We understand that navigating the world of retirement benefits may seem like a daunting task and, as an employee, you may have some questions about the Special Pay Plan your employer has set up for you. If you’re new to the plan, or just need a refresher, we’re here to help you get the most out of this powerful benefit.
What is the Special Pay Plan?
The Special Pay Plan uses special forms of compensation (hence, “Special Pay” plan) like your unused sick leave, unused vacation pay, or early retirement incentives to fund a tax-deferred retirement benefit that’s invested for potential growth. Employers and employees alike reap considerable benefits from a Special Pay Plan, as the benefit enables tax savings for both parties and MidAmerica assures peace of mind in our handling of your hard-earned funds.
How does it work?
Once you retire or separate from service, your employer deposits your accumulated unused sick leave, vacation pay, and other forms of compensation into a 401(a) or 403(b) retirement account. Crucially, these forms of compensation enter the account pre-tax, providing you with significant savings.
To demonstrate the extent of these savings, take the instance of a participant who receives a $10,000 deposit into their Special Pay Plan. They permanently avoid the 7.65% FICA tax, saving them $765 in FICA taxes deposited into their plan. Furthermore, the employer also avoids matching the 7.65% FICA tax they are otherwise obligated to pay per IRS rules. The employer may elect to use these savings to fund organization projects or to invest these savings back into their employees.
The participant’s retirement account is income tax deferred, meaning any income taxes will be paid upon withdrawal from the account. Income tax deferral can usually provide you with even more savings, since you’ll likely fall into a lower income tax bracket further into retirement due to a reduction in your annual income (compared to when you were actively working.)
Invested for potential growth.
Finally, your Special Pay Plan is invested for potential tax-deferred growth with a minimum guaranteed annual rate of return. You may also have the freedom to self-direct the investment of your funds to meet personal retirement goals, if your plan allows.
When can I access my funds?
Participants are immediately vested in their Special Pay Plan upon retirement or separation of employment—which means you fully own the account—giving you immediate access to your funds once you retire. However, we encourage you to think of the account as a rainy day fund—a reservoir of resources accessible on a needs-first basis. The money is there when you need it but has the potential to grow tax-deferred when you don’t!
Important IRS rules to consider.
IRS rules state that participants achieve full access to their funds when they reach 59 ½ years of age. So, if you separate from employment before that age, a 10% tax fee will be imposed on your distribution. If you are over the age of 59 ½ when you separate from employment, you will have full access to your 401(a) or 403(b) account and are, in fact, obligated to withdraw a certain percentage of your funds after the age of 72.
We’re here to help.
If you still have questions about your Special Pay Plan or need additional resources, MidAmerica’s Participant Services team is here to help. We provide nationwide coverage for participant education, ensuring you understand how to manage and access your benefit. In addition to our service team, you always have access to your benefit online by selecting Access Account from the top right-hand corner of the website.*
The Participant Services team is happy to answer any questions at (855) 329-0097 Monday through Thursday from 8:30 a.m. – 8:00 p.m. ET and Friday from 8:30 a.m. – 6:00 p.m. ET. You can also reach us by email at [email protected].
*Please note you will not have access to your account online until MidAmerica receives your first plan contribution. Once the contribution has been received from your employer, we will mail you a detailed Welcome Kit with instructions on how to register for your account.