HOUSTON POLICE OFFICERS PENSION SYSTEM POST RETIREMENT OPTION PLAN (PROP) POLICY SECTION 1400

Transcription

1 HOUSTON POLICE OFFICERS PENSION SYSTEM POST RETIREMENT OPTION PLAN (PROP) POLICY SECTION

2 TABLE OF CONTENTS SECTION PAGE 1400 INTRODUCTION PURPOSE ELIGIBILITY APPLICATION FOR PROP PARTICIPATION PARTICIPATING IN PROP DISTRIBUTIONS FROM PROP AND TERMINATION OF PARTICIPATION IN PROP TAXATION OF PROP DISTRIBUTIONS QUALIFIED DOMESTIC RELATIONS ORDERS (QDROS) REQUIRED DISTRIBUTIONS FROM PROP REEMPLOYMENT PARTICIPATION BY SPOUSES PROP BENEFICIARY DESIGNATION

3 1400 Introduction The Board of the Houston Police Officers Pension System (HPOPS), pursuant to statutory authority under the provisions of Article 6243g-4, Vernon s Annotated Texas Statutes (VATS) and under Section 67, Article XVI, Texas Constitution, has been given the responsibility for the general administration, management, and operation of the pension system. The applicable laws governing disability retirements and HPOPS are promulgated in Article 6243g-4, Vernon's Annotated Revised Civil Statutes of Texas, and any agreements pursuant to Section 27, thereof Purpose HPOPS is committed to the efficient and effective fulfillment of the mission of HPOPS, which is to responsibly manage the system in the best interests of the members and beneficiaries so that they may have peace of mind knowing their pension benefits are secure. The purpose of this policy is to provide a documented policy for applicants electing the Post Retirement Option Plan (PROP), and provides a detailed outline to be followed by the System Staff when processing applications for the PROP election and distributions. This policy may change from time to time as case law and legislation develop 1402 Eligibility Member is as defined under Article 6243g-4 Sec. 2, Vernon s Annotated Texas Statutes Prior to making a formal application to participate in PROP, a member must be eligible to receive a monthly pension benefit from HPOPS and be eligible for DROP participation as described in Article 6243g-4 and HPOPS DROP Policy, Section All members should seek advice concerning their participation in PROP from their personal attorney, tax advisor, or financial advisor, who is knowledgeable about the rules for taxing distributions from tax qualified governmental plans PROP applicants must meet all requirements of the applicable state law and the requirements established by the HPOPS Board of Trustees in this policy statement Application for PROP Participation If a member has elected to participate in PROP at the time of termination (retirement) an application must be submitted to the System Office at the time of the member s application for retirement A member desiring to participate in PROP must complete and sign the following where applicable. 3

4 A. PROP Application Form, B. PROP Acknowledgement Form. C. During the application process the member will be given copies of all documents that have been completed and signed The completed application will be reviewed and verified by the HPOPS Staff and then approved by the HPOPS Executive Director. The Board of Trustees will then ratify the application at a regular meeting of the Board A member can withdraw a PROP application at any time PRIOR to: A. In the case of a retiring member, the earlier of the ratification of the application by the Board or the disbursement of the member s first monthly annuity payment. B. In the case of a retired member, the ratification of the application by the Board. C. A request to withdraw must be made in writing and submitted to the HPOPS office Within a reasonable period of time after the receipt of the PROP application, the System Staff will notify the member of the approval of the application, including: A. The effective date of the approved application; B. The amount transferred from the member s DROP account Participating in PROP The System Staff will provide each PROP participant semi-annual statements of PROP account activity The System Staff will direct all requests for PROP balances to the HPOPS Web site. If a member does not have Internet access then System staff will answer phone inquiries from the PROP participants The PROP account consists of two (2) cash flows: A. the portion of the DROP or $5, lump sum allocated to PROP upon termination, and B. the calculated interest A member may allocate all or a portion of such member s DROP accountor $5, lump sum to a notional PROP account but only if this is elected at the time of termination (retirement). 4

5 Allocation of either all or a portion of a member s DROP account, or the $5, lump sum, to PROP will result in a decrease in the amount of these lump sum distributions that may be recovered tax free upon termination A member's PROP benefit will be accounted for by HPOPS in a separate notional account. The member's assets will not be physically separated from other assets of the System. The interest earnings attributable to a member will be credited to each member s notional PROP account (bookkeeping account) monthly The PROP interest rate is at the System s compounded average rate of return for a 5-year period ending on June 30 th of each year and multiplied by sixty-five percent (65%). This calculated interest rate will be credited beginning January 1 of the following year. The interest on an individual's PROP monies is calculated as follows: A. As of June 30 th, determine the compounded average rate of return for the System for the last 5 fiscal years and multiply by sixty-five percent (65%). B. Divide the resulting amount by to determine the daily interest rate. This daily interest rate is multiplied by the number of days in the given month. The product is then multiplied by account balances that were in the individual accounts for the entire month. C. On uneven cash flows occurring in the account within a month, the 5-year compounded rate is divided by and multiplied by the number of days that the deposit or distribution is in the account for that month. This product is then multiplied by the amount of the cash flow. D. The PROP interest rate shall never be less than two and half percent (2.5%) with no ceiling Distributions from PROP and Termination of Participation in PROP When a member chooses to receive a distribution from their PROP account the request must comply with this policy. The allowable types of distributions are emergency, nonrecurring quarterly, recurring monthly,recurring quarterly, and 415 limitation A member may request an emergency PROP distribution at any time for an unforeseeable emergency. A. An unforeseeable emergency is defined as severe financial hardship of the member, dependent, or beneficiary resulting from one or more of the following: 1. Illness or accident of the member or beneficiary, member s spouse, or a dependent as defined in Article 6243g-4. 5

6 2. Loss of the member s or beneficiary s property due to casualty (not covered by insurance) or 3. Other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the member or beneficiary. B. Situations that may constitute unforeseeable emergencies include: 1. The loss of property caused by fire, flood or other catastrophic loss beyond the control of the member or beneficiary. 2. The imminent foreclosure of or eviction from the member s or beneficiary s primary residence. 3. A hardship need arising as a result of a sudden and unexpected illness of the member, such member s spouse or dependent or the member s designated primary beneficiary. 4. The need to pay for medical expenses, including non-refundable deductibles, as well as the cost of prescription drug medication. 5. The need to pay for the funeral expenses of a spouse or dependent. C. Situations that do not constitute unforeseeable emergencies generally are situations where the individual had significant control or could have reasonably and prudently anticipated, avoided or budgeted for the event. Examples include: 1. The purchase of a new vehicle, new appliance, second home or pool, etc. 2. Marriage costs for yourself or dependents. 3. Vehicle repairs, appliance replacement, or maintenance. 4. Costs for a divorce, divorce settlement or child support. 5. Costs of bankruptcy (except when bankruptcy is a direct result of an unforeseeable illness or casualty). 6. Education costs for you or your dependents. 7. Bills that you knowingly incurred but cannot pay such as loans, credit card debt, vehicle, and house or boat payments. This also includes refinancing existing debt. 8. Funeral expenses for a person other than your spouse or dependent. 9. Unreimbursed medical expenses related to an elective surgery. 6

7 10. Routine medical, dental or orthodontic services. 11. Bankruptcy. 12. Legal judgments and legal fees. 13. Investment or gambling losses. 14. To cover wage garnishment. 15. To pay income tax, property tax, back taxes or fines associated with back taxes. 16. To supplement insurance coverage. 17. To cover a loss not covered by insurance because of failure to retain insurance coverage. D. To request an emergency PROP distribution, the member must complete and sign an Emergency PROP Distribution Form and provide all necessary and requested supporting proof and documentation. E. The member must document that a financial need exists that cannot be relieved through any other means. Other means to alleviate the financial hardship include reimbursement or compensation from insurance and liquidation of assets to the extent the liquidation itself doesn t cause a financial hardship F. The member must identify the emergency event and explain how the event contributed to the financial hardship. Some causal connection between the event and the financial hardship must be shown. G. Any request without supporting documentation will not be processed. H. Only the amount reasonably necessary to meet the emergency need (which may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from the distribution) is available for withdrawal. I. The requested distribution must be needed currently and not at some later date. J. The request will be reviewed by HPOPS Staff and actioned by the Board at the next available meeting. K. The Board will evaluate the facts and circumstances of each case to determine if it meets the requirements for an unforeseeable emergency withdrawal. The 7

8 Board will determine unforeseeability from the perspective of a reasonable and prudent person. L. An unfavorable decision may be appealed within 30 calendar days within notification of denial by sending a written request and any additional supporting documentation that may be relevant for the appeal. The member will be notified of the final outcome of the appeal. Once the appeal has been reviewed and a determination has been made that decision is final and will not be subject to further appeal A PROP member may apply for a nonrecurring quarterly distribution from the member s PROP account four (4) times per year with such distributions being made on March 31, June 30, September 30 or December Nonrecurring quarterly distributions from a PROP account must be at least $10,000 unless the member is receiving a final distribution and discontinuing participation in PROP, or is to receive a required minimum distribution (MRD) in accordance with Internal Revenue Code Section 401(a)(9), and the Regulations thereunder In addition to an emergency or nonrecurring quarterly distribution, a member may apply to receive either a recurring monthly or a recurring quarterly lump sum distribution from their PROP account. A. At retirement, a recurring lump sum distribution can be started at next distribution date as administratively feasible and must continue for at least a 12 month period. B. Subsequent to retirement, a recurring lump sum distribution can be started in any month and must continue for at least a 12 month period. C. A recurring lump sum distribution can be stopped or changed in any month after a 12 month period. When a recurring lump sum distribution is changed after the 12 month period it cannot be changed again for another 12 month period. Once a recurring lump sum distribution is stopped a new recurring lump sum distribution can be started at a subsequent distribution date or later. D. Monthly recurring lump sum distributions from a PROP account must be at least $2,000. Quarterly recurring lump sum distributions from a PROP account must be at least $5,000. E. In any month that the balance in the PROP account is less than the requested recurring lump sum distribution, the entire balance of the account will be distributed, as scheduled and the PROP account will be closed. F. Members can only have one recurring lump sum distribution active at a time. 8

9 G. Recurring lump sum distributions must be paid via ACH (checking or savings type accounts). Recurring lump sum distributions cannot be sent by wire transfers A request for a distribution from a member s PROP account must be filed with the System Office by the fifth day of the month in which the distribution is to be effective. For example, if a member is requesting a distribution for the quarter ending December 31 or to start a monthly recurring distribution December 31, the request must be received on or before December 5. If the 5 th day of the month falls on a Saturday or Sunday the envelope in which the request was mailed must bear a postmark no later than the 5 th day of the month in which the distribution is to be made. The distribution request cannot be submitted to HPOPS earlier than one year from the requested distribution date Distributions from a PROP account will only be made by an electronic funds transfer If after a nonrecurring distribution request it is found that the account will have a balance of less than $5000 the entire balance will be distributed at the time of the requested distribution Members can only distribute monies to one destinations/account per distribution request Once a total distribution of a PROP account has been made to a PROP member the member is no longer eligible to participate in PROP An immediate distribution from a PROP account is allowed if necessary to avoid exceeding the IRC Sec. 415(b) limitation Taxation of PROP distributions Taxation of PROP distributions is dependent on the member s age when service with the Houston Police Department is discontinued. Following is an outline of HPOPS understanding of current tax law. A. For qualified public safety members who separate from service prior to age 50 the rules are as follows according to the Internal Revenue Code: 1. When money is withdrawn from the notional PROP account (either DROP money or interest on PROP amounts) the amounts withdrawn will be subject to a ten percent (10%) early distribution tax penalty in addition to regular income taxes unless the member is over 59 ½ years of age and has been in PROP for more than five years. The taxes will apply to all withdrawals whether from contributions or any accumulated earnings. 2. Members who enter PROP subsequent to age 59 ½ are not subject to the five-year waiting period provision. 9

10 B. For qualified public safety members who separate from service at age 50 or older, when money is subsequently withdrawn from the PROP notional account (either DROP money or interest on PROP amounts), the member will be subject to regular income taxes on the amounts withdrawn with no ten percent (10%) early distribution tax penalty Withdrawals from a PROP account generally can be rolled over to an IRA or another qualified plan. A. Such rollovers will be subject to the mandatory twenty percent (20%) income tax withholding by the System if the withdrawal is not paid directly to an IRA or another qualified plan. B. PROP monies may be rolled over directly to an IRA or another qualified plan. C. For a member who retires prior to age 50 and one hundred percent (100%) of the PROP account is not rolled over to an IRA on the same date, the member could be subject to certain tax penalties and interest A member of HPOPS who is a participant in the PROP program and who elects to terminate participation in PROP should seek advice from the member s personal attorney, tax advisor, or financial advisor, who is knowledgeable about the rules for taxing distributions from tax qualified governmental plans Qualified Domestic Relations Orders (QDROs) If the member becomes involved in a divorce proceeding and a Domestic Relations Order submitted to the System is determined to be a Qualified Domestic Relations Order (QDRO), the portion of the PROP account that is awarded to the alternate payee shall be distributed from the PROP account at the end of the next month, as administratively feasible. Interest will be paid through the date of distribution The payment to the alternate payee (if the alternate payee is not a child who is receiving support from the member) is taxable to the alternate payee and will be subject to twenty percent (20%) withholding unless the Alternate Payee rolls over the funds into an IRA Required Distributions from PROP If a member who is active in PROP dies: A. A surviving spouse may choose to leave a portion or all of the PROP account with the pension system. B. The designated beneficiary or the estate as applicable will be required to take a distribution of the PROP account balance as of the end of the quarter 10

11 immediately subsequent to the date of the member s or surviving spouse s death. C. The PROP account will earn interest up to the effective date of the distribution Age 70 ½ Rules A. By April 1, of the year following the year in which a member reaches age 70 ½, the member must begin receiving a Minimum Required Distribution (MRD) of the PROP account and annuity payments so as to fully comply with Section 401(a)(9) of the Code and Regulations thereunder. B. Specific Minimum Required Distribution (MRD) policy and procedure provisions are outlined in HPOPS Minimum Required Distribution Policy, Section Reemployment If a retired member who is or was a PROP participant is rehired as a classified employee of the police department any pension benefit or PROP distribution that was being paid shall be suspended. Such an account shall continue to earn interest at the PROP interest rate, but no further distributions will be made from the PROP account until the rehired member is subsequently retired. 11

12 1410 Participation by Spouses Upon the death of a member who participates in DROP or PROP, the spouse of the deceased member may choose to keep a portion or all of the members DROP/PROP account in PROP Upon the death of a member in PROP, the spouse may elect to take a PROP distribution at the time the spouse completes the survivor benefit application. The distribution will occur on the last day of the month following completion of the necessary paperwork. Interest will accrue on the distribution amount until the date of distribution Request for distributions by a spouse that occur after those described in section will be subject to the distribution requirements in section PROP Beneficiary Designation In accordance with Article 6243g-4 Sec. 16A, Vernon s Annotated Texas Statutes, members and spouses may designate beneficiaries to receive their PROP account in the event of the member s or spouse s death A member who is married at death is considered to have designated the member s spouse to receive the PROP account For purposes of PROP beneficiary designation, HPOPS will recognize the member s marriage to the spouse in accordance with HPOPS Proof of Marriage Policy, Section

13 A member s PROP account may be distributed to designated beneficiaries other than the member s spouse if either of the following occurs: A. The member did not have a spouse at the time of his/her death. This will happen if the member s spouse predeceases the member, if the member and spouse are divorced after the member designated the spouse, or if the member is not married at his/her death. B. The member s spouse consents in a notarized writing to the distribution to other beneficiaries The member or surviving spouse must submit a PROP Designation of Beneficiary Form issued by HPOPS in order to designate his/her beneficiaries In general, the member or surviving spouse may designate any person or persons s/he wishes to receive the PROP account provided the designation makes a distribution of 100% of the PROP account In making the beneficiary designation, the member or surviving spouse can choose to designate both primary and contingent beneficiaries. A. Primary beneficiaries are entitled to the PROP account at the member s or surviving spouse s death. If more than one primary beneficiary is designated and one or more of these beneficiaries do not survive the member or surviving spouse, the percentage of the deceased beneficiary s designated share shall be divided equally among the remaining primary beneficiary(ies). B. Contingent beneficiaries are entitled to the PROP account only if all primary beneficiaries are deceased at the time of the member s or surviving spouse s death. If any of the named contingent beneficiaries do not survive the primary beneficiary(ies), the percentage of the deceased contingent beneficiary s designated share shall be divided equally among the remaining contingent beneficiaries A PROP Designation of Beneficiary Form will be ineffective and not used if: A. The member or surviving spouse does not designate a distribution that disposes of 100% of his/her PROP account in either of the primary or contingent beneficiary selections respectively. B. The member has a spouse at the time of his/her death and the spouse has not properly consented to the distribution to the designated beneficiaries. C. The member or surviving spouse listed contingent beneficiaries but no primary beneficiaries. D. The member did not properly answer any of the required questions on the PROP Designation of Beneficiary Form. 13

14 If the member has not designated a beneficiary, either because a PROP Designation of Beneficiary Form was not completed or the form that was completed is defective, the member s PROP account will be distributed according to the following order: A. To the member s spouse; B. To the member s children in equal shares if the member has no spouse. C. To the member s parents in equal shares if the member has no spouse and no children. D. To the member s estate if the member has no spouse, children, and parents at the time of his/her death If the surviving spouse has not designated a beneficiary, either because a PROP Designation of Beneficiary Form was not completed or the form that was completed is defective, the surviving spouse s PROP account will be distributed to the surviving spouse s estate A member s or surviving spouse s executed PROP Designation of Beneficiary Form will be valid once HPOPS Staff has reviewed and approved the designation. HPOPS Staff will notify the member if his/her designation was approved or the reason it was declined Members and or surviving spouses must submit a new PROP Designation of Beneficiary Form in order to modify or revoke a previous beneficiary designation that HPOPS has approved Electronically submitted PROP beneficiary designations are subject to the above described policies and procedures. 14