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, I' .~ i "t1 ..~ ~ ;] )1 ~~ :;1 f1 ti ~ f! . . A. G. Op.107- a-3, January 22, 1980 26 U.S.C.A. ~ 457 (b )(2) Minn. Stat. ~ 356.24, subd. ] (5) Minn. Stat. ~ 353028 Minn. Stat. ~ 424A.02, subd. 8(b). Also see 26 U.S.C.A. s 408 ./ 46 c. Bonuses The attorney general has determined that bonuses constitute a gift and are therefore not lawful city expenditures, d. Deferred compensation While salaries are usually the largest portion of the city budget, part of any employee's wages may be paid in the fOIm of deferred compensation. Federal statute permits an employee to defer a maximum of 33 and 1/3rd percent of total salary or $7,500, whichever is less. However, this dollar amount has been adjusted for inflation to $8,500. The city will still need to budget for the employer's share of Social Security and Medicare to the same extent that these withholdings would be required on the employee's regular earnings. Generally, an employee may elect to defer specified amounts from his or her salary under a deferred compensation plan. There is a tax savings for the employee because taxes are not payable until the money is withdrawn. Since most employees have a lower income during their retirement years, the earnings will be taxed at a lower rate. Public employers may contribute to the state of Minnesota deferred compensation plan in amounts provided in the employer's personnel policy or collective bargaining agreement. This contribution may not exceed $2,000 per year, per employee. The employee must match any amount the employer contributes. Although employees may contribute to other deferred compensation plans, public employers may only contribute amounts to the state's plan for their employees. If an employer contributes $2,000, the employee's contribution cannot exceed $6,500 since the deferred compensation amount is capped at $8,500, There is special authority for cities to offer deferred compensation to city managers or a chief administrative officer. Within six months of beginning employment, the manager or chief administrative officer may elect to be excluded from PERA The city may agree to contribute to deferred compensation for this individual. Such contributions must comply with federal tax laws. Deferred compensation is generally not available as an option for volunteer firefighters. However, transfers of lump sum service pension amounts to individual retirement accounts (IRAs) are permissible only if the relief association's bylaws permit it and the plan qualifies under the Internal Revenue Code standards. League of Minnesota Cities