REPORT TO DEFERRED COMPENSATION COMMITTEE
SUBJECT
Title
Action to Approve the Implementation of a 401(a) Deferred Compensation Plan, and Recommend Same to City Manager
Report
BACKGROUND
The City has had a section 457(b) Deferred Compensation Plan for several decades. The Internal Revenue Code (IRC) allows for several different types of deferred compensation plans, one of which is a section 401(a) plan. The plans have varying contribution limitations under the IRC. A section 401(a) plan option is primarily for employer contributions toward employee’s accounts that do not count against the contribution limitation in section 457(b) accounts. Historically, the City did not contribute to employees’ retirement accounts. In recent years, through the labor negotiations process, the City has begun to contribute to employees’ accounts, depending on the employees’ bargaining unit. More recently, the City has agreed to make deferred compensation contributions on behalf of City employees in classifications represented by the Unclassified Miscellaneous Management (Unit 9) bargaining unit on a successor Memorandum of Understanding (MOU) effective January 1, 2025.
DISCUSSION
The City has worked with the City’s current deferred compensation administrator, 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 setup to mirror the existing 457(b) plan as closely as possible, including having the same mutual funds available to participants to invest in. Additionally, the 457(b) plan and the 401(a) plan have the same administrative fees.
If the City contributes the MOU provided employer contributions to deferred compensation to the 401(a) plan account, instead of the 457(b) plan account, employees will have the option to contribute more total dollars toward their deferred compensation by having employee contributions go into the 457(b) plan.
Nationwide allows for employees to have both the 457(b) and 401(a) accounts. Once an employee has a City of Santa Clara 457(b) deferred compensation account with Nationwide, they will not need to separately elect the 401(a) plan. 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.
Notably, there are some key differences between the 401(a) account and the 457(b) account which include:
1. 457(b) account has a contribution limit of $23,500 for 2025. The City can separately contribute MOU provided contribution to the 401(a) (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. After 59 and ½, there is no penalty.
3. 457(b) contributions are subject to Social Security and Medicare taxes. 401(a) contributions are not.
It should be noted that the City has agreements with other bargaining units to make contributions to deferred compensation on behalf of employees; however, these agreements currently reference only the 457(b) accounts. As it becomes practicable, the City can discuss with the relevant bargaining units that City contributions will go into the 401(a) instead. At this time, upon implementation of the new 401(a) plan, only City contributions to employees represented by Unit 9 will go into the 401(a) plan. Furthermore, approval of Nationwide as the 401(a) Plan administrator and record-keeper is appropriate without a competitive process under the City’s purchasing code, first, because there is no associated cost to the City for the Plan administration and, second, because it is necessary to achieve interoperability with the existing deferred compensation plan.
Additional miscellaneous documents, in addition to the Adoption Agreement and the Administrative Services Agreement, will need to be completed in order to effectuate the Plan. The Committee may recommend to the City Manager to sign all necessary documents to effectuate the Section 401(a) Plan.
ENVIRONMENTAL REVIEW
The action being considered does not constitute a “project” within the meaning of the California Environment Quality Act (“CEQA”) pursuant to CEQA Guidelines section 15378(a)(4) in that it is a fiscal activity that does not involve any commitment to any specific project which may result in a potential significant impact on the environment.
FISCAL IMPACT
Implementation of a 401(a) Plan will have no fiscal impact on the City apart from staff time because all Plan-related fees are paid by Plan participants. The Agreement contains an provision regarding early cancellation by the City, which carries a fee of $200,000.
City (employer) contribution to a deferred compensation plan as required under an applicable MOU is budgeted as a part of personnel-related costs and is an independent obligation to the members of that bargaining unit, regardless of the mechanics of implementation of the Plan, which is all that is before this Committee for action. For example, the fiscal impact associated with City contributions to Unit 9 members’ deferred compensation accounts was described in conjunction with the action approving the Unit 9 MOU (approved by City Council on November 19, 2024) and is not included as a fiscal impact directly tied to this present action.
PUBLIC CONTACT
Public contact was made by posting the Deferred Compensation Committee 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 <mailto:clerk@santaclaraca.gov>, or at the public information desk at any City of Santa Clara public library.
RECOMMENDATION
Recommendation
1. Approve implementation of a Section 401(a) Deferred Compensation Plan upon terms aligned with the City’s existing Section 457(b) Plan, to effectuate a provision of the Unit 9 MOU; and
2. Recommend to the City Manager execution of all required Section 401(a) Deferred Compensation Plan documents upon terms aligned with the City’s existing Section 457(b) Plan, in a final form to be approved by the City Attorney’s Office.
ATTACHMENT
1. DRAFT 401(a) Adoption Agreement
2. DRAFT 401(a) Administrative Services Agreement
3. City’s existing Nationwide 457(b) Plan Administrative Services Agreement