Laid-off D.C. General employees eyeing their retirement accounts find that 457 is an unlucky number.
When D.C. General Hospital was closed by the city in July, it wasn’t just the patients who had to look for new alternatives. Nearly 2,000 employees of the now defunct Public Benefit Corp. (PBC), which operated the hospital, were laid off as a result of the closing. They’re looking for new alternatives as wellnew jobs, new ways to pay the bills, and new ways to invest or access the retirement cash they’ve saved.
Janet Jackson, a nurse at the shuttered hospital, is one of those employees. Her layoff has caused her predictable financial distress, and the 53-year-old Fort Washington, Md., resident has been eyeing the sizable funds in her 457 Deferred Compensation Plana retirement account established under tax law for employees of governments, municipalities, and their agenciesas a temporary escape route.
At present, Jackson has more than $100,000 socked away in her 457 account. She says that the PBC Foundationthe nonprofit fundraising arm of the PBCtold employees that they could roll their retirement investments into new 457 accounts called Fidelity Funds, operated by the Arlington, Va.-based Benefit Concepts Group, Inc. and the United Bank of Virginia. The best part of this alternative plan, Jackson says, was that participants were told they could take tax-free loans from their accounts.
The new plan seemed to be an easy way to ease her pressing financial burden. Jackson knew that the 457 plan that she kept with the city didn’t offer a loan provision. The rollover proposal endorsed by the PBC Foundation would increase Jackson’s cash flow without necessitating a payout to the Internal Revenue Service (IRS).
“The PBC [Foundation] said we could roll it over and borrow your own money,” recalls Jackson. “That’s how I understood it.”
But city officials had a different interpretation of the options available to the former PBC workers. They told Jackson she had only three choices if she wanted to tap into her account: one lump-sum payment, a series of payments spread out over time, or purchased annuity options. All three alternatives would incur significant tax penalties.
Worse yet, a deadline for her decision loomed. Jackson had only until Aug. 14one month to the day from the hospital’s closureto decide if and how she would reallocate her money. “I was told that I just had to take the money out and that I didn’t have much time to do it,” she says.
The 457 Deferred Compensation Plan held by former D.C. General employees is unlike the traditional 401(k) or 403(b) plans, which allow participants to borrow from their retirement accounts without any tax penalty.
“If they want access to the money [now], they have to pay taxes,” says N. Anthony Calhoun, the District’s deputy chief financial officer and treasurer.
Jackson is still bewildered by the mixed messages she’s received from the PBC Foundation and the city. “It was just confusing,” she says.
Jackson’s puzzlement is understandable. She and 425 other ex-D.C. General employees who hold retirement funds in 457 accounts are the focus of a tug of war between Benefit Concepts Groupwhich says its plan will help Jackson and others in her situationand the city, which refuses to endorse the plan.
Benefit Concepts Group President Jim Cannon argues that the District is “lying” to former D.C. General employees about their deferred-compensation-plan accounts.
“Loan provisions [for 457 plans] do exist,” Cannon argues. “It’s up to the employer.” He says that the city hasn’t offered such a provision because it believes that such a move would be a risky bureaucratic nightmare.
“Their assumption is that a lot of D.C. employees would take loans and not pay them back,” he says. “It would be a very popular feature, which would cause more paperwork for the District.”
Cannon says that Jackson and other 457-plan participants would lose 35 percent of their money to local and federal taxes if they chose any of the current disbursement options. “The IRS would be their new best friend,” he quips.
Cannon says the plan put together by his firm with the United Bank of Virginia and the PBC Foundationrenamed the Healthy D.C. Foundation (HDCF) after the closing of D.C. General and the PBCwill give former D.C. General employees flexibility with their retirement money right now. The aim of the HDCF, which seeks out tax-exempt contributions and grants, is to fund programs to enhance the quality of health care in the District and increase access to it.
“These people have real bills to pay,” Cannon concludes. “This loan isn’t going to be the sole salvation of that, but it’s one piece.”
According to a top official at the HDCF, speaking on condition of anonymity, Benefit Concepts Group came to the nonprofit with the alternative plan. The nonprofit’s leadership quickly endorsed it.
“[Benefit Concepts Group] approached us literally in the hallway of our office,” says the official. “After reviewing it, we decided that it would be something that would benefit the employees and this was a way to support them. My impression was that former employees would be in a situation of possibly mental stress and strain and that having as many alternatives to protecting their money was as good a thing as possible.”
Senior management of the PBC Foundation sent a letter to D.C. General employees on May 18, informing them about the new Fidelity Funds option.
The letter stated: “You may elect to participate in the new 457 plan when you are separated from service with the DCGH/PBC. This means you have the opportunity to roll your retirement dollars into the Fidelity Funds’ deferred compensation plan and thus can avoid paying additional taxes and penalties.”
The hitch in the Benefit Concepts Group plan is the inflexibility of 457 accounts under current tax laws. Holders of 457 accounts must be employed by the organization that sponsors the plan. For former D.C. General employees to participate in the Benefit Concepts Group plan, they must be employed by the HDCF.
Cannon says that as long as former D.C. General employees performed “some sort of service” to the HDCF, they would be eligible, even if, as he puts it, they were to simply “stuff envelopes.”
HDCF officials are apparently unaware that such service is required, however. “That’s not our understanding,” another HDCF official says.
Cannon says that he would obtain “no personal gain” from the alternative plan, but he observes that his firm would make a profit of about $125,000 a year if D.C. General employees such as Jackson did roll over into the Benefit Concepts Group plan.
District officials conclude flatly that the Benefit Concepts Group proposal is not an option for the laid-off D.C. General workers.
In a June 27 letter to employees, Calhoun attempted to quash the notion that employees could roll over to the alternative plan, observing that “the Government of the District of Columbia does not endorse this program with Benefit Concepts Group and United Bank of Virginia.”
Far from clarifying the situation, however, Calhoun’s missive caused confusion among employees, who had little more than two weeks of work left before collecting their final D.C. General paychecks. The letter spelled out the city’s negative position on the alternative 457 plan and reiterated disbursement options that were available to D.C. General employees, but it did not mention another important option: keeping the money in current accounts until a new federal law allowing 457 rollovers takes effect. On Jan. 1, 2002, the Economic Growth and Tax Relief Reconciliation Act will eliminate the legal quirk that prevents 457-account-plan holders from transferring their retirement cash into conventional retirement tax shelters such as individual retirement accounts.
Calhoun’s letter elicited a sharp response from Benefit Concepts Group. In a July 13 missive, Cannon demanded a “retraction letter to all participants” in the 457 plan, “admitting that the PBC Foundation Alternative 457 Plan is allowed by the law.” He argued that the city was misinforming laid-off D.C. General employees and casting aspersions on his firm.
Calhoun replied with a July 23 letter in which he stated that his office did not intend to attack any of the parties that had created the Fidelity Funds rollover program. But he reiterated his view of the plan’s shortcomings.
Calhoun now argues that former D.C. General employees don’t face a “choose or lose” dilemma.
“They don’t have to take the money outthat’s the first thing,” he says. “The plan doesn’t require you to take the money out just because you leave. Cannon is trying to imply that they have to take this money.
“I apologize if it wasn’t clear,” continues Calhoun. “The idea was to get the letter out quickly.”
Calhoun maintains that the lawyers he’s consulted about the Benefit Concepts Group plan have advised him that foundations and nonprofit organizations, such as the HDCF, offering 457 retirement plans can’t provide loan options to employees from their retirement accounts. He adds that he remains dubious about the sufficiency of stuffing envelopes to obtain eligibility.
“I don’t see the foundation hiring these people as contractors,” argues Calhoun. “It might be technically legal. We were getting inquiries from employees [saying] that all they had to do was to sign their money to his plan. We knew nothing about it. He didn’t come talk to us. The red lights went on.”
Cannon continues to maintain that the District is wrong about his company’s plan. He vows to keep fighting to enroll former D.C. General employees. According to his attorneys, his plan is legal under federal tax law.
“We haven’t lost this battle yet,” says Cannon.
Calhoun sympathizes with the former D.C. General employees who might need an immediate cash infusion, but he says that the matter is out of the District’s hands because of federal tax restrictions.
“There is something called a hardship withdrawal, but you still have to pay taxes,” Calhoun explains. “The IRS makes the rules.”
In the meantime, Jackson is faced with difficult choices: roll into a controversial new 457, take a big tax hit for immediate cash, or tough it out until she can transfer her retirement funds at the dawn of 2002.
“It’s our money,” says Jackson. “And I want to be in control of my own money.” CP