• September 21, 2014

IRS regulates deferred compensation

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Posted: Sunday, August 5, 2007 12:00 pm | Updated: 4:53 pm, Wed Aug 15, 2012.

By Candace Birkelbach

Killeen Daily Herald

The Internal Revenue Service issued new regulations in April regarding deferred compensation for school employees who work fewer than 12 months a year.

A common practice among school districts for employees who work fewer than 12 months during the year is to annualize their payments or spread them out over a 12-month period.

The new rules state that compensation generally cannot be deferred for more than 13 months without penalty. The new rules also require written agreements among employers and employees in order to defer compensation for up to 13 months, the Association of Texas Professional Educators reported.

The written agreement must be in place before the first day of the employee's service; otherwise, the deferred compensation is subject to a 20 percent excise tax charged to the employee.

The Killeen Independent School District chose to have all its employees receive annualized compensation. The district is sending out a notice to employees to inform them that the district made the unilateral decision to continue annualized compensation, something it has practiced for about 10 years, said Steve Cook, KISD executive director for personnel services.

"We made this election for everyone, and they do not have to sign a written agreement for deferred compensation to avoid the 20 percent tax," Cook said. "We've looked into this, and it was kind of disturbing initially, but our attorneys confirmed that it is just as legal to do the unilateral process."

Whether or not an educator defers compensation should not affect the amount of the total annual salary that the educator will receive – only the timing of when it is received, the ATPE wrote in an article on its Web site. "If an educator receives deferred compensation without having a written agreement or district policy providing for deferred compensation, the educator, not the district, will be responsible for the 20 percent excise tax," the article stated.

The annual compensation enables teachers to continue to get paid in the summer months even though they are not working, Cook said.

"It also helps with their benefits contributions so there is no period where they will have to pay benefits," Cook said.

Teachers who work fewer than 12 months in the year must receive their salary over 12 months and cannot just be paid over the 10 months they are in service, Cook added.

Contact Candace Birkelbach at candaceb@kdhnews.com or call (254) 501-7553

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