The Defined Contribution Plan (DCP) administered by PERA is a tax-deferred retirement savings program for elected public officials (and public physicians and ambulance service personnel) in which participants determine how employee and employer contributions are to be invested through the purchase of shares in accounts of the Minnesota Supplemental Investment Fund. Total contributions plus investment performance determine the ultimate benefit, which is paid as a lump sum upon withdrawal.
All local public officials elected to their positions by the public at large, and individuals appointed to boards and commissions of governmental subdivisions are eligible to participate in the plan. Officials appointed to vacant elective positions are also eligible for the plan for the remainder of the office’s term. DCP is the only PERA retirement plan available to officials elected to governing body positions (ex: city council, county board, school board, etc.) after June 20, 2002.
Participation in the plan is completely voluntary for each individual and there is no minimum salary requirement. Elected officials participating in the plan may choose to discontinue participation at any time.
How It Works
Elected public officials contribute five percent of their elective salary and their employers contribute an identical amount. Elective salary includes only compensation the official receives for services rendered in the position to which the official was elected by the public at large. (Among other things, elective salary does not include compensation or reimbursement for expenses. Nor does it include compensation received by the official for services rendered to an entity or agency in a position not filled by election of the public at large.)
Plan participants designate a percentage of total contributions to be placed in one or more of seven accounts of the Minnesota Supplemental Investment Fund. This investment fund is administered by the Minnesota State Board of Investment and includes actively and passively managed stock, bond and balanced accounts, a money market account and a fixed interest account. The investment goals of these accounts and the returns the accounts have actually achieved are described in the Minnesota Supplemental Investment Fund annual prospectus published by the Minnesota State Board of Investment.
Contributions made by the elected official and matched by the employer are combined and used to purchase shares in accounts selected by the participant. Shares belong entirely to the elected official participant. Except for the Money Market and Fixed Interest Accounts, whose shares are always one dollar each, shares are purchased at market prices.
Interest paid by the money market and fixed accounts is reinvested, increasing each share’s value of the respective accounts. Interest and dividends earned by the stocks and bonds held in the other five accounts are used to purchase additional stocks and bonds in those accounts. These purchases and the gains and losses in market value of the stocks and bonds held in the accounts are reflected in the value of the accounts’ shares, in much the same way as with mutual funds.
DCP participants may change their investment selections any time and may also transfer all or portions of previously purchased shares from one account to another.
Some special restrictions apply, however, to transferring funds to other accounts from the Fixed Interest Account. Contact the PERA office for complete details about these transfer restrictions.
Purchasing Past Elected Service
By law, the purchase of past elected service had to be initiated prior to July 1, 2011. It applied to elected officials who are members of the Defined Contribution Plan and who had service as an elected official prior to June 30, 1991, that was not covered by a retirement plan. It allows them to pay contributions on that past service and invest those contributions plus matching employer contributions in the DCP. PERA can no longer accept requests to begin the purchase process.
The Defined Contribution Plan And Taxes
Participants do not pay taxes on contributions to the DCP withheld from earnings and those made on behalf of the participant by the employer. However, because the DCP is a qualified tax-deferred program, these contributions are taxable upon withdrawal, unless rolled over into another tax-qualified plan. If taken out before age 59½, withdrawals are, with a few exceptions, subject to an additional ten percent tax surcharge, unless rolled over.
Employee payments for past service are recorded in the participant’s account as taxed contributions. Consequently, the participant will not have tax liability for these contributions upon withdrawal.
Because the DCP is tax-qualified, enrollment in the plan may lower the maximum contribution participants may make to a deferred compensation plan and may also, depending upon income level, eliminate the tax deductibility of contributions to an individual retirement account (IRA).
Medicare and Social Security Withholdings
Participation in Medicare is required for all DCP members elected or appointed after March 31, 1986. With limited exceptions, members are excluded from participating in Social Security. For some positions, however, Social Security participation is required due to a Section 218 agreement between the federal government and either PERA or a single governmental unit. For details, contact your governmental unit’s human resources office or PERA.
For retirement purposes, DCP members who do not have Social Security taxes withheld from their salary may have future Social Security benefits reduced (if eligible for such benefits) because of the DCP lump-sum benefit they receive from PERA after terminating public service. For details, contact the Social Security Administration and request information on the Government Pension Offset and the Windfall Elimination provision.
Two percent of the employer contributions to the DCP (2 cents for each $1.00 contributed by your employer) is used by PERA for administrative costs of the plan. In addition, 0.25 percent (one quarter of one percent) of the value of your shares is also retained by PERA each year to help defray the costs of administering the plan. This asset-based charge amounts to $2.50 for each $1,000 in your account.