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BACKGROUND <br />The City adopted deferred compensation plans (Title 26, Section 457 of the Internal <br />Revenue Code) that allow employees to make additional (and entirely voluntary) <br />contributions out of their salaries for retirement purposes. The City acts as a trustee <br />under these plans but incurs no cost; the costs associated with the plans are paid out of <br />the employees' contributions and earnings on investments. These plans are <br />administered by ICMA Retirement Corporation and CaIPERS 457. <br />The IRS Code allows for a loan program in a 457 retirement plan and provides eligible <br />participants an ability to borrow funds from their account balance and repay through <br />payroll deduction. <br />DISCUSSION <br />With recent changes in the economy that include rising energy costs and a downturn in <br />the housing market, some employees face tremendous financial challenges. Many <br />attempt to borrow money for a variety of reasons and are unable to do so because of <br />the tight financial market. Some of these same employees pre-planned for their <br />retirement and invested pre-taxed dollars into atax-deferred, IRC 457 deferred <br />compensation program. <br />The City of Pleasanton has an opportunity to assist employees by amending its IRC 457 <br />plan documents with CALPERS and ICMA. The amendment would allow eligible <br />employees to borrow against their 457 retirement savings accounts, and repaid via <br />payroll deduction at an interest rate of prime plus .5% for ICMA and prime plus 1 % for <br />CaIPERS 457. The maximum an employee may borrow is 50% of the amount in the <br />account and only a single loan is allowed at any one time. Any outstanding balance is <br />immediately due and payable in the event of separation of employment. Failure to <br />repay upon separation of employment is deemed a distribution and reported as a <br />taxable distribution. <br />The City incurs no cost as a result of implementing this program. The IRC 457 loan <br />program presents a viable alternative for those facing economic challenges. <br />Submitted by: Fiscal Review: <br />'~ <br />ulie Yuan- iu David P. Culver <br />sistant Ci Manager Director of Finance <br />Attachments: <br />1. Resolution for ICMA Amendment <br />2. Resolution for CaIPERS 457 Amendment <br />Approved <br />Nelson Fialho <br />City Manager <br />Page 2 of 2 <br />