THE MOST COMMON QUESTIONS AND ANSWERS ABOUT YOUR SECTION 457 PLAN

• Is Life Insurance an investment?
• I've been told that my death benefits are taxable, is that true?
• What is a Section 457 Plan?
• What are the effects on income tax?
• How are distributions made?  (how do I get my money?)
• Can I borrow from my account or take a hardship withdrawal?
• Should I participate if I am unsure about my committment?
• What is the difference in universal life insurance, whole life insurance and an annuity?
• Are there advantages to purchasing my life insurance/annuity in a Section 457 Plan over other tax shelters?
• What will my check stub indicate?
• What happend if I leave my employer?
• How are taxes paid on my cash values?
• Do I build cash values for post retirement needs?
• What is the role of the employer offering a 457 Plan?
• What is the role of the trust or custodial account?
• What are the reporting requirements and tax consequences of loans on my policy?

Q: Is Life Insurance Protection an investment?

A:  No, Life insurance is just that, protection.  The type of life insurance you have most likely builds substantial cash values over your lifetime, but it is not an investment.  The cash value is an added benefit.  Life insurance wears many different hats if done correctly.  Today it may provide for the replacement of income, college for children in the event of your death or just the completion of your financial dreams.  Tomorrow, it may provide for income replacement after retirement.  It is an excellent way to leverage a few dollars into thousands.

Q:  I've been told that my death benefits are taxable, is that true?

A:  Chances are you heard this from someone wanting you to change your plan.  Remember, they are working for a commission and may be putting their interest ahead of yours.  Your life insurance death benefits are taxable while working since you have not had to pay any Federal or State Income Tax on your premiums.  When you retire, you will receive a 1099(r) for reportable income on the surrender value of your policy.  You can take money from the cash value you have been earning interest on over your career and pay the taxes due and from that point on, your death benefits are tax free.  Basically, you get the tax shelter during your building years when you need all income possible and get a tax free death benefit at the time most of us may face death.

Q: What is a Section 457 Plan?

A: A Section 457 Plan is a deferred compensation plan for employees of States, Counties, Municipalities and certain non- profit organizations whereby employees may set aside for retirement. This deferred income may be placed in annuities mutual funds, variable annuities, group variable annuities and insurance contracts, etc.

Q: What are the effects on income tax?

A: Money set aside in a Section 457 Plan will have no Federal or State income tax due until a distribution is made from the plan. All FICA and Social Security taxes will be paid at the time the income is earned and will not be due at retirement.

Q: How are distributions made?

A: Distributions are made "ONLY" under four conditions: At Retirement, At Death, Upon becoming disabled, and upon a separation from Service of the employee.

Q: Can I borrow from my account or take a hardship withdrawal?

A:  Under certain circumstances: As described by the IRS - You must be in a hardship situation that a normally prudent person could not have planned for. Loans for college and home purchase are specifically disallowed by the IRS. In addition, you must provide proof of the hardship and borrow no more than the extent of the hardship. All loans must be repaid within 5 years with after tax dollars.  The hardship must be medical for an immediate family member, death of an immediate family member or a catastrophic event i.e. hurricane, tornado or flood etc.  Keep in mind that a 457 plan is a "retirement planning vehicle".

Q: Should I participate if I am unsure about my commitment?

A: Absolutely not. Planning for retirement is a sober and serious decision requiring commitment. We do not recommend that you participate in an available plan without being certain that you are committed.

Q: What is the difference between universal life insurance, whole life insurance and an annuity?

A: Universal Life Insurance is a life insurance product that provides valuable life insurance protection as well as cash values. The cost for life insurance comes out of each premium you pay through your deferrals. Whole Life Insurance is a life insurance policy where the insurance companies investments pay dividends against future cost of insurance or add dividends to your policy values.  Whole Life Insurance is the most conservative insurance program with excellent guaranteed benefits. An annuity is a contract with an insurance company in which no life insurance benefit is provided. An annuity contract provides for a stream of income payments to be made to you in return for premium deposits made. The account earns interest and is tax sheltered until such time as a distribution is made.

Q: Are there advantages to purchasing my life insurance/annuity in a Section 457 Plan compared to other tax shelters?

A: In our opinion, yes. If you purchase life insurance in your 457 plan and plan to keep it into your retirement years, you will have the benefit of tax sheltering your premiums (see advantage of pre-tax on front page link). There is a tremendous advantage to you personally to pay for your life insurance or annuity with pre-tax dollars. Any distribution from your insurance or annuity values prior to age 59 1/2 will not be subject to the 10% pre-mature distribution penalty now imposed on many tax shelters.

Q: What will my check stub indicate?

A: Your check stub will show the total amount of deferral, but the net effect on your take home pay will be less due to the pre-tax advantage permitted under Section 457. It is possible that even though you purchased a life insurance policy, your stub may indicate annuity in a block provided by your employer.

Q: What happens when I leave my employer?

A: Immediately contact Pro Benefits Group, Inc. on the web at: www.pbfsi.com . Your options include transferring your plan to another tax shelter as provided by law, surrender, continuing your plan or a combination of the above.

Q: How are taxes paid on my cash values?

A: Taxes will be based upon your cash surrender value of your plan regardless of the vehicle used to accumulate values. An example might be surrender value on a life insurance policy. Your accumulated value may be much higher in early years, but surrender value low due to surrender penalties. Your tax is on the surrender value only.

Q: Do I build cash values for post retirement needs?

A: Yes.  Cash values accumulate over time and are an additional benefit of permanent life insurance.  The excess interest earned helps keep premiums level.  We overfund our products to emphasize the build-up of cash values for your benefit.

Q: What is the role of the employer offering a 457 Plan?

A: The employer is the plan sponsor and administrator. As such, they are ultimately responsible for the legal implementation and management of the plan. PBFS, provides the majority of information and management tools and currently provides the expense for maintaining the trustee relationship, but reserves the right to stop providing . Employers are responsible for scheduling the annual staff meetings (not to exceed 15 minutes in length), reporting on contributions and any legal distribution.  They are also responsible for keeping the plan up to date.   Generally, if a distribution occurs while in service, the distributions are reported on a 1099r by the trustee for income tax purposes. 

Q: "What is the role of the trust or custodial account?"

A:  The 1996 Small Business Job Protection Act passed by Congress mandated the establishment of a trust or custodial account for all governmental Section 457(b) plans, like in a school.  This trust is the owner and legal beneficiary of the plan until the: death of a participant, the disability of a participant or the participant retires or ceases employment at which time proceeds or benefits are paid to the participant or their beneficiaries.  The trust is "to hold for the exclusive benefit of the plan participant and their beneficiary(ies) the proceeds of the plan."

Q" What are the reporting requirements and tax consequences of loans on my policy?

A: There are no current reporting requirements as with 401(k) and cafeteria plans. Distributions must however be reported and loans must be repaid as prescribed by IRS Code.

Legal Disclaimer - We do not give tax or legal advise. If you have question regarding specific tax or legal issues we recommend you contact your tax advisor or counsel. Section 457 PBGroup,Inc. 1201