Early Withdrawals Not Permitted

A volunteer firefighter LOSAP adopted in New York State can not be designed to allow an early withdrawal before the entitlement age. The entitlement age is defined in Section 215(4) as:

Emphasis was added on the last sentence. This is about as clear as the law can be – a program may not provide for the payment of benefits to a participant before age 55, except in the case of disability.

The practical ramification of this is that a volunteer who earns five years of LOSAP service credit in his/her 20s and resigns (we could call this person a terminated vested participant, or TV) cannot be paid until the entitlement age. This means a LOSAP sponsor will have to track this TV for 30 or more years, sending him/her the annual statement with all of the mandatory disclosures. Ultimately this means the Sponsor will likely incur administrative expenses related to this person over the 30+ year period he/she remains a participant. Unfortunately, there is no way under the current law to allow a LOSAP to be designed to just distribute a lump-sum to a terminated vested participant at the date of resignation, thereby removing that liability and administrative cost from the plan.

It could be natural for a sponsor to consider the purchase a deferred annuity contract to fund the benefit to a TV. In this case, the sponsor would pay a one-time premium to offload the responsibility of paying this benefit to an insurance company. With this approach, the former volunteer does not receive payment until the entitlement age, which satisfies the stipulation detailed in the quoted statute above. One obvious drawback would be the cost of the annuity contract, and if the premium for the annuity results in a cost savings relative to the actuarial liability and anticipated administrative expense to be paid over time. But even if it was a fiscally prudent solution, once those assets are removed from the plan and separated from the assets of the LOSAP sponsor, it creates a taxable event for the participant. In layman’s terms, the individual would have to pay income tax on the purchase price of the annuity even though the benefits wouldn’t be paid until a later date. That would be a undesired result as well. Therefore, practically speaking, this is not a solution.

Although the point of this post was to discuss early withdrawals, it is interesting to note that the definition of entitlement age is that it is the age a participant can begin receiving a unreduced service award, and that age can be no earlier than age 55. Generally, a LOSAP designed with a specific entitlement age, ranging from 55 to 65, and benefits do not commence until that age. However, this definition appears to imply that a sponsor could set an entitlement age at when an unreduced benefit is paid, and that perhaps a participant could elect to commence a reduced benefit at a younger age (but no younger than 55). Presumably that would reduction would be an actuarial reduction, though that terminology doesn’t apply to a defined contribution plan, and the definition of entitlement age applies to both defined benefit and defined contribution plans. The conclusion for the purposes of this post is that perhaps a quasi-early -withdrawal provision could be achieved under this scenario, but other factors must be considered which may make this option impractical also (we’ll possibly explore this in a future post). Additionally, it is not not solve the issue of having to administratively track an age 25 terminated vested participant.