If you worked for and retired from a school district in 1993 (as an example), you would have received a severance package upon retirement. The school district would say to the retiree, “Thank you for your service. Here is your $20,000 severance package. Happy Retirement.” This was problematic to both the retiree and the employer.
Employee challenges:
- What if an employee worked in 4 or 5 different districts throughout their career? They would have 30+ years in the system and qualify for full retirement from their pension (TRA or PERA). However, in this example, they may not have stayed at one district long enough to qualify for the severance package.
- Receiving the severance package of $20,000 is a taxable event in the calendar year the employee received it. Depending on their income for the year, this additional income may push them into a higher taxable income bracket.
- Receiving the match amount now that they are retired, they may invest in low risk investments with low rate of returns.
Employer challenges:
- The employer couldn’t control their costs. Example: the employer could estimate that 20 people would retire. If the retirement package was $20,000; 20 retirees X $20,000 = $400,000 would be set aside for the severance package benefit. What if they had 55 people retire? The budget it suddenly shattered! This was happening in several top-heavy school districts in the Twin Cities Metro area. Due to the expense and budget constraints, some school districts were forced to delay payment of the severance package 5 – 7 years post retirement, which became a public relations nightmare!
- Budget constraints trickle down to the classroom.
Enter “The Match”
School districts started negotiating a match for their employees in the late 1980’s/early 1990’s. This match ultimately became a “buy-down” of the former severance package. When the match benefit was initially established in the district, the benefit was based on an employee’s hire date.
- Senior staff may have not been eligible for the match, due to being so close to retirement. They would remain with the severance package at retirement.
- Mid-career staff hired would have had the option to choose if they wanted to remain in the severance package or participate in the match benefit. If they chose the match, their severance would be ‘bought-down’ by the match. As an example, let’s say a teacher opted into the match and the employer contribution totaled $11,000. The teacher’s severance package was $20,000 when she/he opted into the 403(b) Match. $20,000 severance package minus $11,000 received in the 403(b) plan leaves $9,000. The teacher would have received a severance package of $9,000.
- Recent and future teachers would only have the match option available; the severance package has been phased out.
Employee benefits:
- The employee receives the match as outlined in their employment contract and are 100% vested immediately. If they work in 4-5 different districts throughout their career and their employer offers a match to the 403(b) benefit, the continue to receive the benefit based on participation in that district.
- They receive the deferred growth of the underlying investment.
- They can control their taxes at retirement.
Employer benefits:
- The employer can reference their employee hire dates and calculate the exact cost of the benefit with full participation.
- This calculation allows them to control their costs.
Disclosures
Education and illustrative purposes only. Severance package amounts vary by employer and bargaining group. This material is not intended as ERISA, tax, legal or investment advice. If you are seeking such advice specific to your needs, such advice services must be obtained on your own, separate from this educational material. This is written, speaking to public school employees in the State of MN 1-963518