Physicians entering public service in Minnesota have the alternative of coverage under two distinctly different retirement plans administered by the Public Employees Retirement Association of Minnesota—the Defined Contribution Plan (DCP) and the Coordinated Plan.
The Defined Contribution Plan provides for a percentage of salary contribution by both you and your employer. You choose how this money is invested and the benefit is determined by the performance of those investments. The Coordinated Plan is a traditional pension plan whereby both you and your employer make contributions each pay period and the benefit is determined by a formula based on your years of public service and average salary during your highest consecutive five-year salary. While the Coordinated Plan provides for lifetime benefits with annual adjustments, the DCP benefit is a lump-sum amount you can reinvest as you see fit.
To qualify for either plan, you must be an employee of the governmental agency, not an independent contractor providing services to the facility. You have 90 days from the commencement of your public service to decide between the two plans. If you do not elect to enroll in the DCP plan within this period of time, you must be enrolled in the Coordinated Plan if you meet the eligibility requirements. Once you enroll in a plan, your decision is irrevocable.
Defined Contribution Plan
The Defined Contribution Plan (DCP) administered by PERA is a tax-deferred retirement savings program for physicians, elected public officials and public 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.
How It Works
You contribute five percent of your salary and your employer contributes an identical amount to the plan. Salary includes only compensation you receive for services rendered to your employer, including overtime. It does not include compensation or reimbursement for expenses. Nor does it include compensation received for services rendered to another employer.
You designate a percentage of total contributions to be placed in one or more of seven accounts of the Minnesota Supplemental Investment Fund administered by the Minnesota State Board of Investment. Investment goals of these accounts and the returns they have actually achieved are described in the Minnesota Supplemental Investment Fund annual prospectus published by the Minnesota State Board of Investment.
Your contributions and those of your employer are combined and used to purchase shares in the accounts you select. The shares belong entirely to you. 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 interest 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.
You may change your 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.
Upon your termination of public service, you are entitled to a lump-sum payment of the value of the shares you hold. The same is true for your beneficiary(ies) upon your death. The final value of the shares purchased with employee and employer contributions is determined by economic and market conditions. Thus, PERA and the State of Minnesota cannot guarantee that the value of your account will not decrease to a level below your original purchase price of the shares.
If you qualify for permanent disability under Minnesota Statutes governing PERA, you have the option of receiving monthly payments from your account instead of a lump-sum distribution. The amount of the monthly payments cannot exceed ten times the combined employee and employer contributions for the month preceding the disability. Also, disability payments must be in $100 increments. The benefit ends when your disability status ends or when the account is depleted.
Proceeds of an account are payable 30 days or more after your date of termination from public employment, approval for disability benefits, or death.
You, or someone acting on your behalf, must file an application for withdrawal of the funds with PERA before payment can be made. Upon your death, the value of all accounts is payable, on application, to your beneficiaries, or if none are designated, to your heirs.
The lump-sum benefit payment may be rolled over to another tax-qualified plan or used to purchase an annuity from an insurance company. PERA will, at your direction, send the payment to an insurance company licensed to do business in Minnesota for the purpose of purchasing an annuity.
The Defined Contribution Plan And Taxes
You do not pay taxes on contributions to the DCP withheld from your earnings and those made on your behalf by your 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 10 percent tax surcharge, unless rolled over.
Because the DCP is tax-qualified, enrollment in the plan may lower the maximum contribution you may make to a deferred compensation plan and may also, depending upon your income level, eliminate the tax deductibility of contributions to an individual retirement account (IRA). We recommend discussing the tax implications of retirement participation with your tax advisor.
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.