REPORT TO COUNCIL
SUBJECT
Title
Approve the Implementation of a Section 401(a) Deferred Compensation Plan, and Authorize the City Manager to Execute All Plan Documents to Implement the Section 401(a) Deferred Compensation Plan, and Authorize the City Manager to Execute Side Letter Agreements, and Execute Any Future Side Letter Agreements, with Bargaining Units for City Contributions towards Deferred Compensation from the 457(b) Plan to the 401(a) Plan.
Report
BACKGROUND
The City established a deferred compensation retirement plan (hereafter, “Plan”) and authorized a deferral of a portion of employee compensation to be contributed to the plan and invested in an Internal Revenue Service (IRS) approved plan. The plan was established under Section 457(b) (hereafter, “457(b) plan”) of the Internal Revenue Code of 1986, as amended. Through the labor negotiation process, the City agreed with multiple bargaining units to make contributions towards their represented employees’ deferred compensation retirement accounts. Those City contributions were deposited in the employees’ 457(b) deferred compensation retirement accounts. Recently, there was interest in the creation of a Section 401(a) deferred compensation retirement account (hereafter, “401(a) plan”) in which the City would make employer contributions to certain of its employees’ 401(a) deferred compensation retirement accounts to allow employees to maximize their contributions to the 457(b) deferred compensation retirement account. The City has since reached agreement with several bargaining units to have the City’s contributions go into the 401(a) deferred compensation account.
DISCUSSION
On or about November 21, 2024, the Deferred Compensation Advisory Committee recommended to the City Manager that the City adopt a Section 401(a) deferred compensation retirement plan and authorized the City Manager to execute all required Plan documents upon aligning terms with the City’s existing Section 457(b) deferred compensation retirement plan to the extent possible.
Currently, Nationwide Trust Company, FSB (hereafter, “Nationwide”) serves as Trustee (Plan Administrator) of the City’s Section 457(b) deferred compensation retirement plan. The City has worked with Nationwide, to prepare a 401(a) plan to be available to allow for City contributions toward employees’ deferred compensation. The 401(a) plan has been drafted to align with the City’s existing 457(b) plan as closely as possible and is anticipated to have the same fees.
The City’s decision to adopt and implement the 401(a) plan would facilitate the City making tax deferred contributions to eligible employees’ retirement plans, and thus allow employees to maximize amounts they contribute to their individual 457(b) plan. If the City contributes the agreed upon employer deferred compensation contributions to the 401(a) plan, instead of the 457(b) plan, employees will have the option to contribute more total dollars toward their deferred compensation by maximizing employee contributions into their individual section 457(b) deferred compensation retirement accounts up to the annual limit.
Under the IRS rules and regulations, employees are allowed to have both section 457(b) and section 401(a) deferred compensation retirement accounts. Nationwide plan administration A 401(a) account will be created for an employee with an existing 457(b) account, and the City can make its contributions toward the employee’s 401(a) plan account upon agreement with the representative bargaining units, if any. Otherwise, the City will continue to make any agreed upon employer deferred compensation contributions into the eligible employees’ 457(b) deferred compensation retirement accounts.
Notably, there are some key differences between the 401(a) plan and the 457(b) plan which include:
1. 457(b) has annual contribution limits; for 2025, it is $23,500. The City can separately contribute the agreed upon employer-provided contribution to the 401(a) (which subject to a separate limit).
2. 457(b) account non-Roth funds can be accessed immediately after separation, regardless of age. The 401(a) account non-Roth funds can be accessed immediately after separation with a 10% penalty before age 59 and ½, subject to specific exceptions. After age 59 and ½, there is no penalty.
3. 457(b) contributions are subject to Social Security and Medicare taxes, while 401(a) contributions are not.
It should be noted that the City has agreements with several bargaining units to make contributions to deferred compensation on behalf of employees; however, these agreements currently reference only the 457(b) plan. The Santa Clara Firefighters, IAFF Local 1171 (Unit 1), the Unclassified Police Management Association (Unit 9A), and the Unclassified Miscellaneous Management Employees (Unit 9) have entered into Side Letter Agreements with the City to have City contributions into their represented employees deferred compensation to go into the 401(a) plan once the 401(a) plan has been implemented. Moving forward, other bargaining units may be interested in having the City contributions into deferred compensation go into the 401(a) plan; if so, the City will enter into Side Letter Agreements at that time.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environmental Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(b)(5) in that it is a governmental organizational or administrative activity that will not result in direct or indirect changes in the environment.
FISCAL IMPACT
There is no anticipated additional costs with the implementation of the 401(a) plan, or having City contributions go into the 401(a) plan versus the current 457(b) plan.
COORDINATION
This report has been coordinated with the Finance Department and City Attorney’s Office.
PUBLIC CONTACT
Public contact was made by posting the Council agenda on the City’s official-notice bulletin board outside City Hall Council Chambers. A complete agenda packet is available on the City’s website and in the City Clerk’s Office at least 72 hours prior to a Regular Meeting and 24 hours prior to a Special Meeting. A hard copy of any agenda report may be requested by contacting the City Clerk’s Office at (408) 615-2220, email clerk@santaclaraca.gov or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
Approve the Implementation of a Section 401(a) Deferred Compensation Plan, and Authorize the City Manager to Execute All Plan Documents to Implement the Section 401(a) Deferred Compensation Plan, and Authorize the City Manager to Execute Side Letter Agreements, and Execute Any Future Side Letter Agreements, with Bargaining Units for City Contributions towards Deferred Compensation from the 457(b) Plan to the 401(a) Plan in final forms approved by the City Attorney.
Staff
Reviewed by: Aracely Azevedo, Director of Human Resources
Approved by: Jovan D. Grogan, City Manager
ATTACHMENTS
1. 401(a) Adoption Agreement
2. 401(a) Administrative Services Agreement
3. Additional 401(a) Plan setup documents from Nationwide
4. Side Letter Agreement with the Santa Clara Firefighters, IAFF Local 1171 (Unit 1) on 401(a)
5. Side Letter Agreement with the Unclassified Police Management Association (Unit 9A) on 401(a)
6. Side Letter Agreement with the Unclassified Miscellaneous Management Employees (Unit 9) on 401(a)