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V '. . - . <- <br />If <br />!; <br />'.V <br />l-V <br />T08 <br />FKOM: <br />DATB: <br />80BJBCT <br />Mayor and City Council <br />Ron Moocse, City Administrator <br />// <br />December 5, 1991 <br />Deferred Compensation Plan Versus FICA for Non-PERA <br />Employees <br />A Federal law (OBRA) effective 7/1/91 required all public <br />employees not eligible for a pension plan to be placed on FICA <br />(Social Security). This law generally affects those employees <br />who are exempt from PERA membership including seasonal employees <br />and those part time employees who earn less than $5,200 per year. <br />This could also include CounciImembers who have decided not to <br />join PERA. <br />The law provides for a public employer to use a deferred <br />compensation plan as an alternative to the FICA requirement* <br />This option must be exercised by December 31, 1991. In order to <br />exercise the option the City must have an OBRA compensation <br />program in place. This program included a deferred compensation <br />plan and guidelines for participation. <br />The advantages of the deferred compensation plan option are two <br />fold: <br />1. The City does not pay FICA tax on these employees. <br />2. The eligible employees who generally are hired on a <br />short time basis pay 7.5% of gross pay into a deferred <br />compensation plan rather than paying the FICA tax. <br />The deferred compensation contribution is refundable at <br />termination of employment. The FICA tax is not refundable. <br />These two advantages taken together reduce the City's effective <br />seasonal employee cost by 6.3% while increasing the effective pay <br />rates for seasonal employees by the same percentage. Although <br />the cost savings to the City would not be great at the current <br />seasonal staffing level the number of seasonal and temporary <br />employees may increase substantially in future years. <br />If the City selects the deferred compensation option it has <br />significant flexibility regarding which employees will be <br />eligible and whether to give employees the option of choosing the <br />deferred compensation versus PICA. The Council may choose to <br />make the deferred compensation plan optional for CounciImembers. <br />It is recommended > the deferred compensation option be <br />mandatory for all eligible employees other than the <br />CounciImembers with the exception of those who, because of other <br />legal restrictions, cannot participate in a deferred compensation <br />plan. i.e. Those who are already contributing at the maximum <br />deferred compensation level.