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HomeMy WebLinkAboutMemo - FICA Alternative ProposalCITY OF MIAMI, FLORIDA INTER -OFFICE MEMORANDUM TO: Honorable Mayor and Members of the City Commission FROM: Daniel J. A I • is° Acting City Manger DATE: November 1, 2013 FILE: SUBJECT: FICA Alternative Proposal REFERENCES: ENCLOSURES: Attached for your review is the FICA Alternative proposal for all temporary, seasonal and part- time employees requested at the July 25th commission meeting. Please feel free to contact me with any questions you may have. Prospects of Implementing a FICA Alternative Plan for Part-time. Seasonal, and Temporary Employees I. INTRODUCTION On July 25, 2013, the City Commission requested the administration submit a report, within sixty (60) days, detailing the prospects of instituting a Federal Insurance Contributions Act ("FICA") alternative retirement plan (the "Plan") for part-time, seasonal, and temporary employees. In brief, the Omnibus Budget Reconciliation Act of 1990 ("OBRA") introduced into law Internal Revenue Code, §3121(b)(7)(F),1 which allows part-time, seasonal, and temporary employees to contribute to a private retirement plan instead of Social Security. Additionally, the law removes the employer's obligation to contribute to Social Security on behalf of the participating employees. Please note, participation in the Plan would not affect participation in Medicare; the employer must continue to pay Medicare tax. II. THE CITY'S VENDOR AND MEMBERSHIP REQUIREWNTS In terms of the overall legality, the City Attorney's office has advised that there is no legal impediment to implementing the Plan. With regard to a vendor provider, Resolution No. R-77- 224 approved the ICMA-RC Public Trust Fund Agreement as provided for in Ordinance 8610. On August 13, 2003, the City Attorney's office issued a legal opinion defining ICMA 457 Deferred Compensation Plan membership, specifically indicating that all individuals who perform services for the City, either as employees or as independent contractors may be members of the Plan. Therefore, if the City of Miami implemented a FICA alternative retirement plan as a defined contribution plan under Section 457 that meets IRC §3121 requirements, then all individuals who perform services for the City may participate under the current deferred compensation plan administered by either ICMA-RC or Nationwide. Furthermore, the City would not have to conduct a Request for Proposals process to seek a vendor for the subject Plan as the Plan administration is already within the scope of services provided in the City's contract for these services. However, it is strongly recommended that the City elect only one provider for the Plan. In order to assist in determining the most desirable provider, the City requested information from both ICMA-RC and Nationwide concerning their respective methods for implementing the Plan. While ICMA-RC offers the Plan through a 401(a) deferred compensation vehicle, Nationwide administers it through a 457(b). A 457(b) does not apply a ten percent (10%) penalty for early withdrawal, whereas a 401(a) does. In addition, Nationwide currently administers FICA Alternative Plans in the State of Florida while ICMA-RC does not; therefore, Nationwide would be recommended. The following is a brief desmiption of the history of social security coverage to public employees: "Mtatc and local government employees were excluded from social security coverage from 1935 (the date of the original Social Security Act) until 1950 because there was a legal question regarding the federal government's authority totax state and local governments. Beginning in 1951, states were. allowed to enter into voluntary agreements with the federal government to provide social security coverage to public employees. These agreements are called Section 218 Agreements because they are authorized by Section 218 of the Social Security Act "Internal Revenue Technical Guidelines for Employment Tax Issues. Prospects of Implementing a PICA Alternative Plan for Part-time. Seasonal, and Temporary Employees Ifl, FICA ALTERNATIVE PLAN DETAILS FICA taxes reduce an employee's wages 6.2% on an after-tax basis. Under the Plan, a 6.2% pre- tax contribution will be deducted from the employee's wages. The pre-tax feature of the Plan allows for participation in the plan with little to no impact on the employee's net paycheck. Employees earn a market rate of return on their investment and the principal will be protected. However, it is mandatory that eligible employees participate in this Plan should it be implemented. Additionally, an employee may designate a beneficiary of their account; the form of payment of benefits is lump -sum. An employee may also remain in the Plan upon separation from the City. IV. FICA ALTERNATIVE PLAN FISCAL IMPACT ESTIMATE The City currently employs six hundred eighteen (618) employees who would be eligible to participate in the Plan; two hundred thirty-four (234) full-time and twenty-three (23) part-time temporary employees; two hundred eighty-one (281) part-time regular and three hundred thirty- three (333) part-time seasonal employees. The estimated savings in the General Fund for FY 2013-14 will be $375,000. This is based on a budget of $8.29 million of Part -Time and Temporary Employee wages, an estimated start date of January 1, 2014 (nine months of the fiscal year), and mandatory usage of the FICA Alternative. The annualized amount is estimated at $500,000. It should be noted that some of -the above savings would be in Special Revenue and not General Fund as a portion of the wages paid to eligible employees is covered by the Special Revenue Fund. In some cases, almost a third of the savings realized by the implementation of the Plan is in Special Revenue, a source of funds which is significantly more restrictive on spending than the General Fund, V. FEASIBILITY OF IMPLEMENTING FICA ALTERNATIVE PLAN The benefits of implementing the Plan include an employee's ability to save far retirement, the freedom to remain in the Plan upon separation from the City, a market rate of return on investments, ability to designate a beneficiary to receive a lump -sum payment of the employee's contributions upon their death, and a neutral impact of the employee's paycheck. Furthermore, the City would realize savings from FICA tax obligation for the eligible employees, Despite these benefits, the Plan creates some potential unappealing consequences. For instance, participating employees do not accrue Social Security work credits thus, decreasing those benefits should they return to paying into Social Security in the future. In addition, employers implementing this Plan will have to provide eligible employees with exhaustive information -sessions and guidance on how the Plan works and detail the impact to their entitlements. Further, a mandatory participation may discourage a potential employee from accepting employment with the City if they perceive the loss of Social Security credits as a negative. Prospects of Implementing a FICA Alternative Plan for Part-time, Seasonal, and Temporary Employees CONCLUSION Based on the foregoing and in researching the implementation of the FICA Alternative Plan at a number of public nniversities, the Palm Beach School District, and the City of Miami Beach, the net savings warrants consideration for implementation.