STATE OF LOUISIANA

DEPARTMENT OF STATE CIVIL SERVICE

BATON ROUGE, LOUISIANA

General Circular No. 001505

To: Heads of State Agencies and Human Resource Directors

Subject: New Regulations Regarding The Deferring of Taxes

Issue Date: October 28, 2002

The United States Department of the Treasury has announced new regulations that will allow the deferring of taxes on a broader range of compensation than has been allowed in the past through participation in the Deferred Compensation Plan. Employees can begin taking advantage of these changes right away. The new regulations will allow the deferring of taxes on lump sum payments for retroactive pay, and lump sum payments for annual leave and sick leave. Retroactive pay arises in a number of circumstances in our employment system, and payment for up to three hundred hours of annual leave occurs upon separation of every employee. We do not make lump sum payments for sick leave.

The pertinent change in the regulations addresses the timing of the signing of the document that causes funds to be deposited with the Deferred Compensation Plan. As interpreted in the past, the document had to be signed before the compensation was earned. Because leave is earned from the first day of employment, and because retroactive pay has already been earned, the lump sum payments were not eligible to be considered compensation upon which taxes could be deferred. The new regulations provide that the deferral agreement must be signed not before the compensation is earned, but "before the first day of the month in which the compensation is paid or made available" in order to defer taxes on that compensation.

Additionally, the yearly maximum annual deferral amounts are raised both by the new regulations and by changes in the law. For 2002, the amount is fixed at $11,000, for 2003 at $12,000, for 2004 at $13,000, for 2005 at $14,000, and for 2006 at $15,000.

No new Civil Service rule is necessary because of these changes. The employee may make an election to defer taxes regarding these newly covered items of compensation in the same manner at has been done in the past regarding salary.

There is one caveat, however. The new regulations are said to be effective January 1, 2002, but only if the regulations are adopted. They have not been yet adopted, but because the administrators of the Deferred Compensation Plan, and the industry, generally, have a high degree of confidence that the regulations will be adopted later this year, the Plan is now accepting amounts deferred from these newly identified items of compensation. It should be mentioned that because the limits of the annual deferral amounts have been raised by law, the validity of such limits is not affected by the regulations, but now exist at the higher levels.

Please make you employees aware of this general circular and the information contained herein.

Sincerely,

Allen H. Reynolds

Director