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Retirement Manual - Withdrawal and Refund Benefits

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Withdrawal of Accumulated Employee Contributions – (See R. S. 11:15

If an employee is terminated, and is not eligible to retire, he is eligible to receive a refund of his accumulated employee contributions.  Before payment can be made to the former member, he must remain out of service for sixty days, all contributions withheld from his salary must have been received by the fund, and his former employer must certify that the information on the application is accurate.  Once a former member receives a refund of his employee contributions, all service credit attributable to the contributions will be cancelled.  Neither the former member nor his beneficiary will be entitled to receive any benefits related to such service.

Tax Treatment of Refunds

Employee contributions made prior to January 1, 2000 were not tax sheltered.  Therefore, a member’s taxable income was gross of such withheld employee contributions.  Employee contributions made on or after January 1, 2000, when the retirement system became a qualified plan, are tax-sheltered.  Therefore, a member’s taxable income during this period is net of withheld employee contributions.

An employee who participated in the system prior to January 1, 2000, terminates employment after January 1, 2000, and who thereafter applies for a refund of accumulated employee contributions will have two categories of accumulated employee contributions:

  1. Employee contributions paid prior to January 1, 2000 were not tax sheltered and therefore, if taxes were paid on the full gross salary of the member, refunded employee contributions for this period would not be considered a taxable distribution.
  2. Employee contributions paid on and after January 1, 2000 may have been tax sheltered and therefore would require different treatment.  Such sheltered employee contributions, unless rolled over into a qualified plan or IRA, have restrictions placed on their treatment at the time they are refunded.
    1. First, an employee would owe ordinary income taxes on refunded contributions that were not previously taxed as income.
    2. A 10% income tax penalty may apply if the refund is made before the employee reaches age 59½.  (Certain exceptions apply that include distributions made on or after an employee’s death, a distribution attributable to the employee’s being totally and permanently disabled, a distribution made to an employee after separation from service after attainment of age 55, a distribution made to satisfy a federal tax levy, a distribution to an alternate payee pursuant to a domestic relations order, or a distribution for certain medical expenses that would be allowable as an itemized deduction.)
    3. The retirement system is required to withhold 20% of the sheltered employee contributions that are eligible for rollover if they are instead paid directly to the member.  The 20% withholding may be more or less than the actual federal income taxes owed as a result of the refund.

Members should consult a tax accountant for advice on matters related to refunded employee contributions.  The 10% income tax penalty and the 20% withholding requirement can be avoided if the employee elects to rollover all sheltered employee contributions into an IRA or other qualified retirement plan.  The portion of any refund equal to those employee contributions that were paid prior to January 1, 2000 may not be rolled over.

Example: Assume that an employee terminated employment on January 1, 2009, that the employee contribution balance includes $1,000 in employee contributions made prior to January 1, 2000 and $5,000 in sheltered employee contributions made on and after January 1, 2000.  Upon proper application for a refund of contributions, the amount of $1,000 will be refunded directly to the member and is not subject to withholding or tax penalty since the employee has already paid federal income taxes on these contributions.  The amount of the $5,000 of sheltered employee contributions may either be (1) rolled-over into an IRA or other qualified retirement plan without withholding of federal income taxes, or (2) refunded directly to the member with 20% withheld.  If a refund is made to the member with 20% withheld for federal income taxes, the distribution is a taxable event reported to the IRS and may be subject to a 10% penalty if the employee is under the age of 59½ years when the refund is paid and does not fit any of the exceptions provided for by the Internal Revenue Service. 

Important Considerations Prior to Requesting a Refund of Accumulated Employee Contributions

A member who ceases to be an employee may leave the accumulated employee contributions on deposit with the system, but such funds do not accrue interest that could be paid to the former member at a subsequent time upon a request for a refund of accumulated employee contributions. A person who ceases to be an employee and who leaves their accumulated employee contributions on deposit with the system is not a member of the system unless they otherwise return to membership and will not, except as otherwise specified, be eligible for any benefits due members.  A refund may be requested at any time and if a former member who had not withdrawn their accumulated employee contributions dies, the accumulated employee contributions on deposit will, upon proper application, be paid to the designated beneficiary or, if none, the former member’s estate.

A few reasons exist for a member who ceases to be an employee to leave the accumulated employee contributions on deposit with the system.  Such a member may:

  1. Have enough years of service credit to be eligible for a deferred retirement benefit.
  2. Expect to return to covered employment and become eligible for a benefit at a later date.
  3. Expect to be employed by another public entity in Louisiana where they will become a member of another public retirement system.  In this case, a terminated member with all employee contributions remaining on deposit may execute a reciprocal recognition agreement with another eligible public retirement system or complete a transfer of service credit.  Upon completion of a transfer of service credit, an amount including the member’s employee contribution balance will be sent to the receiving system (For more details see Reciprocal Recognition of Credited Service in Other Public Retirement Systems and Transfers Between Public Retirement Systems).

A person who was previously a member of the system and who returns to covered employment must again and at that time become a member of the system.  The requirement to become a member of the system exists regardless of whether the member withdrew their contributions made during the previous period of membership.

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