State) pertain to the governance and general administration of deferred compensation plans in New York State. These Rules apply equally to the New York State Deferred Compensation Plan and all deferred compensation plan sponsored by local governments in the State.

The remainder of this document will review the Rules and Regulations of the New York State Deferred Compensation Board and address questions related to the Rules.

Section 9000 – Establishment of a Deferred Compensation Committee

This section provides definitions to commonly used terms that exist throughout the Rules. The following definitions are of particular interest.

Deferred Compensation Committee – The Rules require each local government that sponsors a local deferred compensation plan to appoint a "committee, board, entity or an officer" to carry out the responsibilities of administering the local deferred compensation plan. The Rules do not specify the size or composition of the committee, board or entity.

It should be noted that it is permissible to appoint a single individual (an officer) to perform the responsibilities of the Committee.

The committee is responsible to "to act on behalf of the local employer under" a plan established by a local employer. Some of the responsibilities of the deferred compensation committee include administering Requests for Proposals for financial institutions, a plan trustee, administrative service agency, auditor and other plan services and contracting with those service providers.

Section 9001.2 – Plan Selection

This section states that a local government may offer a deferred compensation plan by either

Participating in the State Plan,
Adopting the Model Plan, as prepared by the State Board, or
Adopting Another Plan, which complies with all the requirements of the Board's Rules and Section 457 of the Internal Revenue Code.

A local government, however, may only sponsor one deferred compensation plan.

The State Plan is the deferred compensation plan sponsored by New York State for its employees and the employees of participating employers. A local government that wants to participate in the State Plan adopts a resolution or other legal document and files it with the State Plan. The employees of the participating employer will then be permitted to take advantage of all Plan investment options and resources.

A Model Plan is a deferred compensation plan written by the State Board for use by a local government. A deferred compensation plan is an employer-sponsored benefit governed by the Internal Revenue Code. The Code requires a written plan document describing the administrative procedures that the plan sponsor will follow. The Internal Revenue Service will review the plan document of a plan sponsor to ensure that it conforms to Section 457 of the Code and, if it does, issue a determination letter to that effect. The State Board submits the Model Plan to the Service to obtain a determination letter applicable to it. Therefore, a local government that uses the Model Plan will not have to seek its own determination letter to assure that its plan document is in compliance with Section 457 of the Code.

The third alternative available to a local government is the adoption of "another plan." This requires the sponsoring local government to create its own plan document and apply to the Service for a determination letter.

9002.1 – Trust Requirement

This section requires that all assets of a Deferred Compensation plan are to be "held in trust for the exclusive benefit of plan participants and their beneficiaries," may be used "only to pay plan benefits and defray reasonable expenses of administering the plan," and "cannot revert to the State or local employer until all plan benefits have been paid to plan participants and beneficiaries in accordance with the terms of the plan."

This section establishes the requirements that must be met in order to qualify as a trust agreement.

9002.2 – Filing Requirements

Each local employer that adopts a model plan or another plan must file specific documents relating to the plan with the President of the New York State Civil Service Commission when

The deferred compensation plan is initially established
There is a change to the model plan document or another plan document
A new contract is entered into with one or more of the service providers to the plan.

The documents that must be filed are:

A copy of the plan document
A copy of the trust agreement (if a copy of the trust agreement was submitted previously, a copy of the letter notifying the trustee of the new amendment is sufficient);
An opinion signed by the local employer's chief executive officer and chief legal officer stating that its deferred compensation plan and trust agreement meet the requirements of Section 457 and all other applicable federal, State and local laws, the Board Regulations, and that all required approvals of any local governing body or officer have been obtained;
The name of each service provider (trustee, independent consultant, financial organization, certified public accountants, and administrative service agency) to the plan and a certification signed by the local employer's chief executive officer and chief legal officer stating that each service provider has been selected as required in Board's Regulations;
Evidence of bonds and insurance required by the Board's Regulations; and
Evidence that each service provider to the plan has assumed responsibility and has indemnified the plan from any action brought against it as a result of acts or omissions of the service providers together with the reasonable costs of litigation.

When a committee adopts amendments to the model plan or another plan, the local employer is required to file only those documents that have changed since the most recent filing. The local employer is to file an affidavit attesting to those documents that are the same.

9002.2(b) - Acceptance of Salary Deferrals

Section 9002.2(b) requires a written acknowledgement from the President of the Civil Service Commission that all documents have been received prior to the acceptance of any deferrals from plan participants.

9002.2(b) – Amendments to the Model Plan

A local government that has adopted the model plan may not make any amendments to the model plan document except those authorized by the Board because the model plan and its amendments have received a determination letter from the Service. Adopting amendments other than those approved by the Board may not conform to the Internal Revenue Service Regulations and, therefore, are not covered by the determination letter.

9002.2(c) - Another Plan Requirements

A local government that adopted another plan must file either (i) a ruling or determination from the Service that the plan meets the requirement of Section 457 of the Code or (ii) an opinion of the local government's legal counsel that the plan meets the requirements of Section 457 of the Code.

9003 – Provisions Relating to Contracts with Plan Service Providers

This section requires all services provided to a deferred compensation plan be granted after a competitive request for proposal procedures. Services that may be contracted include the plan trustee, independent consultant, financial organization, certified public accountants, administrative service agency, and legal.

However, the plan need not conduct a request for proposal process for

Administrative services if the plan determines that the trustee or financial organization can perform this service
Independent consultant services if the plan determines that the board or committee can perform this service
Trustee services if the committee or board is to serve as the trustee

A committee may select a certified public accountant in conjunction with a Request for Proposals issued by the public employer that sponsors the plan provided that the scope of services includes auditing of the plan, that the committee adheres to the selection criteria included in Section 9003.3 of the Regulations, and the auditor is selected independently by the committee.

A board or committee may select financial organizations to provide investment services following a search procedure where a plan selects its investment services independently from its administrative service agency, trustee, auditor, or consultant services. The search must be conducted by an independent consultant selected by the board or committee through a request for proposal procedure. The board or committee must direct the investment consultant as to the classification or sub-classification of the investment service and the minimum number of candidates to be recommended. The investment consultant must adhere to the qualification guidelines in the Rules in conducting the search.

Section 9003.2 – RFP Procedures

This section requires that the plan sponsor publish an announcement in the State Register and the official newspaper of the of the plan sponsor requesting competitive proposals. The notice must be published at least 90 prior to the date that the contract will be awarded.

Section 9003.3 – Criteria for Selection

The board or committee shall use the following criteria when selecting a service provider:

The stability of the service provider as evidenced by its experience or investment record over a substantial period of time
The ability of the service provider to comply with the requirements of the plan, section 457 and the Board's rules
Experience with eligible deferred compensation plans and other qualified retirement plans
With respect to financial products, the variety and types of investment products and the ability to transfer such products offered by a different financial organization
The quality and soundness of services
Overall cost efficiency
Overall quality and scope of the services to be provided.

All proposals from prospective service providers must be in writing and

Acknowledge that the proposal complies with the requirements of the Board's Rules
Clearly indicate all direct and indirect fees
Fully disclose any sponsorship or similar relationship. Relationships are precluded unless it can be demonstrated that the arrangement is cost effective. (Section 9003.3(b))

Before any service agreement becomes effective, the chief executive officer and the chief legal officer of the plan sponsor must certify to the President of the Civil Service Commission that the selection was made in accordance with the Board's rules. (Section 9003.3(d))

Section 9003.4 – Diverse Investment Options

This section requires the deferred compensation committee to provide the opportunity for participant assets to be invested in one or more of a broad range of investment alternatives, including fixed income and equity investments.

Section 9003.5 – Contract Limitations

Contracts

Must be awarded on a competitive basis.
Cannot exceed 5 years in length, however, contracts may be extended, for cause, by a maximum of two one-year extensions.
Cannot impose penalties or surrender charges for the transfer of assets or responsibilities upon the expiration of the contract.

A board or committee may enter into a contract not to exceed ten years with an administrative service agency, financial organization(s), and trustee where the plan selects such services independently from each other selection.

Section 9003.5 (b) – Contract Extensions

Contracts may be extended for up to two, one-year extensions when the committee determines, in writing, that an extension is in the best interests of the plan and approved by the committee by a vote. The initial one-year extension may only be granted only after the expiration of the initial term of the contract. A second one-year extension may be granted upon the completion of the expiration of the first one-year extension. The committee must describe in writing the reasons that the extension is in the best interests of the plan.

Section 9003.5(c) – Anti-delegation Clause

This section provides that a committee may not enter into an agreement that permits a service provider to select other service providers for the plan. However, a mutual fund or brokerage "window" arrangement is not considered a delegation of services and may be provided if it is not the sole investment alternative of the plan.

This section also permits a board or a committee to enter into an agreement with a financial organization to manage a stable income fund that authorizes the financial organization to invest in guaranteed investment contracts, wrap contracts, and other specific services.

Section 9003.6 – All Plan Providers to Act as Plan Fiduciaries

This section requires each plan trustee, independent consultant, administrative service agency and financial organization to certify that it is a fiduciary for the responsibilities it has assumed for the plan. Exempt from this rule are financial organizations that issue guaranteed investment contracts and mutual funds.

Section 9003.7 – Annuity Contracts and Life Insurance Policies are Precluded Investments

This section provides that investments in an annuity contract for a term of more than five years or is measured by one or more natural lifetimes or any life insurance or other contract providing traditional death benefits is prohibited in a plan.

Annuity contracts as investment vehicles are permissible if the term of the annuity contracts does not extend beyond the term of the contract with the investment provider. Section 9003.5(a) generally limits the contract term with all providers to five years. Section 9003.5(a), further, prohibits the imposition of surrender charges for the transfer of assets at the end of the contract term.

Section 9003.8 – Investment of Salary Deferrals

This section requires that all employee salary deferrals and investment instructions be transmitted to the plan trustee no later than two days after the payroll date. The trustee will invest all deferrals no late r than one day following receipt.

Section 9004.1 – Confidentiality of Plan Records

This section prohibits the use of any information obtained by a plan provider for any purpose other than plan administration of the plan. A plan provider cannot solicit or market any products or services that may be available from that provider. It further states that all participant information obtained by the plan provider shall be kept confidential and used exclusively for purposes of the plan.

Section 9005.1 – Financial Statements, Auditing, and Agreed Upon Procedures

This section requires the Board or committee of a plan with 100 or more participants to annually prepare or cause to be prepared a financial statement of net assets available for benefits in accordance with GASB Statement 32 and to have those financial statements audited by a certified public accountant.

This section also requires the committee of any plan with fewer than 100 participants to annually prepare or cause to prepare an unaudited financial statement of net assets available for benefits and engage a certified public accountant to conduct a review of the plan's activities and conduct an agreed-upon procedures report on specific administrative procedures. Those procedures will include a review of:

Account balances by investment option and in the aggregate.
Deferrals reported by the plan sponsor, by individual participant and in the aggregate.
Remittance of deferrals to the trustee in a timely manner.
Accounting of deferrals between pre-tax and Roth designated contributions.
Application of deferral limitations and payment of required minimum distributions.
Administration of regular distributions, unforeseeable emergency distributions, and loans.
Processing of deferral and asset allocation changes in a timely manner.
Disclosure of plan level and participant level fees to participants and allocation of such fees.
Notification to employees of the plan and enrollment opportunities.

The plan sponsor shall communicate to plan participants that the audit or agreed-upon procedures report is available for review. The audit or agreed-upon procedures of the plan are to be filed with the President of the Department of Civil Service no later than six months following the close of the plan year. The board or committee will appoint the firm of certified public accountants to conduct the annual audit or agreed-upon procedures report through an RFP process.

Section 9005.2 – Authority of Board and Committee

This section empowers the board or committee to terminate any service provider if the service provider is not performing its responsibilities required by the Board's Rules.

Section 9005.3 – Statements to Participants

This section requires the plan to provide each participant a statement at least quarterly, which will include the participant's account balance, interest in each investment option, and any other data required by the plan. The plan will also furnish written disclosure of all fees and expenses paid out of or charged against any plan assets, including fees and expenses deducted from any investment return and the allocation of the fees and expenses among participant's accounts.

Section 9005.4 – Bonding and Insurance

Each service provider and each outside agent that handles, holds, invests, maintains custody for or directs disbursement of funds or serves as a trustee must be bonded to protect the plan from loss resulting from fraud or dishonesty by such service provider. The bond may not be less than the value of the plan assets managed, administered or held by such provider, or $25 million, whichever is less. The board or committee may require a bond greater than this requirement.

If a member of the board or committee is the appointed trustee, the costs of the required bond will be treated as a reasonable expense of the plan and may be paid from the assets of the plan.

Section 9006.1 – Board Authority

This section provides the Board with the authority to investigate, hold hearings and take necessary actions against a plan when it is notified that a plan or contract is not in substantial compliance with the Board's Rules. The Board may take appropriate actions to ensure that the plan or service providers are acting in compliance with the Board's Rules, including the termination of a plan, contract, or agreement.

Section 9006.2 – Agreements Subject to Board's Rules

This section requires every contract or agreement to contain a provision that the contract is in conformance with the Board's Rules and that the plan document and the Rules are part of the contract.

Section 9006.3 – Exemptions to Board Rules

This section permits the Board to grant an exception to the Board's Rules in exceptional circumstances. A request for an exemption from a plan sponsor must be made in writing to the Board and contain a detailed reason for the exemption. Should the Board grant an exemption, it must describe the exceptional circumstances and the reason that the exemption is in the best interests of the plan. Where an exemption is granted by the Board, the remedy and administrative procedures of the plan must continue to be in accordance with the IRC, the plan documents, and the Board's fiduciary obligation.

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