There are several benefits that the New York City Government Employees enjoy during and after their service period. One of those many plans is DCP or Deferred Compensation Plan. Let us look at all the crucial details related to the Deferred Compensation Plan available for New York City Government Employees.
- What is a Deferred Compensation Plan?
The Deferred Compensation Plan offered by the City is a tax-favored retirement account. This account allows an employee to save for the future. The process of savings happens via payroll deductions. As a result, the earnings gained by an employee accumulated as tax-free earnings and stay in the account during the employee’s service period.
- Types of Programs under the Deferred Compensation Plan:
Typically there are two programs that Deferred Compensation Plan of the City offers to the employees-
- The 457 Plan
- The 401(k) Plan
The offers of pre-tax and after-tax are valid for both the plans.
- Few Things to note about DCP:
There are certain things that a New York City Employee needs to know about Deferred Compensation Plan-
- The amount that is allowed for contribution by an employee gets adjusted every year.
- This amount also depends on the age of the employee.
- To know about the contribution limit for a particular year, the employee should visit the Office of Labor Relations website.
- What happens when an employee retires from City Service?
Clearly, a New York City Govt employee may wonder about the situation afterward when the work period is over. What exactly happens when an employee retires or takes work under a different employer? Well, in such a case, typically, an employee has two options to choose from-
- The employee might leave the money in the City 457 Plan or 401(k) plan until necessary.
- The employee may also roll over the 457 Plan or 401(k) plan assets to a different employer plan. 457 Plan, 401(k) Plan, 403(b) Plan, the NYCEIRA or any Individual Retirement Account, etc., are some such plans.
- Pre-Tax and After-Tax Contribution:
As we have mentioned earlier, for the 457 Plan or 401(k) Plan, the contributions can be made either as a pre-tax contribution or after-tax contribution.
- When it comes to the pre-tax contribution, an employee must contribute before the federal, state, and local income taxes are taken out. This is helpful to save the earnings. After contributing, the amount earned gets reduced, and after that, one needs to pay income tax on a lesser amount. So, this is a tax-saving technique.
- When it comes to Roth contribution, i.e., the after-tax contribution for both 457 and 401(k), naturally, contributions are made with the after-tax amount. However, in this case, the withdrawal of contribution or earning can be tax-free if certain conditions are fulfilled.
A New York City Govt employee still needs to pay the Social Security and Medicare Taxes on the Deferred Compensation Plan contributions. As a result, naturally, the earnings that get recorded for FICA taxes on the W-2 may become greater than the earnings for the employee’s income tax.
- Tax Reporting on Pension Plan Withdrawals:
A New York City Govt employee needs to pay income tax if they withdraw an amount from the pre-tax 457 or pre-tax 401(k) Plan.
In case an employee takes a distribution from the pre-tax 457 Plan or 401(k) Plan, they are responsible for federal tax withholdings. This is applicable for state and local taxes as well.
An employee will be sent a 1099-R at the end of every year. This 1099-R will mention the amounts paid and withheld for taxes.
However, it should be noted that if they come to Roth or after-tax contributions, they’ll be regarded as tax-free if they fulfill certain conditions.
- Things to be noted:
There are certain things that a New York City Employee must consider-
- If an employee does not have a membership to a City Pension, then the Deferred Compensation Plan could be selected as the sole retirement plan.
- If an employee chooses to contribute at least 7.5% directly to the Deferred Compensation Plan, they don’t have to pay any Social Security Tax.
- Newly hired employees need to sign a “Statement Concerning Your Employment in a Job Not Covered by Social Security”, as per the requirements of The Social Security Protection Act, 2004.
According to the explanation of the potential effects of two Social Security Law provisions on workers, no coverage is given under Social Security in Form SSA-1495.
- Contribution to Social Security can be made if the contribution to DCP is lesser than 7.5%.
- After getting the membership of City Pension, an employee needs to contribute to Social Security. In this case, the employee can contribute any amount lesser than 7.5% to DCP. These are the things an NYC employee must know about the Deferred Compensation Plan.