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Volunteers Beware
COSTLY PITFALL FOR $30 DEFINED BENEFIT PLANS

Volunteers participating in Service Award Programs (SAP) that opt to take advantage of New York State’s increase in the defined benefit Service Award Program’s maximum annual accrual from $20 to $30 per month payable as a straight life annuity may end up paying taxes on inaccessible Service Award Program funds.

Based on an interpretation of Internal Revenue Code Section (IRC) 457(e)(11), the value of the $30 lifetime annuity accrual exceeds the IRC $3,000 per-year, per-participant limitation. If this limit is exceeded, then benefits accrued in the Service Award Program would become immediately taxable to all vested participants.

Penflex President Ed Holohan explains this complicated tax issue and suggests what you can do to avoid this pitfall.

Q. How can volunteers be stuck with paying taxes on inaccessible Service Award Program (SAP) funds?

A. If a SAP complies with IRC Section 457(e)(11), a participant in the SAP is not taxed on the payments he or she receives from the program until he receives them. If the SAP does not comply with the same IRC Section, the participant is taxed as the payments are accrued before they are paid.

Q. Does the $30 DB program comply with IRC Section      457(e)(11)?

A. A defined benefit program that pays $30 monthly lifetime benefits does not comply with IRC Section 457(e)(11).

Q. What is Penflex doing to help resolve this issue?

A. We are working with the National Volunteer Fire Council (NVFC) to propose amendments to federal laws that will resolve this and other SAP issues.

Q. What is the proposed amendment on this issue?

A. The proposed NVFC amendment to IRC Section 457(e)(11) would raise the $3,000 limitation and therefore allow $30 defined benefit programs. The earliest this amendment would take effect is Jan. 1, 2007, which means $30 accruals before 2007—and until this amendment actually takes effect—must be limited to comply with IRC Section 457(e)(11).

Q. How long will it take for this to take effect?

A. It is possible that the IRC may never be amended on this issue or the process could take several years.

Q. In the meantime, what can Sponsors do?

A. First, volunteers and sponsors should support the NVFC’s efforts to amend the federal law. In the meantime, we would recommend waiting to offer the $30 accrual until the law is amended. If you cannot wait, sponsors can limit the payment of the $30 accrual.

If you need assistance with this complex issue, please contact: PENFLEX, INC., (800) 742-1409.