DA Memo - August 2, 2002
August 2, 2002*
- Group Life Insurance Conversion Form
- Rollovers and Transfers: Summary of Current Tax Provisions
- 30-Day Wait Before Returning to Employment
- "Independent Contractors" or Employees?
- "Substitute Teachers" or Not?
- Employer Reporting
- Military Call-Up
- Getting Wired
- KPERS 7/99 Beneficiary Designation Form: Importance of Completing the Entire Form
*This memo previously contained information about financial planning and retirement benefits. Please encourage your retiring employees to research all their financial retirement options.
(1) Group Life Insurance Conversion Form
KPERS and Security Benefit Life (SBL) are introducing a new Life Conversion Information Request Form for KPERS Members" who are eligible to convert their group term and optional life insurance policies. State law imposes some fairly strict deadlines regarding life insurance conversion and so this process must be expedited in as timely a fashion as possible. The following are the steps the member and the designated agent need to take when the member is leaving KPERS-covered employment:
(a) DA gives member Life Conversion Information Request Form for KPERS
Member.
(b) Member completes Section 1 (Member Section) of form if member is interested
in converting group insurance and returns to Designated Agent. (Note:
this form must not be completed more than 60 days prior to member's last
date on payroll.)
(c) Designated Agent completes Section 2 (see DA instructions on reverse
side of form) and forwards form to KPERS immediately. KPERS will notify
SBL-usually on the same day the Information Request Form is received-that
the member wishes to receive a conversion application.
(d) SBL will notify member of specific conversion information and the
member has 31 days from the date member's current group insurance terminates
to complete the conversion application and pay the first premium. (This
means the member has only 31 days from the member's last day on payroll
to both complete the conversion application and pay the first premium
or the member loses the opportunity to convert.)
KPERS members who are eligible to convert insurance but do not wish to do so should not fill out the Information Request Form.
(2) Rollovers and Transfers / Summary of Tax Provisions
The provisions of federal tax law summarized in the following section, including changes authorized by EGTRRA, govern rollovers and transfers into KPERS for service purchases and rollovers out of KPERS when there is a distributable event.
A. What can be rolled into KPERS?
- Money from former-employer plans
- 401(a) qualified plans (including a Keogh plan that meets additional requirements pertaining to owner-employees)
- 401(k) profit sharing plans
- 403(a)
- 403(b) tax sheltered annuities (educational employers)
- 457(b) deferred compensation (state and local governmental employers)
- Money from IRAs
- 408(a)
- 408(b)
B. What cannot be rolled into KPERS?
- After-tax contributions
- A plan that is not a qualified defined contribution plan (which KPERS is not; it is a defined benefit plan) cannot accept any rollover of after-tax contributions.
C. What can be transferred (trustee-to-trustee) into KPERS?
(Trustee-to-Trustee Transfer article in May 2002 DA Memo on Legislation)
- Money from former- and current-employer plans
- 403(b) annuity
- 457(b) governmental deferred compensation plan
Note: Rollovers and transfers are distinguished as follows:
- A rollover involves the distribution of the employee's entire available balance from a former employer plan; the employee's employment under the plan has come to an end; the employee's account is closed. (rollover info on the IRS web site)
- A transfer may involve the distribution of part of the employee's balance; it may be from a former-employer or current-employer plan; the employee's employment and participation in the plan may have come to an end, or it may be continuing; the employee's account may remain open.
D. What can be rolled out of KPERS?
- Both non-taxed and taxed contributions
- non-taxed contributions (those made on a pre-tax basis for participating service)
- taxed contributions (those made on a post-tax basis for participating service before enactment of employer pickups; or made on a post-tax basis for purchase of service credit any time)
Note: Effective 1/1/02, not just the taxable part of the distribution (the pre-tax contributions and the interest or earnings on the account) but also the nontaxable part (the post-tax contributions) are now eligible rollover distributions. That is, it is mandatory that KPERS allow both taxable and nontaxable money, upon distribution, to be rolled over. However, not all receiving plans will accept a rollover of previously taxed contributions. Members should check first with the plan they want to roll previously taxed contributions into, to see if that plan will take it.
E. Where can rollouts be rolled to?
- Answer may depend on whether taxable or nontaxable distribution
- Taxable and nontaxable distributions that are eligible rollover distributions
can be rolled from a Defined Benefit plan directly to:
- 401(k)
- traditional IRA
- Taxable distributions that are eligible rollover distributions can
be rolled over from a Defined Benefit plan directly to:
- 403(b)
- 457(b)
Note: 401(k)s and IRAs are not permitted to accept direct rollovers of after-tax contributions unless they provide separate accounting for after-tax contributions and the earnings thereon.
Note: 401(k)s and IRAs are not permitted to accept an indirect rollover of after-tax contributions (where an individual has taken a distribution but has 60 days to rollover to a retirement plan).
Note: A Defined Benefit plan (e.g., KPERS) is required keep a record that distinguishes a distribution as between pre-tax and post-tax contributions.
F. What cannot be rolled out of KPERS?
- Nontaxable distributions cannot be rolled out to certain distributees
- KPERS cannot directly roll over after-tax contributions (nontaxable
distribution) to:
· 403(b) tax-sheltered annuity
· 457(b) governmental deferred compensation plan - The following types of accounts may not receive a rollover:
· Roth IRA
· SIMPLE IRA
· Coverdell Education Savings Account (because they are not traditional IRAs)
(3) 30-Day Wait Before Returning to Employment
The Retirement Act states that members who withdraw or retire from KPERS may not return to work for any participating employer within 30 days of the retirement date or the application to withdraw. Most members are aware of this 30-day "break in service" requirement, but it's worth a reminder that before the 30-day waiting period may commence, the employment relationship must be fully severed.
That is, simply being off the payroll for other reasons-with the intent to return-is not a severance of the employment relationship. For example, school employees who are off the payroll in the summer have not severed their employment with the employer; they plan to return to work in the fall and thus are not eligible to apply for retirement or withdrawal during this time off payroll.
(4) "Independent Contractor" or Employee?
For KPERS, the question whether an individual is an employee or an independent contractor is crucial in determining if that individual will be a member of the system or not. It also arises in determining whether a retirant who has returned to employment is subject to the $15,000 annual earnings limit. In some circumstances, employers designate workers as independent contractors when, in fact, they are employees.
Both the IRS and the courts are clear on one thing: if the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. The primary inquiry for the IRS in determining whether a relationship of employer and employee exists is the amount of any "right to control" that the employer has over the individual. (IRS definitions and examples)
KPERS makes findings in the area of independent contractor issues using the factors established by the IRS and the courts. If the written contract for services is in good form and describes a situation that may legitimately be seen as an independent contractor rather than an employer-employee relationship, KPERS will assume that the worker is not an employee. But if there is a dispute, the actual conduct of the parties always governs the final analysis. An employer-employee relationship includes (but isn't limited to) situations where:
- the employer has the right to supervise, control and direct the person's performance;
- the employer governs the hours, manner, details and means of performance;
- the employer provides the tools and equipment for the services.
If the above factors are present the person is probably an employee. However, the mere right to control the result to be accomplished does not necessarily create an employer-employee relationship. There is a traditional "20-factor test" that is helpful in analyzing whether someone is an employee or a contractor. If a worker is an employee, he or she should be enrolled in KPERS at the appropriate time or subject to the $15,000 post-retirement earnings limit, as the case may be.
(5) "Substitute Teaching" or Not?
As with the employee-vs-contractor issue above, there is some misunderstanding about whether teachers (and retired teachers) are working as substitutes or not. Substitutes are not eligible to be enrolled in KPERS. And retirees who return to work as substitutes are not subject to the $15,000 earnings limit even if they work for an employer who employed them in their last two years of KPERS participation. But, as with the situation of employees compared to contractors, discussed above, the parties don't control the status of the relationship by the name they give it. Rather, the status flows from the way the relationship is structured and conducted. Here are some guidelines:
Throughout this article, the term "teacher" or "teachers" does include administrators:
Substitute teachers are assigned as follows
- daily call;
- replacement, hired when the regular teacher does not complete the school year;
- temporary, hired for a set time period when the regular teacher for whatever reason is off but plans to return.
Substitute teachers are employed in:
- K-12
- Vo-Tech (or Technical College)
- Community College
Teachers who are not on daily call, replacement, or temporary status are not substitutes.
- If working after retirement for an employer who employed them within their last two years of KPERS participation, teachers who are not on daily call, replacement, or temporary status are subject to the $15,000 earning limit.
- If not retired, teachers whose employment requires 630 hours or more and who are not on daily call, replacement, or temporary status must participate in KPERS.
The above guidelines are supported by the following sources and authorities:
- K.A.R. 90-31-9, an administrative regulation of the Kansas State Board of Education, effective December 27, 1996, and amended September 24, 1999, provides guidance for school districts regarding the employment of non-retired substitutes and substitute administrators, setting limits on the number of days per assignment and the number of days per year that districts may assign teachers with various types of certificates.
- K.A.R. 80-45-2, a KPERS regulation effective January 1, 1966, interpreting provisions of KSRS law, provides guidance for post-retirement employment of substitutes by specifying that a teacher working after retirement is employed as a substitute: "when he [or she] temporarily replaces a regular employee or when temporarily employed for an unfilled position until such time as a permanent employee can be secured, and when paid a per diem or at an hourly, weekly or monthly rate."
- The KPERS Designated Agent Procedure Manual, at Chapter 5, page 49, since July 1, 1991, has provided that exempt positions include Daily Call, Replacement, and Temporary teacher positions.
(6) Employer Reporting
One of top priorities of the Retirement System this year has been to improve the contribution reporting process. The timely and accurate reporting of annual contributions by KPERS employers is a key element of the Retirement System. The information is used to update membership records that are communicated to members on their annual statements and is the source data for determining benefits. Information from the contribution reports is provided to the System's actuary for calculation of the actuarial liability of the Retirement System.
We are happy to report significant improvements in this year's reporting process. With lots of effort from you, and some new assistance that KPERS put in place, reports were submitted on a more timely basis and with fewer errors. This allowed the Retirement System to update member records and produce the annual statements of member contributions much earlier than in past years. The Retirement System staff would like to extend our appreciation for your effort in contributing to the progress made this year.
The Retirement Staff will continue to look for various ways to improve on the contribution reporting process. For next year's reporting cycle, we hope to provide the annual contribution report on an electronic spreadsheet. In addition, we hope to improve on the turnaround time in communicating any problems we experienced with the data you provided. We are also exploring enhancements to our reporting system that will allow immediate production of annual statements for the vast majority of the member records that are without any posting errors.
(7) Military Call-Up / Ongoing Service Purchase
When a member is in the middle of a payroll-deduction service purchase and is called up for military service, the following payroll procedures should be implemented:,/span>
If the last day on payroll before going on leave coincides with the end
of the payroll quarter:
· Member's purchase is resumed upon return to work, on the first
day of the first payroll period in the next new quarter.
· Deduction for the purchase remains at the same percentage of
salary as before the leave began.
· Purchase continues until all quarters applied for have been purchased.
If the last day on payroll before going on leave occurs in the middle
of a quarter:
· Member's purchase is resumed upon return to work, on the first
day of the first payroll period in the next new quarter.
· Deduction for the purchase remains at the same percentage of
salary as before the leave began.
· The interrupted quarter does not count (is abandoned, for purposes
of the purchase).
· Purchase continues until all quarters applied for have been purchased.
After the purchase is completed in the above manner, the employer refunds to the member any service-purchase contributions deducted from the member's salary in the interrupted quarter. The refunded amount is reported as taxable income to the member in the year in which the refund is paid. If the employer has already remitted the refunded contributions to KPERS, a credit is available. (If the refund is for contributions remitted in a previous year, this employer credit process involves using a KPERS-17 form, which is not necessary for refunds of contributions remitted in the current year.)
(8) Getting Wired
It's fast, easy and convenient. The KPERS web site is an excellent resource to help you do your job as a designated agent. Within seconds you can find KPERS forms, the employer reporting manual, and loads of other information about the details of KPERS membership. Our web site allows you to get immediate, up-to-date information in a number of areas when you want it, 24 hours a day, seven days a week.
KPERS and designated agents have a unique partnership, working together to help employees get the most from their benefits. In the future we would like to make working together easier with electronic communication. You can already e-mail us with questions and requests instead of calling. No waiting. On your own time schedule. KPERS' staff is committed to a 24-hour turnaround for responses.
Encourage your employees to refer to www.kpers.org, too, for general benefit information and to use the benefit calculator. Take some time this week and browse www.kpers.org. We have a gold mine just waiting for you.
(9) KPERS 7/99 (Beneficiary Designation) / Importance of Completing the Entire Form
When first filing or when updating their Designation of Beneficiary, members need to complete the entire form.
Provide All Requested Information
The form asks for quite a bit of detailed information, because we really need it. We ask for a beneficiary's social security number, relationship to member, birth date, and address. To a KPERS benefits analyst working with the family of a deceased member, the importance of having all this information on file becomes very clear. A member may die years after filing the form with KPERS.
Without details to rely on, KPERS may have trouble locating beneficiaries, or distinguishing among family members. For example, the member may have named Jack Jones as a beneficiary, but may have a brother, son, and uncle all named Jack Jones. Particularly important is the date of birth. When a beneficiary is a minor child at the time the member dies, special conditions apply. Complete information helps KPERS process applications more quickly and accurately.
Complete All Parts of the Form, Even if Changing Only One Thing
The latest designation of beneficiary received in KPERS' office* before the member dies controls the distribution of benefits. It's often true that members may wish to change only their primary beneficiary and leave their contingent beneficiary designation alone, or vice versa. It's not hard to see why they may think that all they need to do is fill out that part of the form concerning whichever category of beneficiary they wish to change. But if they do not fill in Part C (primary beneficiary) or Part D (contingent beneficiary), their updated KPERS record will reflect that they do not have a named beneficiary in the portion left blank. Be sure to advise members not to leave any parts of the KPERS-7/99 blank.
*For employees still in their year of service who have first-day coverage, and unclassified employees with a Regents institution, the latest designation filed with the employer controls.