401(a) plan allows workers to defer accumulated leave payouts, potentially saving thousands in taxes
December 24, 2025 | Town of Hempstead
Town employees approaching retirement just got a powerful new tool for managing their financial transition: the Town Board approved the establishment of an IRC Section 401(a) defined contribution plan that allows workers to defer accumulated unused leave pay into a tax-advantaged retirement account.
The plan, negotiated as part of the new CSEA collective bargaining agreement, addresses a longstanding challenge for retiring municipal employees: the tax hit from cashing out years of banked sick time, vacation, and compensatory time all at once.
When town employees retire or separate from service, they're often entitled to substantial payouts for accumulated leave. Under the new CSEA contract, employees can now cash out up to 100 days of unused vacation leave alone—potentially worth $30,000 to $50,000 or more for senior workers.
Previously, that entire amount would be paid as taxable income in a single year, often pushing retirees into higher tax brackets precisely when they're trying to transition to fixed incomes.
How the 401(a) Plan Works
The new plan allows eligible employees to defer their accumulated leave payouts into a qualified retirement account rather than receiving taxable cash.
What Can Be Deferred:
- Accumulated sick leave
- Unused vacation leave
- Compensatory time
- Any incentive amounts authorized by the Town related to accumulated unused leave
Default Draw-Down Order: Unless an employee provides written direction at least 30 days before their first contribution, leave will be converted in this order:
- Sick leave (first)
- Vacation leave
- Compensatory time
- Incentive pay (last)
Contribution Limits: All deferrals are subject to annual IRS limits, which change yearly. Employees should consult with the plan administrator or a tax professional to understand current limits and optimize their contributions.
Timing: The Town will remit contributions to each employee's 401(a) account within a reasonable period after separation or retirement, consistent with plan rules and administrative procedures.
Who's Eligible
Eligibility is limited to employees who satisfy minimum service and participation standards set by the Town and the plan. The Town may require written notice of an employee's intent to retire before any contribution is made—so workers considering this option should plan ahead and communicate with HR well before their departure date.
Plan Administration
The 401(a) plan will be administered through BENCOR or another provider approved by the Town. BENCOR is a national firm specializing in governmental retirement plans and has administered similar programs for municipalities across the country.
The plan document adopted by the Board runs 39 pages and covers:
- Eligibility and participation requirements
- Contribution methods and allocation
- Account management and investments
- Distribution rules and timing
- Required minimum distributions
- Loan provisions (if applicable)
- Claims procedures
Tax Advantages
The primary benefit of the 401(a) structure is tax deferral. Rather than paying income tax on leave payouts in the year of separation—often at the employee's highest marginal rate—funds grow tax-deferred in the 401(a) account.
Employees pay taxes only when they withdraw funds, ideally in retirement when their income (and tax bracket) may be lower. This can result in significant tax savings, particularly for employees with large accumulated leave balances.
Additionally, funds in the 401(a) can potentially be rolled over to an IRA or other qualified plan, providing further flexibility in retirement planning.
Next Steps
The plan becomes effective upon Town Board approval, which occurred at the December 23, 2025 meeting. However, administrative setup—including finalizing the relationship with BENCOR, establishing accounts, and creating enrollment procedures—will take additional time.
The Town Attorney and Town Comptroller are authorized to execute any documents necessary to implement the plan. Employees should watch for communications from Human Resources regarding enrollment timelines and procedures.