Company pensions and saving schemes are wide and varied in their policies, workings and (most importantly for the employee) the way that the money is eventually paid out. Many employers will offer some kind of pension scheme or salary sacrifice in return for non taxable benefits; however, the Ohio Deferred Compensation initiative presents an ideal way for certain employees to supplement their savings on the road to retirement.
The Ohio Deferred Compensation scheme was set up in 1977 in conjunction with the Internal Revenue Service to offer a 'top up' option for state and local government employees in Ohio without it negatively affecting their tax or pension status. The simple explanation of the program is that employees either pay $15 per payday (if paid bi-monthly) or $30 per payday if paid monthly (more can be paid in up to $16,500 per year.) This is then stored away through an indepdendent third party and invested until the employee has terminated employment (or retired!) and paid out in one lump sum, set aside from any pension maturities.
Salary sacrifice schemes are known the world over, and the main benefit for the average worker is that whatever is taken out of their salary is exempt from taxation, both local and federal. Therefore, when the $30 is set aside, it's a full $30 that goes into the saving scheme. Of course, it is taxed upon redemption, but this is a consideration for the future rather than worrying about tax in the present.
The other main benefit of this scheme is that it allows those who find their pensions are not working enough to put a little bit extra away. The Ohio Deferred Compensation scheme's model has, unsurprisingly, been taken and copied the world over for its ability to add that 'little bit extra' on top of company pension and reward schemes.
Of course, the main reason behind the Ohio Deferred Compensation idea is that, come retirement time, all those supplementary payments finally come to fruition in a lump sum. The best part of the scheme is that this scheme doesn't even affect pension payouts.
With any idea such as this, there are inevitably downsides. The first is that one must consider participation in the Ohio Deferred Compensation scheme to be locking funds away with no access to them until termination of employment. Therefore, if paying in $100 monthly for ten months, that $1000 absolutely cannot be accessed before employment has finished unless in a small amount of pre-approved circumstances. This does mean, therefore, that if an unexpected cost comes in such as an expensive car repair, house maintenance issue or similar, these funds can't be drawn out to cover the shortfall. For this reason, many employees prefer the money to sit in a savings account with admittedly limited access, but the option to draw down in an emergency.
Another pitfall is that the tax payable on the salary sacrifice is not avoided, it is merely delayed. Upon payout of the money, income tax is still payable at the usual rate. For anyone taking part in the scheme, this is an important fact to remember, and often is a reason that participants will pay in their requested amount plus the whatever the amount of tax would be; at the end, when tax is taken off, the participant knows exactly what they're going to receive.
There is also a (small) cost attached in order to adminster the scheme, but this is taken out of the investment performance of the scheme.
There are a small number of occasions when the money can be accessed, although these are very limited and strictly set out by the IRS. Funds can only be accessed if:
Overall the scheme can present a great way for young or older employees to supplement their already existing pensions with a little bit extra at a variable rate. If, for instance, overtime has been worked, the employee may decide to put in an extra $100 for the month, and likewise, as long as the minimum pay in is achieved, if times are a little tougher, the amount paid in can be reduced. However, it must be considered a locked in agreement with the money largely untouchable, potentially for decades.
The plan is also only available to a select number of people, in particular government and state employees for Ohio. Employees of private companies or other states (including those bordering the state of Ohio) are not eligible to participate.
The scheme is adminsitered by one provider alone, who can be accessed online, by phone or in person. Governmental and public body finance and HR departments are also able to assist employees interested in taking part in the program.
The important thing to remember is that this is a government approved, government adminstered scheme which, for the right investor, presents a great low risk option for saving. But similarly, for those wishing to be more hands on, riskier investments can present the opportunity to increase returns (although loss is also an occupational hazard.)
ohio547.org provides more information on the workings of the scheme as well as information on how to participate.