Administrative Bulletin No. 2002-4

To:  Chief School Administrators                        Date:  June 2002
       College and University Presidents
       School Principals

We understand a vendor is approaching school districts touting a defined contribution plan established under Section 401(a) of the Internal Revenue Code as a way of deferring tax on monies due retiring members for unused sick leave and vacation days which would otherwise be paid in cash to them upon their retirement. 

As a general matter, monies deferred into some kind of tax-favored vehicle and hereby not subject to tax on a current basis are only included in final average salary computations if statutory law so provides. Examples of statutes allowing such treatment are Education Law §3109 (with respect to deferrals into IRC §403(b) tax deferred annuities), State Finance Law §5 (with respect to deferrals into IRC §457 eligible deferred compensation plans) and RSSL §79 (with respect to deferrals into IRC §125 cafeteria plans). 

There is presently no statutory authority allowing for the inclusion of deferrals of money into IRC §401(a) defined contribution plans in final average salary calculations. Because of this, the System cannot assure members such deferrals would be included in final average salary. Members making deferrals of monies act at their peril. The System believes interested school districts should seek legislation similar to the above mentioned provisions expressly 
allowing for such inclusion. 

Please note also that unlike the case of employer funded IRC §403(b) tax deferred annuities, there has been no definitive ruling by the State Comptroller, so far as we are aware, indicating school districts are authorized to establish IRC §401(a) defined contribution plans. School districts may wish to consider obtaining such a ruling or authorizing legislation before proceeding.

Finally, we understand that, in addition to suggesting that monies due retiring members which are deferred into a defined contribution plan would not be subject to current tax, the proponents of such plan are also suggesting that monies deferred into a defined contribution plan, unlike deferrals into IRC §403(b) tax deferred annuities and 457 deferred compensation plans, would not be subject to FICA and FUTA taxes. School districts considering the implementation of a defined contribution plan are strongly urged to obtain opinions of knowledgeable counsel on these matters. 

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