deferred compensation | Funny about Money

It’s 115 degrees out there, and I’ve driven from pillar to post through it. First went over to GDU’s deferred compensation provider. Turns out this is a benefit available to government employees, which you can add to your 403(b) or state retirement plan, allowing you to shelter more of your money than the modest amount most states match. When the employer emits a piece of compensation that you’d like to defer, the employer has to withhold and pay FICA and Medicare. The guy I talked with said I could indeed defer payment of my $5,300 worth of vacation pay and the first payment toward the $19,000 GDU owes me for unpaid sick leave. However, he did not know whether deferring these chunks of compensation would protect me from having Social Security benefits docked in 2010, a buck for every two bucks of unapproved income.

So, it was off to the Social Security Administration, a hefty drive from the mid-town offices of the insurance company that handles the State of Arizona’s deferred compensation scheme.

There a Social Security CSR, the first person I’ve spoken to about this who seemed to know what he was talking about, said that even though FICA and Medicare are withheld by the employer, deferring the pay does cause Social Security to ignore it when figuring that year’s Social Security benefit.

Hallelujah!

This will allow me to teach as much as I need to without losing a large chunk of Social Security. It means I will not have to use the back vacation pay and the first installment of RASL (unpaid sick leave is paid out over three years) to live on. Though I may not be able to invest the money optimally, at least it won’t go away and it can be folded into retirement savings to help support me through my dotage.

GDU, a.k.a. Our Beloved Employer, has to sign off on Form SSA 131, which states that the RASL and vacation pay is pre-2010 income. Knowing GDU, I will have to find the form, track down someone over there with measurable IQ, and then raise hell and put a block under it to get them to do this. No one at GDU seems to know the answers to these questions; the university has laid off so many people at HR that the survivors have no idea what they’re doing. Sometimes when they don’t know the answer to a question, they’ll guess and tell you something that’s dead wrong. Sometimes they’ll frankly tell you they haven’t a clue.

More about deferred compensation: I learned you can open an account and just have it sit there as a vessel, waiting for the RASL and vacation pay. That is, you don’t have to contribute anything out of your paycheck. That’s a relief! With a major life change looming, one has other things to do with a paycheck than to let it sit for a couple of years. Management costs, BTW, are nominal and in some cases nothing.

So: if anyone reading this is in the same boat…

A government employee faced with early retirement, when the amount you can earn and still receive Social Security benefits is strictly limited, can shelter severance pay with a maneuver like this:

• Open a deferred compensation account, if you don’t already have it.
• Have your employer sign and submit Form SSA 131, which certifies that your severance pay represents payment for work performed before you start receiving Social Security.
• Have the severance pay rolled over into the deferred compensation account, realizing that FICA and Medicare will be withheld.
• Let it sit there until you reach “full” Social Security age.

At that point you can withdraw part or all of it, as you please, without affecting your Social Security benefits. You will have to pay regular income tax on it when you draw it out of the deferred compensation plan, but by then your income will be so penurious the taxes likely won’t matter much.

Getting disentangled from the Great Desert University and onto Social Security is a nightmare hassle! Right now I have an inch-thick folder of information, instructions, and policies about retirement, and it’s growing. There’s another folder full of paperwork specific to Social Security and Medicare.

Today I learned that when the state of Arizona pays me the first of three payments for my accrued sick leave (known appropriately as “RASL,” as in “you get to rassle around trying to collect this”), I will owe FICA and Medicare taxes on it. And, even though it represents money earned in 2009, it will not be paid until 30 to 90 days after my job is terminated.

Canning Day is December 31. That means the RASL will come in 2010, after I’ve started collecting Social Security. And that means the $6,355 payment will count as part of the maximum $14,100 I will be allowed to earn in 2010.

This will mean that in order not to have my Social Security benefits docked, I will have to refrain from teaching three of the six community-college classes planned for 2010. And that will mean I will have to use the RASL to live on, rather than putting it into retirement savings, as planned.

Item: I can’t afford to stand down from teaching next year. When you do that, you drop off the departmental chair’s radar, and you may find yourself never being hired again. I know: this has happened to me before. Next year I will need to teach as many sections as I can get, so as to build a track record that will get me hired in the future for as long as I can dodder into a classroom.

Item: I need to put that RASL money in savings!!!!! My investments are down more than $120,000 from where they were a year or so ago, and they certainly aren’t going to regain that in the six months I have left to work at GDU. I just can’t afford to substitute RASL for teaching income.

The university will owe me a little over $19,000 in RASL. This amount will be paid in three annual $6,355 installments: in 2010, in 2011, and in 2012. I will reach age 66 in May of 2011; after that, the dock-your-Social-Security trick stops.

Plowing through the stack of policy statements on RASL, I see that a) you can delay applying for RASL as long as 180 days after you’re terminated, and b) you can defer the first year’s payment (and only the first year’s payment) by rolling it into a deferred compensation plan. And c) the second and third annual payments are disbursed on the anniversaries of your first year’s payment, which comes 30 to 90 days after the state receives your application.

So, to avoid having my Social Security benefits dinged by the RASL and to avoid being forced to use the RASL for living expenses, I’ll have to put two maneuvers into play.

First, I’ll need to delay applying for RASL until the middle of April, so that the soonest possible time it would be paid is mid-May, after my 66th birthday. If I fail to do that, then the second RASL payment will also arrive before I reach the “full” retirement age of 66, and I’ll be dinged for that one, too. If I time my application so that the first RASL payment arrives after May 7, 2010, then the second RASL payment will not arrive until I’m 66, at which time I can earn as much as I want (or can) without affecting Social Security income.

Second, I’ll need to establish a deferred compensation plan before my job ends. This is required. That may mean that even though the damned furloughs just ended, I’ll have to continue having my pay docked. That I will get the money back sometime in the remote future is irrelevant to the fact that I need all my paycheck to stash savings to live on after I’m fired.

The deferred compensation plan is managed by a private provider. That means, of course, that there’ll be fees involved. So I’m going to have to pay someone for the privilege of letting them take my money away from me. Isn’t that sweet?

That’s just the start of it. Then there’s the realization that because I’m being canned in December I have to apply for Social Security in October in order to get the payments started in January. But I will not get my last paycheck until after January 1, because of PeopleSoft’s obnoxious lagging pay scheme. Furthermore, because of the furloughs, the gross amount on an October paycheck will not reflect accurately what GDU will pay me over 2009’s twenty-six pay periods. Nor will I have statements from my freelance clients, nor will I have any clue how much my S-corporation will pay me between September and December 31.

So, how will the Social Security Administration calculate my benefits, when no accurate statement of my 2009 pay will be available until after those benefits are supposed to start?

Then there’s the business of all the vacation pay the SOBs owe me: $5,287 worth. This payment also will come forth in January, 2009.

Will that be held against my Social Security earnings, even though it represents pre-2010 income? Can that amount be rolled over into this deferred compensation plan?

And if I have to roll it over…my GOD! I intended to use that money to cover COBRA. If I have to roll it over into deferred compensation, I won’t have anything budgeted to pay for health insurance between January 1 and May 7, 2010. I’ll have to dig into my retirement savings to cover that.

The more I look into this stuff, the more questions come up and the more unfair the whole mess looks. No wonder I grind my teeth all the time!