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Indiana Public Retirement System

Indiana Public Retirement System (INPRS) > My Fund > Legislators > Legislators' Member Handbook: The Defined Contribution Plan Legislators' Member Handbook: The Defined Contribution Plan

Members of the General Assembly who began service after April 30, 1989, or who were serving on this date and elected to participate, participate in the Defined Contribution Plan. This retirement savings program bases benefits on employee and employer contributions and the investment performance of your account. The plan offers flexibility and convenience, giving you the opportunity to tailor your account based on your personal financial needs. It allows you to guide and monitor the investment direction of your funds on a daily basis. This section explains the basic components of the Defined Contribution Plan.

Plan Provisions

Eligibility

The Defined Contribution Plan applies to legislators who began service after April 30, 1989, or who were in service on this date and elected to participate in this new plan. The Defined Contribution Plan is financed by contributions made by you, as a member, and your employer, the State of Indiana.

Enrollment

Legislators are enrolled in the Defined Contribution Plan when they begin serving in the General Assembly. A welcome packet, which includes information on online account activation, is mailed to legislators soon after they take office. They will have the option of activating their account online or calling INPRS’ customer service center at (888) 526-1687 to initiate this process.

Separation of Service

You are entitled to withdraw your account at any time following your separation of service, but your age at distribution and the payment option you choose will have certain tax consequences. These options are discussed later in this section. The amount available for withdrawal upon separation of service from the General Assembly is the market value of your account.

Contributions

As a member of the Defined Contribution Plan, you and your employer are required by statute to contribute a specified amount to your LRS account.

Employee Contributions

You must contribute five percent (5%) of your salary for your service after June 30, 1989. The Auditor of State deducts employee contributions from each salary payment. Contributions will be credited to the fund on the June 30 following their deduction.

The salary used to compute contributions include the total of the following amounts paid to you by the state for performing legislative services in the year in which the amounts are paid, determined without regard to any salary reduction agreement established under Section 125 or Section 457 of the Internal Revenue Code:

  • Salary;
  • Business per diem allowance and allowances paid in lieu of the submission of claims for reimbursements (but excluding any allowances for mileage),
  • Allowances paid to officers of the House of Representatives and the Senate.

Employer Contributions

In addition to the five percent (5%) employee contribution, the state also makes a contribution on your behalf each pay period. This employer contribution is determined by multiplying your salary for that year by a percentage determined by the INPRS Board and confirmed by the budget agency not to exceed the total contribution rate paid that year by the state to PERF for state employees.

Rollover Contributions

To the extent permitted by the Internal Revenue Code and the applicable regulations, the fund may accept, on behalf of any active member, a rollover distribution from any of the following:

  • A qualified plan described in Section 401(a) or Section 403(a) of the Internal Revenue Code,
  • Any annuity contract or account described in Section 403(b) of the Internal Revenue Code,
  • An eligible plan that is maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state under Section 457(b) of the Internal Revenue Code, or
  • An individual retirement account or annuity described in Section 408(a) or Section 408(b) of the Internal Revenue Code.

Transferring Contributions — PERF/TRF Service

On July 1 following the date you become a member of the Defined Contribution Plan, you may elect to transfer the amount in your PERF or Teachers’ Retirement Fund (TRF) annuity savings account to the Defined Contribution Plan. This amount will then be credited to your account. However, once you transfer this amount, it cannot be returned to your old PERF or TRF account at a later date. In addition, you may not make this election to transfer contributions at a later date.

Loans Against Your Account

Participants in the Defined Contribution Plan may apply for a loan from his or her account subject to limitations set forth in the Indiana Administrative Code and Federal Law. For example, there are minimum and maximum limits on loan amounts. In addition, legislators may make a maximum of two loans each calendar year.

Loans against your account are subject to default provisions.

In accordance with Revenue Code Section 72 (p) and 35 IAC 1.2-6-7, in the event any payments are not made properly when due or you otherwise fail to act upon obligations before the last business day of the 3rd month following the date of termination of employment (or retirement), the Custodian is authorized to exercise such rights or remedies as it may have as creditor. In addition, any expenses incurred by the Custodian in exercising such rights or remedies shall be chargeable to your individual account to the extent permitted by law.  If the loan is in default, the Custodian will offset the loan(s) plus interest by deducting an amount equal to its full unpaid balance(s) from your Legislators’ Defined Contribution Plan account. Any outstanding balance (principal plus interest) of the defaulted loan(s) is required to be repaid by the participant.  If you default on your repayments, the entire outstanding amount of the loan (principal and interest) will be reported to the Internal Revenue Service as a taxable distribution. Under certain circumstances, you may also be subject to penalty taxes. Lastly, if the loan is in default no new loans can be generated on your Legislators’ Defined Contribution Plan account until the remaining outstanding balance is paid in full.

If a member has a loan against his or her account, he or she will be required to bring the amount owed current and will be prevented from rolling forward late loan payments.

You may contact INPRS at (888) 526-1687 for more information. If you have a loan outstanding, you may request information regarding whether you are eligible to apply for another loan from your Legislators’ Defined Contribution Account.

Investing Your Account*

INPRS offers you the choice to direct the investment of your LRS Defined Contribution Account across a number of diversified investment options. Investing for retirement is one of the most important decisions you will ever make. This process must be given careful consideration and reviewed periodically. Three fundamental concepts should  be taken into account when making your investment decisions:

Diversification

Diversification is an investment strategy that seeks to reduce risk by distributing assets over a variety of investments. While this cannot guarantee earnings, it is designed to reduce the risk of loss because a variety of investments will not typically move in the same direction at the same rate at the same time. A diversified retirement plan reduces volatility over longer periods of time.

Risk Tolerance

Risk tolerance refers to your ability to tolerate the dips and peaks of a particular investment portfolio. When evaluating your investment options, it is important to decide how much volatility you can afford to risk over short and long-term investments. Investments with more risk may yield higher returns, but they may also have a tendency to rise and fall sharply over a certain period. You should have a thorough understanding of what your particular risk tolerance is before you choose an investment.

Time Horizon

Time horizon is simply the length of time before you need to access your money. Before you make an investment, you should ask yourself how long you intend to invest. Risk tolerance is associated with time horizon. A person nearing retirement  has a shorter time horizon than someone who is farther from retirement; therefore, the older investor may have a lower risk tolerance than the younger investor because the older investor has a shorter time horizon to endure sharp fluctuations in the market. The younger investor may accept greater risk since they have more time to weather the fluctuations of riskier investments.

*Market-associated risk is involved with investing. INPRS' investment fund options are not insured. INPRS cannot guarantee against the risk of loss based on your self-directed investment fund options.

Your Self-directed Investment Options

The plan allows you to actively manage your member account through self-directed investments. You decide how to allocate the funds in your account across nine investment options described below:

Consolidated Retirement Investment Fund (CRIF)

Prior to 1997, PERF was prohibited from investing in equities. Once that prohibition was lifted, the CRIF was created to allow all the retirement plans administered by the INPRS Board of Trustees to participate and share in the returns of equity investment. CRIF investments include all asset classes employed by the INPRS Board in the management of the retirement portfolio.

Money Market Fund

This fund seeks to provide a capital preserving investment with a stable rate of return by investing in high-quality fixed income securities. The maximum weighted average maturity is ninety (90) days. The investment return generally comes from interest earned by the securities and not from a change in their market value.

Stable Value Fund

This fund seeks to provide capital preservation and a stable rate of return through steady growth in principal and earned interest by investing in high quality fixed income securities. The risk profile of the fund is similar to money market funds.

Fixed Income Fund

The investment objective of the fund is to seek total return, consisting of income and capital appreciation, through both active and passive investment in a diversified bond portfolio.

Large Cap Equity Index Fund

The investment objective of the fund is to seek investment growth/capital appreciation through passive investment in the stocks of the 500 largest U.S. companies.

Small/Mid Cap Equity Fund

The investment objective of the fund is to seek investment growth/capital appreciation through both active and passive investment in stocks of small- and mid-sized U.S. companies.

International Equity Fund

The investment objective of the fund is to seek investment growth/capital appreciation through both active and passive investment in stocks of non-U.S. companies in both developed and emerging markets.

Inflation-Linked Fixed Income Fund

The investment objective of the fund is to maximize real return, consistent with the preservation of capital, through active investment in inflation-linked bonds.

Target Date Funds

The objective of these funds is to pursue an investment strategy consistent with a specific target retirement date through diversified investment options. The asset allocation automatically shifts to become more conservative as the retirement date approaches.

Although we seek to preserve the value of your investment, it is possible to lose money by investing in these options. You can log in to the enhanced PERF Online to review your account valuation as often as daily. You will need your Social Security number (SSN) and passcode to get started. If you do not have your SSN or passcode, call our office at (888) 526-1687.

Withdrawing Your Account

The Defined Contribution Plan’s member account balance may be withdrawn at any time following separation of service in the General Assembly. The payment option you choose and your age at distribution will have specific tax consequences. For your convenience, INPRS offers several flexible payment options. You may select only one of the five options.

Choice A: Purchase of an Annuity with the Total Balance of Your Account Using the entire balance of your account, the Legislators’ Retirement System will purchase an annuity on your behalf from an outside vendor. Terms and conditions may vary depending on the provider and the type of annuity selected. The provider may have additional forms to complete in the purchase process.
Choice B: Monthly Installments of Your Total Account Balance The Legislators’ Retirement System will pay you the entire balance of your account in equal monthly installments of 60, 120 or 180 payments. You must elect the number of payments at the time of application. This selection cannot be changed. No additional interest or earnings will be credited.
Choice C: Complete Distribution of Your Account Based on Tax Preferences

The entire balance of your account will be distributed according to the options you choose for taxable and non-taxable funds. You may make only one selection for each part, taxable and non-taxable. (See table below.*)

*Distribution Options for Payment Choices C, D and E

Taxable Portion Non-Taxable Portion
Direct Rollover Direct Rollover
Paid Directly to Me (Less Withholding) Paid Directly to Me
Partial Rollover Partial Rollover
Choice D: Partial Distribution and an Annuity Part of your account will be paid to you according to the options you choose and the balance will be used to purchase an annuity, subject to the same terms and conditions in Choice A. The amount paid to you must be in the same proportion as the taxable and non-taxable funds in your account. For example, if your account balance includes 60 percent taxable funds and 40 percent non-taxable funds and you elect to withdraw $1,000, the lump sum paid to you will consist of $600 in taxable income and $400 in non-taxable income. (See table above.*)
Choice E: Monthly Installments Your account will be distributed in monthly installments over 60, 120 and 180 months. You may select only one option for each part. (See table above.*)

Please note that Choice A and Choice B involve the total balance of your account, while choices C, D, and E allow you to choose separate directions for the disbursement of taxable and non-taxable funds based on your personal preferences.

Death Benefits

Your account – consisting of employee contributions, employer contributions, and investment earnings or losses – will be paid to your designated beneficiary or beneficiaries if you die either while a member of the General Assembly or after terminating service without having withdrawn your account from the fund. The amount disbursed will be the fair market value of your account upon the date of distribution. This amount would also include employee contributions deducted and employer contributions made since the last day contributions were reported. If there is no beneficiary, or if the beneficiary does not survive you, the account will be paid to:

  • Your surviving spouse;
  • Your surviving dependent(s), if there is no surviving spouse; or,
  • Your estate, if there is no surviving spouse or surviving dependent.

Payment Options for a Spouse

Upon your death, your spouse will have four choices for withdrawing funds from your account. Only one option may be selected from the following:

Choice A: Purchase of an Annuity with the Total Balance of Your Account The Legislators’ Retirement System will purchase an annuity on behalf of your spouse from an outside vendor. Terms and conditions of this annuity may vary depending on the provider and the type of annuity selected. In the purchase process, the provider may have additional forms to be completed.
Choice B: Complete Distribution of Account The entire balance of your account will be distributed according to the selections your spouse makes. Different options may be chosen for the taxable and non-taxable portions of your account. However, your spouse may make only one selection for each portion of the account.
Choice C: Partial Distribution and an Annuity Part of your account will be paid to your spouse according to the selections he or she makes, and the balance will be used to purchase an annuity, subject to the same terms and conditions in Choice A. The amount paid to your spouse must be in the same proportion as the taxable and non-taxable funds in your account. For example, if your account has a balance of $1,000 with a 60 percent taxable portion and 40 percent non-taxable portion and your spouse elects to withdraw it in a lump sum, the amount paid to your spouse will consist of $600 in taxable funds and $400 in non-taxable funds.
Choice D: Monthly Installments Over 60 Months Your beneficiary may elect a 60-month installment distribution of your account balance paid directly to him/her. No additional interest or earnings will be credited.

Payment Options for a Non-Spousal Beneficiary

Choice A: Total Distribution The total amount of the Defined Contribution Account, less any withholding for state and federal taxes, will be paid directly to your beneficiary or to your estate.
Choice B: Purchase of an Annuity The Legislators’ Retirement System will purchase an annuity on behalf of your beneficiary from an outside vendor. Terms and conditions of this annuity may vary depending on the provider and the type of annuity selected. In the purchase process, the provider may have additional forms to be completed. This option is not available for beneficiary payments to an estate.
Choice C: Partial Distribution and an Annuity Part of your account will be paid to your beneficiary and the balance will be used to purchase an annuity, subject to the same terms and conditions as in Choice B. This option is not available if the beneficiary is the estate of the member. The amount paid to your beneficiary out of your account will be in the same proportion of taxable and non-taxable funds as the balance in your account. For example, if your account has a balance of $1,000 with a 60 percent taxable portion and 40 percent non-taxable portion and your beneficiary elects to withdraw the lump sum, the amount paid to your beneficiary will consist of $600 in taxable funds and $400 in non-taxable funds.
Choice D: Monthly Installments Over 60 Months Your beneficiary may elect a 60-month installment distribution of your account balance paid directly to him/her. No additional interest or earnings will be credited.

Income Taxes

Federal Tax Provisions

Withdrawal options are subject to mandatory provisions of federal tax law regarding required beginning date and minimum required distributions, as follows:

  • When you reach age seventy and one-half (70 1/2) or retire, whichever is later, a certain portion of your account cannot be rolled over because it is a required minimum payment that must be paid to you.
  • If you choose to have a payment paid directly to you and any portion of your payment is eligible to be rolled over, you will receive only eighty percent (80%) of the taxable amount of the payment. LRS is required to withhold twenty percent (20%) to be credited as federal income taxes paid for the year in which you receive the payment. However, if you elect a rollover distribution into an eligible IRA or an eligible employer plan within sixty (60) days of receiving your payment, it will not be taxed until you withdraw the funds from the respective plan.
  • If you decide to have your payment paid directly to you before age fifty-nine and one-half (59 1/2), you may also have to pay an additional ten percent (10%) early withdrawal penalty. Generally, the additional ten percent (10%) tax does not apply to (1) payments that are paid after you separate from service with your employer during or after the year you reach age fifty-five (55); (2) payments that are paid because you retire due to disability; (3) payments that are paid as equal (or almost equal) payments over your life expectancy (or your and your beneficiary’s life expectancies); (4) payments that are paid directly to the government to satisfy a federal tax levy; or (5) payments that do not exceed the amount of your deductible medical expenses. See IRS Form 5329 for more information on the additional ten percent (10%) tax.
  • You will receive special tax treatment if you were born before Jan. 2, 1936. As previously mentioned, if you receive a payment from a plan qualified under section 401(a) or a section 403(a) annuity plan that can be rolled over and you do not roll it over to an eligible IRA or an eligible employer plan, the payment  will be taxed in the year you receive it. However, if the payment qualifies as a “lump sum distribution,” it may be eligible for special tax treatment. A lump sum distribution is a payment, within one year, of your entire balance under the plan that is payable to you after you have reached age fifty-nine and one-half (59 1/2) or because you have separated from service with your employer. For a payment to be treated as a lump sum distribution, you must have been a participant in the plan for at least five years before the year in which you received the distribution. The special tax treatment for lump sum distributions that may be available to you is described below.

If you receive a lump sum distribution and you were born before Jan. 2, 1936, you can make a one-time election to figure the tax on the payment by using “10-year averaging." Ten-year averaging often reduces the tax you owe. Ten-Year Averaging
If you receive a lump sum distribution and you were born before Jan. 2, 1936, you may be able to elect to have part of your payment taxed as long-term capital gain at a rate of 20 percent. See IRS Form 4972 for additional information on lump sum distributions and how you elect the special tax treatment. Capital Gain Treatment

There are other limits on the special tax treatment for lump sum distributions. Please see IRS Form 4972 for additional information on lump sum distributions and how you elect the special tax treatment.

Benefit Overpayment or Underpayment

Occasionally, errors occur in benefit calculation. If such an error is discovered, INPRS is required by federal and state law to correct errors at any time, including after you take a distribution of your account balance.  If you receive an overpayment as a result of any error, INPRS is required by federal and state law to recover benefit overpayments.  If you have an underpayment, you will receive an additional payment from INPRS.

Special Tax Notice Regarding Rollovers

A rollover is a payment of all or part of your benefit to an eligible employer plan or an eligible IRA that allows you to continue to postpone taxation of that benefit until it is paid to you. If you choose a direct rollover, your payment will not be taxed in the current year and no income tax will be withheld. An “eligible employer plan” includes  a plan qualified under section 401(a) of the Internal Revenue Code, including a 401(k) plan, profit-sharing plan, defined benefit plan, stock bonus plan, a money purchase plan; a section 403(a) annuity plan; a section 403(b) tax-sheltered annuity; or an eligible section 457(b) plan maintained by a governmental employer (governmental 457 plan).

Please note that an eligible employer plan is not legally required to accept a rollover. Even if a plan accepts rollovers, it might not accept rollovers of certain types of distributions, such as after-tax amounts. If this is the case and your distribution includes after-tax amounts, you may wish instead to roll your distribution over to an eligible IRA, or split your rollover amount between the employer plan in which you will participate and an eligible IRA.

Be sure to check with the administrator of the plan that is to receive your rollover prior to making the rollover.

Obtaining Additional Information

The tax consequences described above are complex and contain many conditions and exceptions that are not included in this notice. There are also state and local tax rules that might apply to your payment. Therefore, you may want to consult with a professional tax advisor before you elect a payment of your benefits from the Legislators’ Retirement System.

More detailed tax information is included in the LRS Application for Withdrawal of Contributions. Also, you can find more specific information on the tax treatment of payments from qualified employer plans in IRS Publication 575, Pension and Annuity Income, and IRS Publication 590, Individual Retirement Arrangements.

Note: These publications are available from your local IRS office, on the IRS Web site at http://www.irs.gov/, or by calling (800) TAX-FORMS.

Section Three: Defined Benefit Plan