Plan Highlights

Deferred Compensation, under the Internal Revenue Code Section 457, is a tax-deferred supplemental retirement program that allows you to contribute a portion of your salary to a retirement account before state and federal taxes are deducted. Deferred compensation plans for public employees were established through legislation passed by Congress in 1978. The government's aim in allowing these tax-favored plans was to encourage workers to establish their own financial security. The City of Chicago Deferred Compensation Plan was first offered to City employees in 1982, and, since then, thousands of City employees have elected to participate in this important benefit.

Your Deferred Compensation Plan offers advantages that other types of savings plans do not offer.

Tax Advantages

The primary benefit of your Deferred Compensation Plan is that you can postpone current state and federal income taxes on:

the amount you elect to contribute, and

the earnings credited to your account.

These tax benefits do not apply to conventional savings plans, such as "passbook" accounts, where your earnings may be subject to current taxation.

The tax advantages of this Plan are intended to encourage you to save for retirement. As a result, there are restrictions on when you can withdraw your money from the Plan. Generally, your account is paid only when you retire, terminate employment or die. You may not withdraw money from your account while you are employed unless you have an approved unforeseeable emergency.

To preserve the tax-deferred status of the Plan, federal tax regulations require that the assets of the Plan be held in a custodial account or trust for the exclusive benefit of you and your beneficiaries until they are paid to you.

Plan Eligibility

Who Is Eligible?

You are eligible to participate in the Plan if you are an active, permanent City employee.

Enrolling in the Plan

To enroll in the Deferred Compensation Plan, contact the plan administrator. See the Important Telephone Numbers and Web sites section of this handbook for more information. A specialist will arrange a date and time to meet with you at your work site to explain the Plan and your investment options, and to answer your questions.

Participation in the Plan is completely voluntary; you decide if you want to contribute. Also, subject to the limits set by the Plan, you decide how much you want to contribute. Beginning in 2002, your City of Chicago Deferred Compensation Plan accepts rollovers of funds you accumulated in another 457 deferred compensation plan and funds from 401(k) and 403(b) plans or IRAs.

Remember, this Plan is meant for long-term savings. Since the value of your account is generally paid to you only when you leave City employment or retire, you should have adequate resources available to meet your current financial obligations before you decide to join the Plan.

How the Plan Works

How Much You Can Save

Beginning in 2002, you can defer $11,000, up to 100% of your includible compensation. 100% of includible compensation generally equates to your annual compensation less any other pre-tax contributions. The limit will increase by $1,000 each year through 2006. After that, the contribution will be indexed each year.

A Catch-up provision will provide two methods under which you can choose to defer additional dollars. If you are within three years of Normal Retirement Age, and have deferred less than your maximum allowable contribution in prior years, you may be able to defer twice the annual contribution limit in effect in the year the provision is used. Beginning in 2002, the law also provides that if you are age 50 or older you qualify to defer additional dollars as well. Call the plan administrator for more details (and refer to the following chart).

The minimum contribution amount is $10 a pay period. You may only contribute whole dollar amounts.

The minimum contribution amount is $10 a pay period. You may only contribute whole dollar amounts.

Any contributions you make to the following City of Chicago plans will reduce the amount you can contribute to the Deferred Compensation Plan:

medical plan (before-tax premium payments);

pension plan;

any other pre-tax benefit plans.

Also, starting in 2002, your City of Chicago Deferred Compensation Plan also accepts a rollover of funds you accumulated in another 457 deferred compensation plan and funds from 401(k) and 403(b) plans or IRAs.

Investing Your Account

You have a choice of three funding options.

Fixed Investment Option - for participants seeking the opportunity to receive a fixed rate of return on their investments. The City of Chicago Deferred Compensation Plan Fixed Return Option is a pool of group annuities issued and underwritten by Nationwide Life Insurance Company of Columbus, Ohio, Monumental Life Insurance Company of Baltimore, Maryland, and Hartford Life Insurance Company of Hartford, Connecticut. The earnings from the portfolios are combined and you receive a single net interest rate. The net interest rate is declared quarterly and credited daily.

Variable Return Option - for participants willing to assume increased risk in exchange for potentially higher rates of return.

Several types of variable investment options are offered including asset allocation funds, international funds, mid-cap stock funds, large cap stock funds, bond funds, and a money market fund. The value of your account will vary depending on the performance of your chosen investment options and could result in either a gain or loss.

Prospectuses for the variable investment options are available from the plan administrator.

Investment results credited to your account may be reduced by an annual expense charge. This annual fee is 0.20% or less, and is in addition to any asset management fees charged by the variable investment options.

Life Insurance Option - for participants who have a long-term investment perspective and who want to build greater financial security for their families. The universal life option, known as UniversaLife Plus, is underwritten by Monumental Life Insurance Company. UniversaLife Plus is a flexible premium, adjustable life insurance policy which is paid up at age 95. This policy accumulates cash value and earns interest at current market rates which may change based on economic conditions. The cash value accumulates on a tax-deferred basis. However, early withdrawal from UniversaLife Plus may result in a substantial reduction in cash value due to surrender charges.

Your life insurance option premium cannot be more than 25% of the total amount you contribute to the Deferred Compensation Plan. Also, under most circumstances, you are limited to a policy face amount between $10,000 and $100,000 under simplified issue guidelines. Insurance coverage of $100,001 or more may be available.

Making Changes

You may change how your account is invested by transferring (or exchanging) the value of your account to other available investment options. Investment changes for future contributions (allocation change) may be made at any time. When you exchange balances from the Fixed Return Option, you may elect up to two exchanges or transfers per calendar year, and exchange or transfer up to 100% of your account value in that calendar year. The total of all participant exchanges cannot exceed 15% of the total amount held in the fixed contracts as of December 31 of the previous calendar year. Or, you may elect to transfer 100% of your fixed account balance over a 5-year period. For this 5-year exchange option, a specific portion of your fixed account balance would be systematically exchanged each month for 5 years until your entire account balance is moved into other plan investment options. Transfers of current account values from or within the variable return option are unlimited. Check the Plan/Product Profiles for more information about restrictions associated with moving your funds. There is no charge for investment changes.

You may increase or decrease the amount you defer at any time subject to annual deferral limits. Contact the plan administrator to obtain the proper form. Please allow several pay periods for processing time for changes to deferral amounts. Also, you may stop your deferrals at any time.

Remember that all changes require advance notice to the plan administrator to allow time to meet any requirements of the payroll administrator or the investment product providers.

How Your Account Grows

When you authorize the City to direct a portion of your pay to the Plan, you also choose how you want to invest your money in the available investment options. Your deferrals will accumulate and earnings will be credited to your account based on the performance of the investment options you chose. If you choose the variable return option, the value of your account will vary depending on the value of the chosen investment options and could result in either a gain or loss. If you choose the Fixed Return Option, interest will be credited to your investment daily.

When Your Account Is Paid

Generally, the value of your account is paid only when you terminate employment, retire or die. If you die, your beneficiary or beneficiaries of record on file at the time of your death will receive your benefits.

Withdrawals

You may only withdraw from your account while you are employed if you experience an approved unforeseeable emergency or qualify for an In-Service Withdrawal. However, the rules and regulations concerning these withdrawals are very restrictive. Also, if you apply for or take an emergency withdrawal, you may not make deferrals to the plan for one year.

Unforeseeable Emergency Withdrawals:

The United States Internal Revenue Code states that an "unforeseeable emergency" is a severe financial hardship caused by:

your sudden and unexpected illness or accident;

your dependent's sudden and unexpected illness or accident;

the loss of your property due to casualty that is not covered by insurance; and

other similar extraordinary circumstances that result from events beyond your control.

A situation will not be considered an unforeseeable emergency by this Plan if the financial emergency can be relieved by:

payments from an insurance company or other source;

your personal assets (unless using those assets creates a severe financial hardship); or

discontinuing your deferrals to the Plan.

If your unforeseeable emergency is caused by any of the following reasons, you will not qualify for a withdrawal from the Plan:

normal monthly expenses;

purchase of a home or car;

loss of overtime or holiday pay;

educational expenses;

annual tax liability;

home or auto maintenance; and

elective or cosmetic surgery or orthodontia

You must apply in writing for an unforeseeable emergency withdrawal. The facts are considered in each case to determine if a true financial emergency exists and are measured against Internal Revenue Service (IRS) standards established by the United States.

Your situation will be reviewed by the City of Chicago Deferred Compensation Committee and the Committee's determination is final. If your application for a withdrawal is approved, you may only withdraw the amount needed to meet the emergency.

In-Service Withdrawals:

You are also able to elect a one-time withdrawal of assets of $5,000 or less, provided all of the following conditions are met: (1) you are still employed by the City, (2) your entire account balance under the Plan is $5,000 or less, (3) you have taken no previous withdrawals of this type, and (4) you have not deferred to the account for a minimum of two years.

Also, keep in mind that any amounts you withdraw are considered taxable income to you in the calendar year in which they are received.

When You Separate From Employment

You may begin receiving a payout after you retire or terminate employment, regardless of your age. However, once you leave City employment or retire, you may no longer make contributions to the plan.

You may choose to leave your account balance in the plan until you attain age 70¹/2. You may also choose to roll over eligible distributions tax-free to a 401(k) or other tax-qualified plan, a 403(b) annuity, or any of the other types of plans that accept rollovers, or to an IRA. However, withdrawals of such amounts from the receiving plan may be subject to early distribution penalties of 10% if withdrawn before attaining age 59¹/2.

After separating service from the City of Chicago, please contact the plan administrator to discuss your payout options under the prevailing tax laws. You may want to consult a tax advisor before making your final decision.

Payout Options

You can receive the value of your account as follows:

Lump Sum

The value of the account is paid in one lump sum.

Partial Lump Sum

You may elect a distribution of a portion of the account. The balance remains on deposit in your account. You will continue to receive current interest rates on assets remaining in the fixed return option. If you are invested in the variable options, your account value will fluctuate based on the performance of the underlying investment options. All current service (including exchange privileges) and contract charges will continue to apply.

Systematic Withdrawal

Designated Amount - This option provides for payments of a specified dollar amount until your account is exhausted (i.e. $500 per month, $1,000 per quarter, etc.)

Designated Period - This option provides payments for a specified period of time not to exceed your projected life expectancy (as determined by the IRS). The gross payment amount will vary due to credited interest on your fixed investments and/or changing market value of your variable investments.

With a Systematic Withdrawal, you will continue to receive current interest rates on assets remaining in the Fixed Return Option. If you are invested in the variable options, your account value will fluctuate based on the performance of the underlying investment options. All current services (including exchange privileges) and contract charges will continue to apply.

Systematic Withdrawal payout options can be changed as frequently as desired. A change can be completed simply by completing a Payout Change Form. Please contact the plan administrator to obtain a Payout Change Form.

Purchased Annuity

Designated Period - An annuity is purchased which provides payments for a fixed period of time, between 3 and 20 years, depending on your age. The annuity purchase rates in effect when your payments begin determines your actual annuity payment. All annuity payments are guaranteed.

Life Income with Payments Certain - An annuity is purchased providing lifetime payments guaranteed for a certain period (0, 5, 10, 15, 20, 25 or 30 years). If the participant dies before the end of the guaranteed period, payments will continue to the designated beneficiary until the end of the period selected.

Please Note: Purchased annuity payout options cannot be changed once the distribution is initiated.

You may elect to have your distribution(s) paid to you: monthly, quarterly, semi-annually or annually. Automatic Deposit is available to either your checking or savings account. Regardless of the payout option you choose, payments must begin no later than the April 1 following the calendar year you reach age 70¹/₂ or separate from service, whichever is later.

Income Taxes

Income taxes will be payable in the year or years in which your account is paid to you or your beneficiary. Taxes are only due on the amounts actually paid to you during that tax year. All distributions are federally taxable as income.

Currently, distributions from deferred compensation plans are exempt from State of Illinois income taxation. The plan administrator will withhold the appropriate income tax based on the payout option you select. Starting in 2002, for distributions from the Plan that are eligible for rollover, a 20% mandatory withholding amount will be assessed. Otherwise, income taxes will be withheld from Plan distributions based on your withholding instructions.
Lump sum distributions may result in significant income tax liability. For this reason, you may want to consult a tax advisor before making a decision about your payout.

As previously mentioned, you may roll over eligible distributions from your 457 plan after separation from service. However, withdrawals of such amounts from the receiving plan may be subject to early distribution penalties of 10% if withdrawn before attaining age 59¹/2.

Please contact the plan administrator for additional information about tax withholding on your distribution option. See the Important Telephone Numbers and Web Sites section of this handbook more information.

Quarterly Account Statements

You'll receive an account statement each quarter that will feature:

your account balance from the previous statement;

how much you've deferred;

earnings or losses;

transaction activity;

current investment allocation;

unit/share values;

investment performance; and

your current account balance.

Nationwide Retirement Solutions (NRS)

As the plan administrator of the City of Chicago Deferred Compensation Plan, Nationwide Retirement Solutions, formerly known as PEBSCO, is available to assist all Plan participants.
Contact the local NRS office if you have questions about:

enrolling in the Plan;

increasing or decreasing your deferrals;

fund options and asset allocation review;

beneficiary changes;

payout options at retirement or separation from service;

rollover or assets into or out of the plan;

account values and unit/share values;

account statement information;

address changes;

redirecting future deferrals (allocation change); or

moving accumulated account values from one option to another option (exchanges).

The Nationwide Retirement Solutions office is located at:

205 West Randolph Street
Suite 1540
Chicago, Illinois 60606
Telephone: (312) 443-1975

Please call your Nationwide Retirement Specialist if you have questions, need more information or wish to make a change in your Deferred Compensation account. Additional information is also available in the Plan/Product Profiles, the City of Chicago Enrollment Kit folder, the web site: www.chicagodeferredcomp.com, and the City of Chicago Deferred Compensation Plan Document.

Note: This is a summary of the City of Chicago Deferred Compensation Plan. However, as a summary it does not cover all the details of the Plan. You should refer to the Plan Document, the Plan/Product Profile, and the Informational Brochure for specific provisions. You can receive a copy of these documents by contacting Nationwide Retirement Solutions.

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