EXHIBIT 4.14
PENSION PLAN
ELIGIBILITY AND PARTICIPATION 1
When Participation Begins 1
If You Are Reemployed By Northern 1
If You Participated In An
Acquired Company's Pension Plan 1
FUNDING THE PLAN 1
Pre-1957 1
VESTING: YOUR
ENTITLEMENT TO A PENSION 2
UNDERSTANDING KEY
CONCEPTS AND TERMS 2
Service 2
Compensation 2
The Social Security Offset 2
The 1996 Covered Compensation Table 3
Protected Prior Plan Provisions 4
Minimum Benefit Formula
For Grandfathered Employees 4
HOW YOUR BENEFIT IS FIGURED 4
Basic Pension Formula 4
WHEN YOU CAN RETIRE...
AND WHAT HAPPENS THEN 5
Normal Retirement 5
Normal Retirement Payment
Options At A Glance 5
Early Retirement 5
Early Retirement
Payment Options At A Glance 6
Postponed Retirement 6
Vested Terminee Benefit 7
Vested Terminee Benefit
Payment Options At A Glance 7
PAYMENT OPTIONS 8
Single Life Annuity 8
100% Joint And Survivor Annuity 8
Level Income 9
Lump Sum 9
Benefit Election Requirements 9
Thinking It All Through 10
SURVIVOR PROTECTION
FOR YOUR FAMILY 10
Survivor Protection If Death Occurs
Before Pension Payments Commence 10
Survivor Protection If Death Occurs
After Pension Payment Commences 10
Death Benefits 11
OTHER INFORMATION
YOU SHOULD KNOW 11
Credit For Service During A Leave 11
Reemployment 11
Acquired Company Prior Plan Benefit 12
How The IRS Limits Pensions 12
Taxes Upon Distribution 12
Using Your Benefit
Statement In Your Planning 13
TIP
ELIGIBILITY AND PARTICIPATION 14
When Participation Begins 14
How it Happens . . . the Northern-Express/SM/ 14
FUNDING YOUR TIP ACCOUNT 15
It All Starts With Your Savings 15
Your Savings Choices 15
After-Tax Contributions 15
Before-Tax Contributions 15
Examples Of TIP's
Before-Tax Savings Advantage 16
How Much You Can Save 16
You Can Adjust Your Savings Strategy 17
The Company Matching Contributions 17
Rollovers And ESOP Transfers 18
i
INVESTING YOUR SAVINGS 19
The Investment Funds 19
Adjusting Your Investment Strategy 20
Dividends And Interest 20
How Your Account Is Valued 20
ACCESS TO YOUR SAVINGS:
LOANS AND WITHDRAWALS 21
Loans 21
Applying For A Loan 22
Withdrawals 22
DISTRIBUTION OF
YOUR TIP ACCOUNT 25
How Distributions Are Made 25
When You Leave The Company 25
If You Work Past Retirement 25
OTHER INFORMATION
YOU SHOULD KNOW 25
Handling Your Requests 25
Accessing Northern-Express/SM/ 25
Special Deadlines at Quarter End 26
Leaves of Absence 26
Reemployment 26
Taxes Upon Distribution 26
ESOP
ELIGIBILITY AND PARTICIPATION 28
When Participation Begins 28
HOW THE ESOP WORKS 28
The Loan Agreement 28
After The Loan Is Repaid 29
Your Stock Is Tax-Free As
Long As It Stays In Your Account 29
Determining How Much
Stock Is Credited To Your Account 29
When Stock Is Credited 30
How And When Your Account Is Valued 30
An Example Of How
Your ESOP Account Works 30
VESTING 31
Vesting Schedule 31
If You Leave The Company 31
YOUR RIGHTS AS A SHAREHOLDER 31
Dividends And Interest 31
Voting Your Shares 32
PAYMENT OF YOUR ACCOUNT 32
When Your Account Is Paid 32
Deferring Your Distribution 33
How Distributions Are Made 33
Distribution Options...
And Their Tax Consequences 33
Penalty On Early Distributions 34
OTHER INFORMATION YOU
SHOULD KNOW 34
Diversification Of Your Account 34
Requesting A Distribution 35
Leaves Of Absence 35
Reemployment 35
PLAN FACTS
Future Of The Plans 36
Plan Limitations 36
Tax Laws 36
Insured Pension Benefits 36
Ownership Of Benefits 37
How Benefits Can Be Forfeited Or Delayed 37
Your Rights Under ERISA 37
Exercising Your Rights 37
If Your Claim Is Denied 38
Plan Facts 39
Calendar Of Events 40
QUICK-FIND INDEX 41
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The Retirement Sourcebook has been developed as a reference guide for you to
learn about some of the most comprehensive benefit plans in the industry - those
which are offered by Northern. This Sourcebook covers all of the pertinent
features of the Pension, Thrift-Incentive and Employee Stock Ownership Plans.
And, as much as possible, the text has been written in nontechnical terms to
make it easier for you to read and understand. Why? Because knowing and
understanding your benefit plans is the only way you can fully appreciate each
plan and their respective values to you. Therefore, you are encouraged to read
through this document in its entirety.
Once you are comfortable with the entire Sourcebook, the Table of Contents and
the Quick-Find Index will help you access specific portions of the document
efficiently. Keep in mind that while every effort has been made to insure that
the plan features reflected in the Sourcebook are accurate, the full Plan
Documents prevail in the event of omissions or differences. You can ask to see a
copy of the Plan Documents by contacting the Benefits Division.
Now, we invite you to take this opportunity to inform yourself about three
benefit plans that can truly make a difference in your life.
i
Retirement Plan Milestones
One year of service. Your participation in the Pension, TIP and ESOP Plans
begins on the first day of the calendar quarter after
one year of service, provided you are age 21.
Two years of service. You become 20% vested in the Company's matching
contribution to TIP and 20% vested in your ESOP
account.
Three years of service. You become 40% vested in the Company's matching
contribution to TIP and 40% vested in your ESOP
account.
Four years of service. You become 60% vested in the Company's matching
contribution to TIP and 60% vested in your ESOP
account.
Five years of service. You become 80% vested in the Company's matching
contribution to TIP and 80% vested in your ESOP
account.
You become 100% vested in your accrued Pension Plan
benefit.
Six years of service. You become 100% vested in the Company's matching
contribution to TIP and 100% vested in your ESOP
account.
You are eligible to diversify a portion of your ESOP
account to TIP or receive a portion of your account in
cash, provided you are at least age 55.
15 years of service. You become eligible for early retirement once you reach
age 55. If you become totally disabled, Pension Plan
benefits continue to accrue.
At age 21. Your participation in the Pension, TIP and ESOP Plans
begins the first day of the calendar quarter after you
have one year of service.
At age 55. You first become eligible for an early retirement
benefit from the Pension Plan provided you have at
least 15 years of service.
You are eligible to diversify a portion of your ESOP
account to TIP, provided you have at least six years of
service.
At age 59-1/2. You may withdraw your vested TIP account balance with
no tax penalty.
At age 62. You are eligible for unreduced Pension Plan early
retirement benefits if you have 15 or more years of
service.
At age 65. You have reached normal retirement and are entitled to
Pension Plan benefits, provided you have at least five
years of service.
At age 70-1/2. You must begin to take your required TIP, ESOP and
Pension Plan distribution no later than the April 1
following the year you reach age 70-1/2.
If you were a participant in the prior plan of an
acquired company at the time of acquisition, you may
have different service milestones (see page 12).
i
Historically speaking, the Pension Plan is the cornerstone of Northern
Trust's benefit program. It dates back to 1913, a year when there were maybe a
handful of similar plans. Northern Trust, being the visionary it has always
been, recognized - and wanted to reward - employees who dedicated their
working years to the Company.
Today, over 80 years later, the plan has changed in response to times and
regulations. But what's stayed the same is that you can still count on the
Pension Plan to do exactly what it was meant to do three-quarters of a century
ago: provide you with a foundation of retirement income for the rest of your
life.
ELIGIBILITY AND PARTICIPATION
Virtually everyone employed by the Northern Trust Company is eligible to join
the Pension Plan. That includes everyone in Northern Trust affiliates and
subsidiaries who have adopted the Pension Plan, but excludes foreign nationals
overseas. All we require for participation purposes is that you complete one
year of vesting service and are age 21. We'll discuss service in more detail on
page 2.
When Participation Begins
Participation automatically begins on the first day of the calendar quarter
(January 1, April 1, July 1 or October 1) after you meet the eligibility
requirements. There are no enrollment forms to complete.
If You Are Reemployed By Northern
If you are reemployed by Northern following a termination of employment, you
will have what is known as a "break in service." Upon your return, your past
service will be counted as vesting service and may be counted as credited
service. The time you were away may also be counted as vesting service,
depending on how long you were gone. Complete details on reemployment are
covered on page 11.
If You Participated In An Acquired Company's Pension Plan
If you were a participant in an acquired company's pension plan at the time of
acquisition, some eligibility and participation rules may differ from those
described in this section. The Benefits Division works with your local
management to communicate those differences at the time of acquisition. (See
"Acquired Company Prior Plan Benefit," page 12.)
FUNDING THE PLAN
The Pension Plan is completely funded by Northern Trust. There are no employee
contributions required, nor are they allowed.
Pre-1957
Until January 1, 1957, Northern people were required to contribute to the
Pension Plan. If you were a plan participant then, your contributions will be
included in your pension benefit. Since your contributions were taxed when they
were made, they are not taxable when they are paid out to you.
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VESTING: YOUR ENTITLEMENT TO A PENSION
Generally, you're entitled to a retirement benefit from the Pension Plan after
just five years of service, even if you leave Northern before retirement. There
is no partial vesting for lesser periods. If you leave the Company before you
have completed five years of service, you are not entitled to a benefit from the
plan. The following "Service" section describes how service is measured.
UNDERSTANDING KEY CONCEPTS AND TERMS
Pension benefits are usually the least understood of all the benefits offered to
employees. We don't want that to be the case with our Pension Plan, so we've
tried our best to present the features of the plan in simple terms. There are,
however, some relatively complex plan design concepts to grasp.
Three main pieces of the pension formula are service, compensation, and the
Social Security offset. Having a clear understanding of these concepts, outlined
below, will get you off to a good start in understanding the Plan.
Service
Service is especially important because it is used to determine the following:
l. when your plan participation begins,
2. when you become entitled to benefits,
3. when you can retire early, and
4. along with pay, service figures into the value of your benefit.
How service is counted. In general, your service begins on your first day with
the Company, ends when your employment does, and includes all your uninterrupted
time as an employee in between up to a maximum of 35 years. In other words, it
includes up to 35 years of your time on the Company's payroll. It may even
include time you aren't on the payroll (during an unpaid leave of absence or a
disability, for example.) (See Other Information You Should Know, "Credit For
Service During A Leave," page 11.)
How service is measured. Throughout this section of the Sourcebook, you'll see
that service is referred to either as credited service or vesting service. These
are the two ways in which the plan measures your time with the Company, and it
uses each measurement for different things. For instance, the amount of your
benefit and your eligibility to retire early depend on your credited service,
while your participation in the plan and your entitlement to benefits depend on
your vesting service.
Even though the plan makes a distinction between credited and vesting service,
you probably won't have to. For most Northern people, these two measurements
will be the same. However, if you leave Northern and later return, special rules
apply. (See Other Information You Should Know, "Reemployment," page 11.)
Compensation
In addition to service, your compensation figures prominently in determining the
amount of your pension, which is why it's important to note that the plan
defines compensation as: "the highest annual average of your compensation during
the full calendar months in any five consecutive year period of credited
service." Simply put, that's the average of the five years in a row in which
your total earnings are the highest. We refer to it as your "high-5"
compensation.
What counts as compensation. When the plan figures your high-5 compensation, it
considers your base pay (including any before-tax payroll deductions), shift
differentials, overtime, and certain Annual Performance Plan incentive awards.
However, the IRS requires us to limit the dollar amount the plan uses in
determining high-5 compensation. This limit, which is $150,000 in 1996, is
indexed to inflation and adjusted upward in increments of $10,000. If your
pension compensation exceeds this limit, you may be entitled to a benefit from
the Supplemental Pension Plan. (See "How The IRS Limits Pensions," page 12.)
The Social Security Offset
Northern Trust makes sizable contributions to the Social Security system on each
employee's behalf, over and above what it pays to provide the Pension Plan. The
Company's total Social Security contributions for 1995 alone were approximately
$20 million. To balance what we
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pay toward Social Security and to the Pension Plan, the plan's formula has what
is known as a "Social Security offset." While the Social Security offset factor
is a fixed percentage, the actual amount of the offset will vary from person to
person because it's based on your Social Security covered compensation, which
we'll call "covered compensation," for short.
Covered compensation. Covered compensation is the average of the maximum taxable
wage bases/1/ for the 35 years ending in the year in which you reach Social
Security normal retirement age. Covered compensation increases each year because
it's an average, and because the taxable wage base goes up every year. The
Covered Compensation Table that applies to employees who retire or leave the
Company in 1996 is shown to the right.
The 1996 Covered Compensation Table
Covered compensation is tied to the year in which you reach normal retirement
age, so look for your birth year to find your own covered compensation. Unlike
the Pension Plan, which generally defines normal retirement age as 65, Social
Security "normal retirement" age varies from person to person, depending on the
year you were born. For people born before 1938, Social Security normal
retirement age is 65; for people born from 1938-1954, Social Security normal
retirement age is 66; for people born after 1954, Social Security normal
retirement age is 67. Remember, the covered compensation table changes annually.
A new one is available from the Benefits Division each year.
A reminder about Social Security. Social Security retirement benefits are not
paid automatically; you must apply for them. You can file your application with
the Social Security office nearest you, and you should do so at least three
months before you plan to retire. Although your Social Security normal
retirement age depends on the year you were born, you can arrange to have your
Social Security benefit start as early as age 62. You can get more information
on Social Security by contacting the nearest Social Security office.
/1/ The maximum taxable wage base is the maximum amount of pay subject to
Social Security taxes each year. The maximum taxable wage base for 1996 is
$62,700. If your average earnings (up to the taxable wage base) in the
three consecutive years in which your earnings were the highest are less
than your covered compensation, the offset will be based on those average
earnings.
1996 Covered Compensation Table
Year Social Security
Retirement 1996 Covered
Year of Birth Age Is Reached Compensation
1924 1989 $16,968
1925 1990 18,312
1926 1991 19,728
1927 1992 21,192
1928 1993 22,716
1929 1994 24,312
1930 1995 25,920
1931 1996 27,576
1932 1997 29,232
1933 1998 30,888
1934 1999 32,532
1935 2000 34,188
1936 2001 35,796
1937 2002 37,392
1938 2004 40,536
1939 2005 42,108
1940 2006 43,668
1941 2007 45,204
1942 2008 46,692
1943 2009 48,108
1944 2010 49,488
1945 2011 50,844
1946 2012 52,164
1947 2013 53,448
1948 2014 54,588
1949 2015 55,644
1950 2016 56,580
1951 2017 57,444
1952 2018 58,224
1953 2019 58,932
1954 2020 59,592
1955 2022 60,720
1956 2023 61,224
1957 2024 61,644
1958 2025 61,980
1959 2026 62,244
1960 2027 62,448
1961 2028 62,592
1962 2029 62,652
1963 2030 62,700
and later
For those not yet at Social Security retirement age, the 1996 taxable wage base
is assumed to remain unchanged in the future.
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Protected Prior Plan Provisions
Most of the Pension Plan provisions apply equally to all Northern people. Plan
rules governing participation, vesting, and payment options, for example, are
the same for everyone. In some cases however, certain prior plan provisions have
been protected for a predefined period of time. We call these "grandfathered"
provisions. Throughout this document grandfathered provisions will be identified
for you with an asterisk (*).
Participants eligible for grandfathering are Northern people who were employed
on December 31, l995. Grandfathering applies up through December 31, 2000 for
the plan provisions in effect prior to 1996, as noted below. These provisions
are outlined in detail in the December, 1995 Sourcebook Supplement.
- - the basic pension formula;
- - the minimum benefit formula;
- - the joint and survivor benefits;
- - the preretirement survivor benefits; and
- - early retirement benefits
Minimum Benefit Formula For Grandfathered Employees
Eligible grandfathered employees get the benefit of having their pension
compared to a second formula (shown below). If the second formula yields a
higher benefit than the l996 formula (shown in the box to the right) covering
all eligible years of service with Northern, grandfathered employees will
receive the higher benefit.
Minimum Benefit Comparison Formula
On the earlier of your termination date or December 31, 2000, your minimum
benefit will equal your accrued benefit calculated under the plan formula in
effect for you as of December 31, l995 applied to all your years of eligible
service up through December 3l, 2000.
The minimum benefit formula is not applied to employees hired January l, l996 or
later.
HOW YOUR BENEFIT IS FIGURED
Our plan is referred to as a "defined benefit" plan. That means your pension is
calculated according to a specific formula. The actual amount of your pension
will depend on a number of factors, such as your age and how much service you
have when you retire, your high-5 compensation, and how you elect to take your
benefit. But it all starts with the basic pension formula.
Basic Pension Formula
The basic pension formula is where everyone begins. The formula takes into
account three things: your credited service up to 35 years, your high-5
compensation, and the Social Security offset. Review the Plan Formula below and
then let's apply a dollars and cents example.
1996 Plan Formula
Step 1 1.8% of high-5 compensation TIMES up
to 35 years of credited service
MINUS
Step 2 .50% of the Social Security covered
compensation offset TIMES up to
35 years of credited service
Example. Suppose you retire in 1996 at age 65 with 35 years of credited service
and high-5 compensation of $27,000. If you refer to the chart on page 3, you'll
see that the Social Security offset for a person born in 1931 is $27,576. The
formula always uses the lower of the covered compensation figure from the table
on page 3 (in this case $27,576) or the average of your salary in the three
consecutive years in which your earnings were the highest. The rest is simple
math, as shown below:
Step 1 1.8% of $27,000 = $486; $486 x 35 yrs $17,010
MINUS
Step 2 .50% of $27,000 = $135.00;
$135.00 x 35 yrs - $ 4,725
-------
$12,285*
* Grandfathering applies to eligible participants who will receive the greater
value of this formula or the Minimum Benefit Comparison formula as indicated
on the left side of this page.
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In this example, you would receive an age-65 basic annual pension of $12,285
payable in the manner you elect. (See Payment Options, page 12.)
WHEN YOU CAN RETIRE...AND WHAT HAPPENS THEN
When you retire is pretty much up to you. The Pension Plan offers you several
retirement dates from which to choose, as well as a say in how your pension is
paid.
Normal Retirement
Retiring at age 65 is considered a normal retirement. It's the point at which
you become eligible to retire and receive a benefit. The only exception to this
rule applies to those who joined Northern after age 60, in which case normal
retirement is the earlier of completion of five years of vesting service or five
years of participation.
What happens then. The way your benefit is normally paid depends on your marital
status at retirement. If you are not married when payments begin, your pension
will be paid as a single life annuity. As its name implies, a single life
annuity is paid over one lifetime: yours. You receive a prorated benefit if your
first month of retirement is a partial month; a fixed benefit each month
thereafter. The monthly amount is determined by the plan formula - for as long
as you live. Payments stop when you die.
If you are married at retirement, your pension will be paid as a 50% joint and
survivor benefit. A joint and survivor benefit pays you a reduced benefit for
your lifetime. When you die, your spouse receives one-half of your benefit for
the rest of his or her life. A joint and survivor benefit pays smaller monthly
benefits than you would normally get under a single life annuity. That's because
payments are expected to be made over two lifetimes - yours and your spouse's -
instead of yours alone. But reducing your monthly benefit lets you continue half
of it to your surviving spouse if you die.
If your surviving spouse dies before your unmarried dependent children reach age
21, payments may continue to your children. (See Survivor Protection For Your
Family, "Eligible Survivors," page 10.)
Normal Retirement Payment Options At A Glance
The following automatic and optional forms of payment may be available to you at
normal retirement. See Payment Options, page 8, for more details on how each
works and how you may elect one.
- - 50% joint and survivor annuity (the automatic form of payment for married
employees)
- - Single life annuity (the automatic form of payment for single employees; an
option for married employees)
- - Lump sum
- - 100% joint and survivor annuity (for married employees who retire with 15 or
more years of credited service)
Early Retirement
The pension plan allows for retirement prior to age 65. You can retire early
anytime after you reach age 55 and complete 15 years of credited service. If
your career with Northern ends before your 65th birthday, you may elect:
- - To receive your full pension entitlement beginning at age 62 (or your age at
termination if later); or
- - To receive a reduced pension beginning at your early retirement age. The
reduction factor is 0.5% for each month (6% for each year) you receive
payments prior to your 62nd birthday.
Let's see how each of these choices work in the following example:
Example. We will use the same retirement year and salary assumptions from the
previous example on page 4 but let's say you take early retirement at age 57
with 27 years of credited service instead of normal retirement at age 65, when
you would have had 35 years of credited service. Step-by-step, here is what it
looks like.
5
Step 1 1.8% of $27,000 = $486; $486 x 27 yrs $13,122
MINUS
Step 2 0.5% of $27,000/1 /= $135; $135 x 27 yrs -3,645
------
Pension payable at age 62 $ 9,477/yr*
$ 789/mo
MINUS
Step 3 Apply the reduction for early
retirement from age 62. Age 57
is 60 months early;
60 x 0.5% = 30%; 30% of $9,477 -2,843
-------
Pension at age 57 $ 6,634/yr*
$ 552/mo
When payments begin. You can choose to have your benefits begin immediately or
payment can be deferred up to your Normal Retirement Age. A lump sum payment can
be deferred up to age 62.
Early Retirement Payment Options At A Glance
The following automatic and optional forms of payment are available to early
retirees regardless of when their pension begins. See Payment Options, page 8,
for more details on how each works and how you may elect one.
- - 50% joint and survivor annuity (the automatic form of payment for married
employees)
- - Single life annuity (the automatic form of payment for single employees; an
option for married employees)
- - Lump sum
- - 100% joint and survivor annuity (for married employees who retire with 15 or
more years of credited service)
- - Level income
Electing an early retirement. If you decide to retire early, contact the
Benefits Division for information on benefits and the required forms. You should
do this about three to six months before you expect to retire since your benefit
election must be made in writing within the 90-day period prior to your last day
worked or your payment will be delayed.
Postponed Retirement
You may postpone your retirement past age 65. In that case, you continue to earn
credited service (up to a maximum of 35 years) and your retirement date is the
last day you are paid. However, if you are still working after age 70-1/2, the
law requires that you start to receive your vested accrued benefit no later than
April 1 of the year following the calendar year in which you turn 70-1/2./2/
What happens then. The automatic and optional forms of benefit payment available
to you at normal retirement are also available to you at postponed retirement.
(See "Normal Retirement Payment Options At A Glance," page 5.)
/1/ The formula always uses the lower of the covered compensation figure from
the table on page 7 (in this case $42,108 based on a 1939 birth year) or
the average of your salary in the three consecutive years in which your
earnings were the highest.
* Grandfathering applies to eligible participants who will receive the greater
value of this formula or the Minimum Benefit Comparison formula as indicated
on page 4.
/2/ This automatic pension commencement provision does not apply to employees
who reached age 70-1/2 before January 1, 1988, provided they were not five
percent owners of the Company in the year in which they reached age 66-1/2,
or any subsequent year.
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Vested Terminee Benefit
If you leave the Company for any reason after you have five or more years of
vesting service but before you are retirement eligible (age 55 with 15 or more
years of service or, your normal retirement age), you will be entitled to a
vested terminee benefit. The benefit is calculated using the basic pension
formula.
What happens then. A vested terminee benefit normally begins when you reach 65.
However, upon your termination you have a one-time election opportunity to
commence your benefit effective the first of the month following termination. If
you choose to start your benefit immediately, it will be actuarially adjusted to
reflect early commencement. If you defer commencement of your benefit and have
less than 15 years of service, your benefit will start at age 65. If you have 15
or more years of service, you can defer commencement of your benefit to anytime
between ages 55 and 65.
Example: Suppose you were hired in 1980 at age 25 and you leave Northern in
September, 1996 with 16 years of service. While employed, your average
compensation was $27,000. You are eligible to either commence your benefit
immediately (monthly annuity or a lump sum) or, since you have 16 years of
service, you can defer commencement of an annuity to any time between the ages
of 55 - 65. Using the plan formula on page 4 here's what the calculation
produces.
Step 1 1.8% of $27,000 = $486; $486 x 16 yrs $7,776
MINUS
Step 2 .50% of $27,000/1/ = $135.00;
$135.00 x 16 yrs - $2,160
--------
$5,616*
Age 65 Monthly Benefit $ 468/mo
Age 55 Monthly Benefit $ 187/mo
(Reduced by 6%/yr for 10 yrs)
Immediate Annuity $ 51/mo
(Reduced from age 55 by
actuarial table)
/1/ The formula always uses the lower of the covered compensation figure (in
this case $60,720) or, the average of your salary in the three consecutive
years in which your earnings were the highest.
* Grandfathering applies to eligible participants who will receive the greater
value of this formula or the Minimum Benefit Comparison formula as indicated
on page 4.
Vested Terminee Benefit Payment Options At A Glance
Here are the automatic and optional forms of payment available to you as a
vested terminee if the total value of your benefit at termination of employment
is equal to or greater than $3,500. If the value is less than $3,500, your
payment will automatically be paid as a lump sum. See Payment Options, page 8,
for more details on how each works and how you may elect one.
- - Immediate lump sum (can only be chosen at termination)
- - Immediate 50% joint and survivor annuity/2/ or single life annuity
- - Deferred 50% joint and survivor annuity/2/ (the automatic form of payment for
married employees)
- - Deferred single life annuity (the automatic form of payment for single
employees; an option for married employees)
/2/ This is available by taking an actuarial reduction on your single life
annuity.
When payments begin. You can choose to have the payment of your benefits begin
immediately, or payment can be deferred according to the schedule below.
Vested Terminee Benefit Payment Options
Credited
Service Annuity Lump Sum
Less than Can be deferred Available upon
15 years to age 65 termination
only - no deferral
Equal to or Can be deferred Available upon
greater than to anytime from termination
15 years age 55 to 65* only - no deferral
* Payments that begin before age 65 will be reduced to reflect your age at
commencement.
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PAYMENT OPTIONS
Most employees will probably find that the automatic forms of payment - the
single life annuity for unmarried employees and the 50% joint and survivor
annuity for married employees - will meet their need for a steady source of
retirement income. But since everyone likes to have a choice, payment options
are built into our Pension Plan. This section outlines what those options are.
As you review your payment options, keep in mind that if you are married and
want to elect an optional form of payment, you must provide the Company with
your spouse's written, notarized consent.
Forms Of Pension Payment At A Glance
Type of Methods of Payment
Retirement Automatic Optional
Normal or - Single employees: - lump sum
Postponed single life annuity
- Married employees: - lump sum
50% joint and - 100% joint and
survivor annuity survivor annuity*
- single life annuity
Early - Single employees: - lump sum
single life annuity - level income
- Married employees: - lump sum
50% joint and - level income
survivor annuity - 100% joint and
survivor annuity*
- single life annuity
Vested - Single employees: - lump sum
Terminee single life annuity
- Married employees: - lump sum
50% joint and - single life annuity
survivor annuity
* For married employees with 15 or more years of credited service
Single Life Annuity
A single life annuity is the automatic form of payment for unmarried employees.
But it is also available as an option to married employees. If you elect a
single life annuity, you would get the full monthly benefit determined by the
plan's formula. Single life annuity payments are made to you for your life.
Payments end when you die. (See When You Can Retire... And What Happens Then,
page 5.)
100% Joint And Survivor Annuity
This option is available under Normal, Early, or Postponed retirements and to
certain acquired company prior plan participants. You may elect the 100% joint
and survivor annuity if you have 15 or more years of credited service and you
are married when you retire. You would receive reduced monthly payments for
life. After your death, your surviving spouse would receive the same monthly
benefit you received, for the rest of his or her life. Your monthly payments are
reduced to account for the extra income your spouse is expected to receive.
Example. To illustrate how this works, we'll look at two employees, Tom and
Joan. To keep things simple, we'll ignore discount rates and the time value of
money, but make the following assumptions:
- - Both Tom and Joan have identical service and salary and retire at the same age
with a pension of $1,000 a month.
- - Tom is married and his wife is younger than he is.
- - Joan is single.
- - Both employees are expected to receive benefits for 15 years, which means they
would each receive 180 monthly payments. Tom's wife is expected to receive
payments for 10 years following Tom's death (that is, she will receive 120
monthly payments).
Joan's Pension
The total value of Joan's pension is $180,000:
$1,000 a month x 180 months = $180,000
Tom's Pension
Tom and his wife are entitled to a reduced 50% joint and survivor annuity. The
total value of the payments they both receive must add up to $180,000. It works
out like this:
Tom: $750/month x 180 months =$135,000
+ spouse: $375/month x 120 months =$ 45,000
- -----------------------------------------------
Total Value of Tom's Pension =$180,000*
* Grandfathering applies to eligible participants who will receive the greater
value of this formula or the Minimum Benefit Comparison formula as indicated
on page 4.
8
If Tom and his wife elect the 100% joint and survivor annuity, Tom's monthly
benefit will be reduced:
Tom: $600/month x 180 months =$108,000
+ spouse: $600/month x 120 months =$ 72,000
- ----------------------------------------------
Total Value of Tom's Pension =$180,000*
As you can see, Tom and Joan each would be entitled to a $180,000 pension. But
because Tom opts to provide his wife with a continuing income after his death,
he's willing to "trade off" part of his benefit. How much Tom actually gets
depends on how much of his benefit is continued to his wife. For example, he'd
get $750 a month if he chose to have 50% of his benefit continue to his wife;
he'd get $600 a month if she were to receive 100% of his benefit.
Level Income
This form of payment is an option for Northern people with 15 or more years of
credited service who retire before their Social Security retirement benefits
begin. It provides both survivor protection and increased pension payments until
Social Security benefits start. Once your Social Security benefits begin, your
Pension Plan benefit is reduced. Your pension before you receive Social Security
would be about the same as the total of your pension and Social Security
benefits, hence the "level income" throughout retirement.
If you die while receiving payments under the level income option (before or
after your social security benefits begin), your spouse would receive 50% of the
pension you would have been entitled to under the 50% joint and survivor annuity
at your early retirement date. This survivor benefit is actuarially reduced.*
Lump Sum
Instead of monthly payments, you may elect to have your pension paid in one cash
payment. The payment will be of the same actuarial value as the pension you
otherwise would automatically receive. When converting your monthly payments to
a lump sum, a 30 Year Treasury Rate (which is adjusted quarterly) is used to
calculate the present value of your annuity. If you retire from the Company,
payment will be made at the end of the month following your retirement date. If
you leave the Company with a vested terminee benefit, payment will be made at
the end of the month after 120 days have elapsed following your last day with
the Company./1/
* Grandfathering applies to eligible participants who will receive the greater
value of this formula or the Minimum Benefit Comparison formula as indicated
on page 4.
If the value of your pension is less than $3,500. If the total value of your
benefit at retirement or termination of employment is $3,500 or less, your
benefit will automatically be paid as a lump sum.
Benefit Election Requirements
When you must apply to the Benefits Division for your pension depends on two
things:
- - Your status when you leave the Company (that is, whether you are a retiree or
a vested terminee); and
- - how you want your pension paid to you.
Benefit Election Requirements
Retirees Vested Terminees
When to apply
for benefits:
- - Automatic form Application Application
of payment required upon required upon
decision to termination
retire
- - Optional form Election Form Election Form
of payment due by last day due within
of work 90 days after
benefit informa-
tion is provided
Revoking your Any time before Any time before
payment election payments begin payments begin
Automatic and optional forms of payment are outlined on page 8.
/1/ Under a transition rule, lump sum distributions paid in the first 6 months
of 1996 will never be less than the amount calculated using the January 1995
PBGC rate of 6%. As before, a factor of 1.2 will be applied to this rate for
vested terminees with a lump sum value over $25,000.
9
Thinking It All Through
As you can see, much thought goes into when to retire and how to have your
pension paid. As your retirement nears, the Benefits Division will discuss all
of the options with you in detail. Also keep in mind that Pension Plan
distributions will have some tax implications. (See Other Information You Should
Know, "Taxes Upon Distribution," page 12.) We recommend that you discuss the
pros and cons of any benefit payment with your tax advisor.
SURVIVOR PROTECTION FOR YOUR FAMILY
The primary purpose of the Pension Plan is to provide you with retirement
income. But the plan also provides - and pays for - a measure of financial
protection for your spouse/1/ and in some instances, for your children too,
after your death. The extent and amount of survivor protection depends on your
credited service. The spouse and eligible children provision covers Northern
people with 15 or more years of credited service, while the spouse only
provision is for employees who die with at least five but less than 15 years of
credited service.
Survivor protection is provided automatically. It may not be waived unless you
elect a lump sum pension or single life annuity.
Survivor Protection If Death Occurs Before Pension Payments Commence
This form of survivor protection is payable under one of the following three
circumstances:
- - if you die while employed by Northern after you are vested;
- - if you die after leaving Northern with a deferred retirement or vested
terminee pension (and before payments commence); or
- - if you die after you are vested and while receiving benefits from the Northern
Trust Long Term Disability Plan.
/1/ In the case of a Vested Terminee or Retiree who deferred commencement of
their benefit, or an in-service death of a vested employee, by "your spouse"
we mean the person to whom you are married when you die. If you die as a
Vested Terminee or Retiree who is receiving a benefit, your surviving
spouse, in order to receive this benefit, must be the person to whom you
were married on the date you commenced your benefit.
If your death occurs under these circumstances, your survivor would be entitled
to a monthly benefit equal to one-half of the benefit you would have received if
you had terminated on the day before you died (or on your actual termination
date, if earlier) and elected the 50% joint and survivor form of payment.*
Eligible Survivors. Certain family members are entitled to survivor benefits
based upon your length of service;
- - if you have less than 15 years of credited service, your spouse alone is
entitled to the survivor benefit which will be payable for his or her
lifetime.
- - if you have 15 or more years of credited service, your spouse and unmarried
children under age 21 count as eligible survivors. Thus, if you die without a
spouse, each child would receive the survivor benefit for as long as he or she
was eligible (i.e., less than age 21 and unmarried). If your spouse were to
die after you and be survived by eligible children, the survivor benefit would
continue while those children remain eligible. Note that:
- if you have no spouse and more than one eligible child, the survivor benefit
will be divided equally among the eligible children; and
- children born or adopted after you leave Northern are not eligible for a
survivor benefit.
When Payments Begin. When survivor benefits may commence is based on the same
options that would have been available to you at the time of your death. All
survivor benefits are reduced for early commencement and are adjusted for the
50% joint and survivor form of payment.
Survivor Protection If Death Occurs After Pension Payment Commences
If you die after pension payments have commenced, a survivor benefit will be
payable only if you elected the 50% or 100% joint and survivor form of pension
at the time your payments commenced.
*Grandfathering applies to eligible participants who will receive the greater
value of this formula or the Minimum Benefit Comparison formula as indicated on
page 4.
10
Death Benefits
There are also times when an additional lump sum death benefit may be payable to
your beneficiary. If you were working at least 20 hours a week before you
retired and were receiving monthly retirement benefits, your beneficiary is
eligible for this special benefit. The death benefit is $5,000. If you choose a
lump sum for your retirement payment, your death benefit will be cashed out in a
lump sum at the time of your retirement.
OTHER INFORMATION YOU SHOULD KNOW
Credit For Service During A Leave
The following chart shows how credit is given for service under the following
circumstances: an unpaid leave of absence, military leave, short term
disability, and long term disability.
Unpaid Leave of Absence Counts as vesting and
of Up To One Year credited service.
including Family Care
Leave
Military Leave Counts as vesting and
credited service if you return
to the Company within the
period required under law.
Short Term Disability All leave time counts for
vesting and credited service.
Long Term Disability If you have at least 15 years
of credited service when
disability begins, all time
counts for vesting and
credited service. If you have
less than 15 years of credited
service when disability
begins, nine months can
be counted for both vesting
and credited service.
Reemployment
Vesting Service. If you leave and are later reemployed by Northern, your past
service will count as vesting service.
Credited Service. If you leave and are later reemployed by Northern, your past
service will count as credited service if either -
- - you did not receive a lump sum from the Plan when you left or
- - you repay the lump sum distribution you received from the Plan (with interest)
- within five years of the date of your reemployment (if your reemployment
occurs on or after January 1, 1994, and if your break in service was less
than 5 years) or
- at any time prior to termination of employment (if your reemployment
occurred prior to January 1, 1994).
If you do not repay the lump sum or are not eligible to repay the lump sum, your
pension when you eventually retire or leave again will be based on the plan
formula and your salary years and credited service after your return.
Break in Service. Your break in service (the period of time between your
termination of employment date and reemployment date) will count as vesting
service (but not credited service) if the break in service is less than one
year.
11
Reemployed Retirees. If you were receiving monthly payments from the Plan when
you are reemployed, your monthly payment may be withheld in the following
situations:
- - your monthly payment will be withheld for any month after your normal
retirement age in which you work for Northern for eight or more days; and
- - your monthly payment will be withheld for any month prior to your normal
retirement age in which you work for Northern.
Upon your subsequent termination of employment, your monthly benefit payable
from the Plan will be recalculated to take into account salary and service
earned after your reemployment. Monthly payments will recommence no later than
three months following your subsequent termination of employment.
Employees Reemployed on or after January 1, 1996. If you were originally
employed prior to 1996, left, and are reemployed by Northern on or after
January 1, 1996, benefit determinations will be considered under the Plan in
effect upon your reemployment. Your past service will be considered for vesting
and credited service in the manner described above to determine your Plan
benefit under the current provisions.
To the extent your past service is considered credited service after your
reemployment (i.e., you did not receive a lump sum distribution or you repaid
the lump sum distribution) - that service period is considered under the
grandfathered formula and options, the value of which would be the minimum
benefit you would receive upon subsequent termination.
Acquired Company Prior Plan Benefit
If you worked for an affiliate of the Company prior to the date of affiliation,
you may have certain other grandfathered provisions from a prior plan or special
vesting and credited service dates agreed to at the time of the affiliation.
Affiliate benefit merger agreements are documented in detail as part of the Plan
Document. Be sure to review your affiliate service dates with the Benefits
Division when you discuss your retirement benefit options.
How The IRS Limits Pensions
While the Pension Plan uses a specific formula to determine your benefit, the
amount of that benefit is subject to certain IRS limits. These limits, which
generally affect only highly-paid employees, change from time to time as tax
laws change. Therefore, your benefit may be reduced due to IRS limits. When this
applies, you may receive a payment from the Supplemental Pension Plan. Payments
from this plan do not qualify for any special tax treatments available for
payment from the Qualified Pension Plan.
Taxes Upon Distribution
The tax treatment of your pension depends on whether you take it as an annuity
or in a lump sum, among other factors. Annuity payments are taxed as ordinary
income in the year in which they are received. You are responsible for paying
these income taxes, which you can do by having taxes withheld from your pension
payments. Alternatively, you can elect in writing on the appropriate form not to
have taxes withheld.
Lump sums are treated differently. If you elect a lump sum distribution, you
have three choices for the taxable portion of your payout:
- - Request a Direct Rollover to an IRA or another employer's qualified plan, in
which case you continue to defer paying taxes; or
- - take it in cash, in which case it is considered taxable income, and 20% for
federal taxes will automatically be withheld; or
Note: With this option you still have 60 days to roll over your lump sum
distribution to an IRA or other qualified plan.
- - split your distribution to have some directly rolled over and some paid in
cash with taxes withheld.
If you choose not to roll over your lump sum, you are responsible for paying the
income taxes that apply in the year you receive your payment.
12
Five-year forward averaging. If you have at least five years of Pension Plan
participation and are 59-1/2 years old or older, you may qualify under current
tax law for a tax advantage called "five-year forward averaging." In general,
five-year forward averaging can prevent payment of your lump sum from forcing
you into a higher tax bracket. You can take advantage of five-year forward
averaging only once.
Ten-year forward averaging. This special tax treatment is available only if you
were at least age 50 before January 1, 1986 and you have at least five years of
Pension Plan participation. It's similar to five-year forward averaging, only
your taxes are calculated over a 10-year period instead of a five-year period.
You can take advantage of this tax treatment only once, and you cannot use both
five and 10-year forward averaging.
Capital gains treatment. Capital gains treatment, in which income is taxed at a
special low rate, is limited to the portion of your lump sum attributable to
pre-1974 service. It's generally available only for distributions received
before 1992 (subject to a special phase-out rule).
However, if you were at least age 50 before January 1, 1986, you can get it at
any time. If you elect capital gains treatment on pre-1974 amounts, the rest of
your lump sum may be taxed as ordinary income or under the five- or 10-year
forward averaging rules.
Excise tax. Current tax law imposes a 10% penalty on any lump sum distribution
made before age 59-1/2. The excise tax does not apply under any of the following
circumstances:
- - you meet the requirements for early retirement;
- - you are 59-1/2 or older;
- - the distribution is made to your beneficiary in the event of your death;
- - you become totally and permanently disabled (and you qualify for Social
Security disability benefits);
- - the distribution is rolled over to another tax-favored plan, such as a
rollover IRA or other qualified plan within 60 days of receiving the
distribution;
- - the withdrawal is used for tax deductible medical expenses (that is, those
expenses that are greater than 7.5% of your adjusted gross income); or
- - payment is made to an alternate payee, as mandated by a Qualified Domestic
Relations Order.
Tax laws are complicated and subject to change. Individual tax treatment can
vary greatly from employee to employee. You should consult a professional tax
counselor or financial advisor before electing or receiving a distribution.
Using Your Benefit Statement In Your Planning
Your annual benefit statement is a very important financial planning tool. Among
other things, it gives you an estimate of what you can expect from the Pension
Plan. Your statement also estimates your Social Security retirement benefit, and
your benefits from two other Northern Trust plans that figure so prominently in
your future: TIP and ESOP. If you have any questions about your benefit
statement, the Benefits Division can answer them.
13
TIP started out in 1958 as a savings plan. (Or what was known in those days as a
"thrift" plan.) It was designed to encourage Northern people to put something
away for the future. Recognizing that a systematic method of saving isn't always
easy, TIP offered an incentive to join the plan: matching contributions.
The Thrift-Incentive Plan is still meant to encourage saving - for retirement in
particular. But, over the years, TIP has evolved into much more than a "thrift"
plan. Today's TIP is a multi-faceted plan that combines tax-advantaged savings,
profit-sharing, and a broad range of investment opportunities. It's a voluntary
plan. But the incentive is one of the most competitive offered. And since 90% of
those eligible currently contribute to TIP, it's obvious that most of you
recognize a good thing.
ELIGIBILITY AND PARTICIPATION
Virtually everyone employed by the Northern Trust Company is eligible to
participate in TIP. That includes everyone in Northern Trust affiliates and
subsidiaries who have adopted TIP, but excludes foreign nationals overseas. All
we require for participation purposes is that you finish a year of service with
Northern, and that you're age 21.
When Participation Begins
Once you're eligible, you can start participating on the very next quarterly
enrollment date. TIP enrollment is held four times a year: January 1, April 1,
July 1 and October 1. The Benefits Division keeps track of who's eligible to
join TIP and when. They'll contact you before your first enrollment opportunity.
Joining later on. You don't have to join TIP as soon as you're eligible. In
fact, if you don't enroll the first time you're eligible, you can join on any
following payroll date. But, you are encouraged to join as soon as eligible
since the Company match (described later on) is based on the contributions you
make each pay period. (See "The Company Matching Contributions," page 17.)
About your enrollment. Joining TIP requires a lot of decisions on your part. For
example, you have to tell us how much you want to save, whether it's on a
before- or after-tax basis, how you want your savings invested, and so on.
You'll tell us all of this during your TIP enrollment process. Your enrollment
directions will also serve as your authorization to Northern Trust to take
your TIP contributions out of each paycheck.
Naming a beneficiary. You'll also be asked to name a beneficiary. That tells us
to whom your TIP account balance should be paid in case you die before you
retire or leave Northern Trust. You may name anyone you choose as your
beneficiary. But, by law, if you are married, you must name your spouse as your
beneficiary. The only time this provision is waived is when your spouse agrees
to it in writing. Your spouse's waiver must be notarized and filed with the
Benefits Division.
How it Happens . . . the Northern-Express/SM/
Most of what you do throughout your participation in TIP will happen through an
interactive voice response system called Northern-Express/SM/ which was designed
to handle your requests. Northern-Express/SM/ is a convenient 24 hour telephone
system that enables you to access information about your account, simply by
using a touch tone telephone. You will use it to enroll in the plan, make
investment elections and changes, transfer balances, request loans or
withdrawals, and a variety of other activities.
You can access Northern-Express/SM/ by calling 1-800-291-PLAN(7526) and using
your Personal Identification number (PIN). Use of your PIN authorizes us to
treat the touch tone responses you make as your electronic signature, having the
same binding effect as your written signature. Also, anytime you complete a
transaction on Northern-Express/SM/ you will be sent a written confirmation of
that activity.
14
FUNDING YOUR TIP ACCOUNT
TIP is funded with your savings and with Northern Trust's contributions on your
behalf. Since the Company's contributions are partially dependent upon the
achievement of a Corporate net earnings goal, it is considered a contingent
thrift savings plan. Whatever money you direct to TIP, and whatever the Company
adds to it, is invested for potential tax deferred growth.
[CHART APPEARS HERE]
It All Starts With Your Savings
TIP starts with your savings. You've got to put money into the plan to be
entitled to Northern's match. The more you save, and the longer you're in, the
more Northern will add to your account, and the greater your retirement savings
will be.
Your Savings Choices
Whatever you decide to save in TIP comes out of your paycheck. How it comes out
is up to you, since you have two choices:
- - before taxes are taken out; or
- - after your pay has been taxed.
You can even opt for a combination of the two with a total limit of 12%. Once
you decide which way and how much to save, the money is taken from each paycheck
and automatically credited to your TIP account. Before making your savings
decisions, keep in mind that the rules for withdrawing your before-tax savings
are different from those for after-tax savings.
Your "pay" for TIP purposes. For purpose of TIP, your pay is your annual base
salary, plus shift differentials. Severance pay, overtime, bonuses or other
types of compensation don't count.
Whatever you save is always yours. Whatever you contribute to TIP is always
yours. After all, it's your money. So, naturally, you have a non-forfeitable
right to your own contributions and your earnings, including any rollover
contributions and ESOP transfers. The actual value of your account depends on
the funds in which you invest your savings which are subject to market
fluctuations.
After-Tax Contributions
When you save with after-tax dollars, you're contributing money that has already
been taxed. You may contribute up to 12% of your pay on an after-tax basis. (The
Tax Reform Act of 1986 changed the way withdrawals of after-tax savings are
treated. See Access To Your Savings: Loans And Withdrawals, page 21 and
Withdrawals of after-tax money, page 24.)
Before-Tax Contributions
TIP, which qualifies as a 401(k)* plan, lets you save up to 12% of your pay on a
before-tax basis. When you save with before-tax dollars, you're actually telling
the Company to direct your money to your TIP account instead of to your
paycheck. Since whatever you save is not considered taxable income, you shelter
part of your current income from federal taxes.
The tax advantage doesn't end there. Your before-tax contributions stay
sheltered from taxes for as long as they remain in the plan. That's usually
until you retire or leave Northern. That's also when the tax-free status ends.
(See Other Information You Should Know, "Taxes Upon Distribution," page 26 for
more information on TIP and taxes.)
Most states and cities follow the federal tax rules for before-tax
contributions. However, depending on where you live, you may have to pay state
and local taxes on before-tax contributions. You should check with your own tax
advisor to find out whether or not you are liable for these taxes.
*401(k) refers to a section of the Internal Revenue Code that lets employers
offer tax-deferred savings vehicles to their employees.
15
Your other Company benefits. When you save with before-tax money, your W-2 form
will show your earnings net of your before-tax savings. But your full pay will
be used to determine your other Northern Trust benefits (such as life insurance,
pension and disability benefits). And, since Social Security deductions stay the
same, saving with before-tax dollars will not reduce your future Social Security
retirement benefits.
The Internal Revenue Service has specified savings limits which may affect your
deposit amounts.
- - First, there is an overall maximum on the dollar amount you may deposit to TIP
on a before-tax basis each year. This maximum changes annually to follow
changes in the cost of living. For 1996, the maximum is $9,500.
- - Next, "highly-paid" employees may have their before-tax or after-tax deposits
limited to a specific percent of pay if overall plan participation among
Northern people does not satisfy the IRS participation tests. ("Highly-paid"
employees were originally defined as those earning at least $50,000 a year,
and updated annually.) For example, if your 1996 annual salary is $66,000 or
more, your before-tax contributions will be limited to 7%.
- - Finally, there is a limit on the amount of pay that can be considered for TIP
purposes, which for 1996 is $150,000.
The TIP/ESOP Representatives will notify anyone affected by these limits.
Examples Of TIP's Before-Tax Savings Advantage
The best way to see the advantage of before-tax savings is by example. The ones
that follow are based on 1996 federal income tax withholding schedules and FICA
tax rates. Your actual tax savings could be even greater, because most states
allow you to defer state income taxes. Naturally, the amount of tax you actually
pay will depend on current tax rates and your own financial situation.
Example A. This example assumes you are married, earn $25,000 a year, claim
three federal income tax exemptions and currently save 4% of your gross pay in
TIP. Since you can save that 4% on either an after-tax or before-tax basis, what
we've shown here is how saving on a before-tax basis can actually increase your
take-home pay.
TIP TIP
After-tax Before-tax
Savings Savings
Annual Gross Pay $25,000.00 $25,000.00
TIP Before-tax Savings - -0- - 1,000.00
---------- ----------
Taxable Income $25,000.00 $24,000.00
Estimated Federal
Income Tax Withholding* $-1,638.00 $-1,488.00
Social Security Tax -1,912.50 -1,912.50
TIP After-tax Savings - 1,000.00 - -0-
---------- ----------
Take-home Pay $20,449.50 $20,599.50
Increased Take-home Pay $150
* Based on 1996 tax rates.
Example B. In the following example, we've shown a married employee earning
$50,000 a year, claiming three federal income tax exemptions, who saves 10% of
gross pay in TIP.
TIP TIP
After-tax Before-tax
Savings Savings
Annual Gross Pay $50,000.00 $50,000.00
TIP Before-tax Savings - -0- - 5,000.00
---------- ----------
Taxable Income $50,000.00 $45,000.00
Estimated Federal Income
Tax Withholding* $-5,388.00 $-4,638.00
Social Security Tax -3,825.00 -3,825.00
TIP After-tax Savings - 5,000.00 - -0-
---------- ----------
Take-home Pay $35,787.00 $36,537.00
Increased Take-home Pay $750
* Based on 1996 tax rates.
How Much You Can Save
The most you can save in TIP is 12% of your pay. But, you can save in any
combination you like, as long as it's in whole percentages, and doesn't go over
the 12% limit. The most you can save each year dollar-wise on a before-tax basis
is determined by law. The rules can change from year to year. The TIP/ESOP
Representatives will let you know if your elected before-tax contributions
exceed the legal limit.
16
You Can Adjust Your Savings Strategy
Once you elect how much of your pay you want to save, you are not locked into
your choice. You can change your contribution amount any pay period by calling
Northern-Express/SM/. (See Other Information You Should Know, "Handling Your
Requests," page 25.)
The Company Matching Contributions
Northern Trust will match a portion of what you save each year. The maximum
Company contribution depends on Northern Trust's earnings for the year. There is
also a minimum Company contribution that is granted regardless of earnings
results.
The maximum Company match can be as high as $1.00 for each $1.00 you save up to
4% of your pay. The minimum match of $ .50 for each $1.00 you save up to 4% of
your pay is paid annually regardless of whether or not Corporate earnings goals
are met. If the total Company match is paid ($1.00 for each $1.00 you save up to
4%) it translates into an additional 4% of pay Company contribution each year!
For example, if you earn $25,000 and decide to save 4% in TIP:
($25,000 x 4% = $1,000)
The minimum match is $ .50: 1,000 x $ .50 = $ 500.00
The additional match
could be as high as $ .50: 1,000 x $ .50 = +500.00
------ ---------
The maximum match is: $1.00: $1,000.00
$1,000/$25,000 = 4% of your salary.
To get the full 4% matching contribution, two things must happen. First, you
must contribute at least 4% of pay each pay period and be an eligible
participant at year-end. If you leave the Company before December 31, you won't
be eligible for any of the year's matching contribution unless you retire,
become permanently disabled, take an authorized leave of absence, or die during
the year. In any of these events, the Company contribution to your TIP account
will be based on your contributions that year.
The second event that triggers the maximum Company match is financial
performance. The maximum matching contribution is linked to profits. Or, more
specifically, to earnings. When the Company's earnings goal is met - which has
been the case every year through 1995 - the match is the full $1.00 for each
dollar you save (up to 4%).
Determining the earnings goal. Northern Trust's Board of Directors determines
and communicates the annual TIP earnings goal at the beginning of each year. The
maximum Company match is based on how much of the earnings goal is reached. When
the earnings reach at least 100% of target, the match is 100%. For each 1% under
the earnings goal, the match will be reduced 2%. If the Corporation's earnings
dip below 75% of the goal, the minimum matching contribution of $.50 is made for
that year. The table below shows what happens when the earnings goal is between
99% and 75%.
Percent Of Northern's
Earnings Goal Matching
Achieved Contribution
Greater Than 100% $1.00
99 .98
98 .96
97 .94
96 .92
95 .90
94 .88
93 .86
92 .84
91 .82
90 .80
89 .78
88 .76
87 .74
86 .72
85 .70
84 .68
83 .66
82 .64
81 .62
80 .60
79 .58
78 .56
77 .54
76 .52
Less Than 75 .50
17
The table below illustrates how Northern's match can have a dramatic effect on
your savings. Let's say you earn $30,000 a year and save 4% of it ($1,200) a
year. If you were saving in a typical savings account, earning a 6% return on
your money, the left hand column shows what your account would look like over
time. What the right hand column shows is what your TIP account would look like
if you were saving that same $1,200 a year in TIP and earning the same 6%
return. Counting the Company's matching contribution, you'd be getting better
than a 100% return on your money. (Pretty impressive, isn't it?)
Typical TIP
Savings Account Account
5 years $ 6,765 $ 13,528
10 years $15,817 $ 31,633
15 years $27,931 $ 55,861
20 years $44,143 $ 88,283
25 years $65,837 $131,671
Your entitlement to the Company's contributions. If you were in TIP before
January 1, 1989, when the Company made Basic contributions to TIP participants'
accounts, these Basic contributions are all yours.
You earn a right to the Company's matching contribution over time, through
what's known as "vesting." Your vested interest in the Company's matching
contributions, and in any investment income and market adjustments attributable
to them, increases with each year of service as outlined in the following table.
Completed Years Vested
Of Service Percentage
Less than 2 0%
2 but less than 3 20%
3 but less than 4 40%
4 but less than 5 60%
5 but less than 6 80%
6 or more 100%
Once you have completed six years of service, you become 100% vested in the
Company's contributions to your TIP account. Any contributions the Company makes
after that are yours as soon as they are made. The same is true of any
investment earnings on Company contributions.
The only time service isn't used to determine vesting is if you become
permanently disabled or die. If either happens, you will be considered fully
vested in the value of all the Company's matching contributions, regardless of
your service at the time.
If you leave Northern Trust for any other reason, you will forfeit any non-
vested contributions in your TIP account. You can get them back if you are
reemployed by Northern Trust within five years. But first you'll have to repay
the full dollar amount of your TIP distribution. You have five years from the
date of your return to do so. (See Other Information You Should Know,
"Reemployment," page 26.)
Rollovers And ESOP Transfers
In addition to your contributions and Northern's contingent matching
contributions, money can go into your TIP account from qualified rollovers and
from any portion of the Employee Stock Ownership Plan (ESOP) account you
transfer to TIP after meeting what's known as the "diversification"
requirements.
Rollover deposits. If you participated in a previous employer's tax-qualified
retirement plan, you may "roll over" (subject to a $500 minimum) the taxable
portion of benefits you have built up in the other plan to TIP. To avoid tax
withholding from the payment, you must have the check made payable directly to
The Northern Trust-TIP. If the check is made payable to you and taxes were
withheld, you can still roll the funds into TIP but you must make the rollover
within 60 days after you receive your distribution from the other plan. If you
had already deposited your distribution into a rollover IRA, you can still roll
it over to TIP (as long as your account contains monies from the prior
employer's plan only). Taxes on the money you roll over are deferred until the
rollover is paid out to you.
18
Rollover contributions are put into a special account for you, and are available
for regular withdrawals, hardship withdrawals, and loans. Rollover deposits
receive the same tax treatment at distribution as contributions made on a
before-tax basis. Rollovers are accepted two times per month coinciding with
Payroll dates. (See Other Information You Should Know, "Handling Your Requests,"
page 25, for when forms must be received by the Benefits Division.)
Diversification transfers from the ESOP. After you reach age 55 and have at
least six years of service, you may transfer a portion of your ESOP account to
one or more of TIP's investment funds (except the Northern Trust Stock Fund), or
take the portion in cash. Your ESOP share account must have a dollar value of at
least $500 in order to make a transfer or take a cash payment.
Any funds you transfer under the diversification feature of the ESOP are
available for loans and withdrawals, and will receive the same tax treatment at
distribution as before-tax contributions. (See the ESOP section of the
Sourcebook, "Distribution Options...And Their Tax Consequences," page 33.)
INVESTING YOUR SAVINGS
TIP's investment funds allow you to develop a strategy that best fits your own
long-range savings needs. You can invest in one or all of the funds in
increments of 1%. You can invest your own contributions and Company
contributions differently.
The Investment Funds
Each fund represents a different type of investment. Each has its own degree of
growth potential and risk. Generally speaking, the funds that have the greatest
potential for investment growth are usually subject to greater risk.
- - The Short-Term Fund. Emphasizes stability of principal through investments in
high-quality, short-term securities such as CDs, Treasury bills, and Treasury
notes.
- - The Benchmark Bond Portfolio. Pursues the maximum total return consistent with
reasonable risk by investing in a broader range of bonds and other fixed
income securities. The Portfolio will have a dollar-weighted average maturity
of between 5 to 15 years. The value of your investment will fluctuate with
changes in interest rates and other market conditions.
- - The Benchmark Balanced Portfolio. Pursues long-term capital appreciation and
income through a mix of stocks, bonds, and money market securities. This mix
is regularly monitored and adjusted.
- - The Benchmark Equity Index Portfolio. Seeks to provide investment results that
approximate the performance of the Standard & Poor's 500 Stock Index, which is
comprised of a diversified group of large, well-established companies.
- - The Benchmark Focused Growth Portfolio. Seeks long-term capital appreciation
mainly through stock investments in companies with high growth potential.
These companies must have been in operation for at least five years.
- - Northern Trust Corporation Common Stock. This option represents investment in
Northern Trust Corporation Common Stock. Only the Company's matching
contributions can be directed to this investment option.
Note: You can direct both your contributions and the Company's contributions to
all funds except Northern Trust Stock. Only the Company's contributions can be
invested in Northern Trust Stock. However, investing in Northern Trust Stock may
be restricted from time to time due to Securities and Exchange Commission (SEC)
regulations.
There are two types of restrictions which can occur. The first restriction
applies on a quarterly basis and is designed to protect the plan from "insider
trading" transactions. (See "Special Deadlines at Quarter End," page 26, for
more details.) The second restriction limits the amount of company stock a plan
such as TIP can hold to 10% of total shares outstanding. This 10% limit is
monitored regularly and participants will be notified if the plan gets close to
that limit. The notification will advise you of specific steps that need to be
implemented to insure compliance with the limit.
19
Adjusting Your Investment Strategy
Daily Valuations. The plan is "valued daily." Just as the name implies, the
value of your individual TIP account is updated every business day. Whenever you
call Northern-Express/SM/ to check on your account, you will hear information
that reflects closing fund prices and account activity from the previous
business day including market changes in your TIP funds, contribution rates,
investment elections, and loan and withdrawal options. Daily valuation gives you
the opportunity to access and manage your account as frequently as you wish.
Changing your allocations. You can change the way you invest your new
contributions for any payroll period. The change will become effective on the
first day of the pay period as long as you call Northern-Express/SM/ by stock
market close the business day before payday. Keep in mind that changing future
allocations has no effect on your existing account balances.
Transferring from one fund to another. You can transfer your investments from
one fund to another on a daily basis. Transferring existing fund balances does
not affect how your future contributions will be invested. A transfer generally
becomes effective the same day you call Northern-Express/SM/. (See Other
Information You Should Know, "Handling Your Requests," page 25 for more details
on investment changes and transfers.)
Dividends And Interest
Dividends and interest earned on each fund are reinvested in that fund.
Investment earnings (if any) are not taxed until you receive a distribution from
the plan.
How Your Account Is Valued
The value of your TIP account reflects the performance of the fund(s) in which
you have invested. Investment performance takes into account two factors:
- - Income (interest and dividends), which can only increase the value of your
accounts; and
- - changes in market value, which can either increase or decrease the value of
your account.
The following chart illustrates how a single contribution of $1,000 of savings
can grow at various rates of return.
How Your Money Can Grow In TIP
$1,000 of savings at various rates of return
Years ---------------------------------------------------------
of Saving 5% 6% 7% 8% 9% 10%
5 $1,276 $1,338 $1,403 $1,469 $1,539 $1,611
10 1,628 1,791 1,967 2,159 2,367 2,593
15 2,079 2,396 2,759 3,172 3,642 4,172
20 2,653 3,207 3,869 4,661 5,604 6,727
25 3,386 4,292 5,427 6,848 8,623 10,834
30 4,322 5,743 7,612 10,062 13,267 17,449
35 5,516 7,686 10,676 14,785 20,414 28,102
40 7,040 10,285 14,974 21,724 31,409 45,259
20
Quarterly Account statements. You will get a TIP statement about four weeks
after the end of each calendar quarter. Your statement will show all TIP
activity to date, including your own contributions, Company contributions, any
investment earnings or losses, and any withdrawals, loans, or investment
transfers you have made.
A few words about your investment decisions. Your investment decisions are your
own and should reflect your personal objectives. The Benefits Division will
provide you with information on the funds but is not authorized to give you
investment advice. You should consider all of the funds carefully before making
your investment choice. Also, keep in mind that any investment carries a degree
of risk. The annual rate of return on your investments will vary depending on
the funds in which you invest. How the funds have performed in the past does not
guarantee that those results will continue. It is up to you to monitor the funds
and to make investment elections that meet your own financial goals. The
Trustees, investment managers, or the Company cannot guarantee against losses.
ACCESS TO YOUR SAVINGS: LOANS AND WITHDRAWALS
TIP is a long-term savings and investment plan. It's meant to encourage you to
save toward retirement. Even so, you may have access to your savings before then
through loans and withdrawals. Loans and withdrawals give you a degree of
flexibility. But they are governed by federal law, which makes it vital that you
understand their respective rules.
Loans
If you're an active employee and have a TIP balance, you may borrow from your
TIP account for any reason. You do pay interest on your loan (which is paid to
your TIP account), but there is no federal income or excise tax imposed on what
you borrow. In most cases, you may have two loans outstanding at any given time.
You can call and request a loan any day; disbursements are made twice a month,
coinciding with payroll dates.
How much you can borrow. The minimum amount you may borrow is $1,000. The most
you may borrow is generally 50% of your vested account balance, to a limit of
$50,000.
Maximum Loan Amount.
- - 50% of your vested account balance to a maximum of $50,000
Note: If you currently have a loan outstanding, or had a loan outstanding
within the previous 12 months, you can find out what your maximum
loanable amount is by calling Northern-Express/SM/.
- - The maximum amount available as a second loan is the lessor of:
- 50% (your vested account balance + your outstanding loan balance) - your
outstanding loan balance, or
- $50,000 less your highest outstanding loan balance during the last 12
months.
How loan money is disbursed. When you take a loan, the money will be disbursed
from your accounts in the following order until the respective funds are
depleted.
Loan Disbursement Method
Account Order Fund Depletion Order
1. Rollover Short Term Fund
2. ESOP Diversification Benchmark Bond Portfolio
3. Company Matching* Benchmark Balanced
Contribution Portfolio
(vested portion) Benchmark Equity Index
4. Acquired Company Portfolio
Prior Plan* Benchmark Focused Growth
(vested portion) Portfolio
5. After-tax Northern Trust Stock Fund
6. Basic contribution*
7. Before-tax
* Only these accounts contain the Northern Trust Stock Fund. Acquired Company
Prior Plan accounts that include employee contributions may not be allowed to
invest in the Northern Trust Stock Fund.
21
Repaying your loan. You must repay your loan in equal installments. Repayments
are made through payroll deductions each payday. All principal and interest
repayments are credited to your account. You choose the loan repayment period,
which can be up to five years. If the loan is used to buy your principal single
family residence, you can take up to 15 years to repay it. Partial pre-payment
is not allowed, but you can repay your outstanding balance in full at any time.
If you leave Northern and are eligible for a final distribution before you have
paid off your loan(s), the outstanding principal balance will be reported to the
IRS as ordinary income. Upon termination, an outstanding loan balance is
considered a distribution. As such, it is subject to taxes. To avoid taxes you
may repay the loan in full or add the amount of the loan to your rollover within
60 days of the distribution.
Interest on your loan. The interest rate on a loan is based on the rate for a
commercial loan secured by a savings account. The interest rate in effect when
you apply for a loan stays the same throughout your loan. All principal and
interest repayments are credited to your TIP account and deposited into the
investment funds you have selected on the date the payment is made.
Applying For A Loan
To apply for a loan, you can call "Northern-Express/SM/" on any day. Your check
will be mailed to your home address during the week after the pay day following
your call.
Withdrawals
In general, how much you can withdraw from your TIP account depends on your age
and on the type of contributions you wish to withdraw. TIP allows daily request
opportunities and three types of withdrawals:
- - Regular Withdrawals
- - Age 59-1/2 Withdrawals
- - Hardship Withdrawals
The rules governing each are different, as described below. All money not
already taxed (such as your pre-tax contributions, the Company's Matching and
Basic contributions, all earnings, etc.) that is withdrawn while you are an
employee is taxed as ordinary income. You may be liable for an additional 10%
federal excise tax on the amount withdrawn. (See Other Information You Should
Know, "Taxes Upon Distribution," page 26, for more details on the excise tax.)
Disbursements for Regular and Age 59-1/2 withdrawals are made twice a month
coinciding with payroll dates. Disbursements for Hardship Withdrawals are made
weekly.
Regular withdrawals. You can make unlimited withdrawal requests. Here are the
accounts you can access and the order in which regular withdrawals are made from
your accounts.
Regular Withdrawal Disbursement Method
Account Order Fund Depletion Order
1. After-tax Short Term Fund
2. Rollover Benchmark Bond Portfolio
3. ESOP Benchmark Balanced Portfolio
Diversification Benchmark Equity Index
4. Company Matching Portfolio
Contribution* Benchmark Focused Growth
(vested portion) Portfolio
5. Acquired Company Northern Trust Stock Fund
Prior Plan*
(vested portion)
* Only these accounts contain the Northern Trust Stock Fund. Acquired Company
Prior Plan accounts that include employee contributions may not be allowed
to invest in the Northern Trust Stock Fund.
If you are less than 100% vested in TIP when you request a withdrawal, the
amount available for withdrawal is reduced by any after-tax contributions that
were matched by the Company and any Company matching contributions made in the
24 months before your withdrawal request.
22
Age 59-1/2 withdrawals. If you are 59-1/2 or older, you can withdraw your entire
vested TIP account balance for any reason. Except for amounts contributed to
your after-tax account, these withdrawals are taxed as ordinary income, but the
10% excise tax penalty will not apply. Here are the accounts you can access and
the order in which age 59-1/2 withdrawals are made from your accounts.
Age 59-1/2 Withdrawal Disbursement Method
Account Order Fund Depletion Order
1. After-tax Short Term Fund
2. Rollover Benchmark Bond Portfolio
3. ESOP Benchmark Balanced Portfolio
Diversification Benchmark Equity Index
4. Company Matching Portfolio
Contribution* Benchmark Focused Growth
(vested portion) Portfolio
5. Acquired Company Northern Trust Stock Fund
Prior Plan*
(vested portion)
6. Basic contribution*
7. Before-tax
* Only these accounts contain the Northern Trust Stock Fund. Acquired Company
Prior Plan accounts that include employee contributions may not be allowed
to invest in the Northern Trust Stock Fund.
Hardship withdrawals. If you're not yet age 59-1/2, the only time you can
withdraw before-tax contributions is when you have a "financial hardship" as
defined by the Internal Revenue Service. According to the IRS, you're eligible
for a hardship withdrawal if you have an immediate and substantial financial
need to meet eligible expenses and have no other financial resources to pay for
them. Eligible hardship expenses are:
1. the purchase of a primary single family residence (not mortgage payments);
2. certain college tuition and associated room and board expenses for the next
year for you, your spouse or dependent child(ren);
3. unreimbursed medical expenses for you, your spouse or dependent child(ren),
4. an immediate family member's funeral expenses, and
5. payments to prevent the foreclosure on or eviction from your primary
residence.
Here are the portions of your TIP account that may be available to you in the
event of hardship withdrawal.
Hardship Withdrawal Disbursement Method
Account Order Fund Depletion Order
1. After-tax Short Term Fund
2. Rollover Benchmark Bond Portfolio
3. ESOP Benchmark Balanced Portfolio
Diversification Benchmark Equity Index
4. Company Matching Portfolio
Contribution* Benchmark Focused Growth
(vested portion) Portfolio
5. Acquired Company Northern Trust Stock Fund
Prior Plan*
(vested portion)
6. Before-tax (excluding
earnings after 12/31/88)
Keep in mind that in addition to ordinary income tax, the 10% excise tax may
apply to your hardship withdrawal.
Requesting and substantiating a hardship withdrawal. Call Northern-Express/sm/
to request a Hardship Withdrawal form. You must complete the form and submit it
to the TIP/ESOP Representative. (See Other Information Your Should Know,
"Handling Your Requests," page 25.)
In order to obtain a withdrawal, you will be required to:
1. Prove that you do, indeed, have a financial hardship. (We'll accept as
evidence items such as medical bills, tuition bills, funeral bills, or
housing contracts.) And,
2. Prove that a TIP withdrawal is the only way you can meet your Financial
Hardship need. You can choose one of two ways to satisfy this part of the
approval process:
23
- - Under the "Safe Harbor" method you will be restricted from contributing to TIP
for one year. This restriction replaces the requirement that you sign a
statement indicating you have no other way to meet your financial hardship
need.
In the year you are eligible to start contributing again, your before-tax
contribution may be limited. Remember, since the Company Match is based on
your contributions, you will not receive any match for the period you are
restricted from contributing.
- - Under the "Facts and Circumstances" method you can avoid restrictions on your
contributions and foregoing the Company Match by signing a statement
indicating that you have no other way to meet your financial hardship need.
How a withdrawal request is approved. The TIP/ESOP Representative will review
all of the documents you submit. They will then determine whether or not your
withdrawal request meets IRS criteria for approval. The Committee will not
approve anything over the amount you need to meet your immediate financial
obligation. Unsubstantiated hardship withdrawal requests will be turned down.
Withdrawals of after-tax money. Under current tax laws, when you withdraw any
after-tax contributions made after January 1, 1987, you must also withdraw a
portion of the investment earnings on your after-tax contributions. Excise taxes
and ordinary income tax may apply to the taxable portion of a withdrawal.
Withdrawals from an after-tax account will be made in the following order.
1. Pre-1987 after-tax contributions.
2. Post-1986 after-tax contributions, in proportion (pro rata basis) to the
taxable earnings in your after-tax account.
Example. We will illustrate this with an example which is meant to show two
things: the order in which after-tax withdrawals are made, and how the taxable
portion of the withdrawal is figured. Let's assume an after-tax TIP account that
is made up of the following:
- - Pre-1987 after-tax contributions $1,000
- - Post-1986 after-tax contributions $2,000
- - Total after-tax earnings $ 500
If this employee requested a $2,000 withdrawal, the money would come first from
his pre-1987 after-tax contributions, which were $1,000. This $1,000 portion of
the withdrawal is non-taxable.
The second $1,000 would be withdrawn from his post-1986 after-tax contributions
and after-tax earnings. To determine how much of this $1,000 withdrawal comes
from earnings and is therefore taxable, his after-tax earnings ($500) would be
divided by $2,500, which is the total of post-1986 after-tax contributions plus
all after-tax earnings.
The resulting percentage will determine what portion of his withdrawal comes
from earnings and is taxable.
$500 = 20%
------
$2,500
$1,000 x 20% = $200 taxable
This employee would therefore pay taxes only on the $200 portion of his
withdrawal (calculated at his individual tax rate, plus any excise tax that may
apply). The withdrawal would come out of his after-tax account as follows:
How A $2,000 After-tax Withdrawal Is Made
After-tax
Account Withdrawal Taxable
1. Pre-1987 after- $1,000 $1,000 No
tax contributions
2. Post-1986 after- $2,000 $ 800 No
tax contributions
3. Total after-tax $ 500 $ 200 Yes*
earnings
*Excise taxes may also apply.
When you take an in-service withdrawal you will have some tax decisions to make.
(See Other Information You Should Know, "Taxes Upon Distribution," page 26.)
24
DISTRIBUTION OF YOUR TIP ACCOUNT
TIP is designed to provide you with a source of retirement income. That's why
the full value of your TIP account is normally paid at retirement. Distributions
may also be made if you become permanently disabled, die, or leave the Company
before you retire. If you die while actively employed, the full value of your
TIP account is payable to your beneficiary.
How Distributions Are Made
The distribution of your TIP account is generally made in one cash payment. If
you have money invested in the Northern Trust Stock Fund, you may request that
it be paid in shares of Northern Trust Corporation stock instead of cash. You
can expect payment about four weeks after the end of the month in which you
receive your last paycheck provided you have submitted your election form. If
you are entitled to the Company match for that year, you will receive that
portion of your distribution five to six weeks after December 31st.
When You Leave The Company
If your TIP balance is over $3,500, you can leave your savings in the plan until
the earlier of reaching age 65 or death. No loans or withdrawals are permitted.
However, you can continue to make transfers among the different investment
options.
If You Work Past Retirement
If you work past normal retirement (generally age 65), you may defer your
complete TIP distribution until you actually retire, but partial annual
distributions of your account must start no later than the April 1st that
follows the calendar year in which you reach age 70-1/2.
OTHER INFORMATION YOU SHOULD KNOW
Handling Your Requests
The Northern-Express/SM/ telephone system provides convenient access to
information about your balance in TIP, and allows you to make changes to your
TIP account. Your participation in TIP starts with calling Northern-Express/SM/
to complete the Enrollment process. But it doesn't end there. Since TIP offers
so many opportunities for making changes in your elections, it's likely that
you'll call Northern-Express/SM/ more than once throughout your participation.
Accessing Northern-Express/SM/
The Northern-Express/SM/ telephone number is 1-800-291-PLAN(7526). For security
reasons you access your account by using your Personal Identification Number
(PIN). If you don't know your PIN, simply call Northern-Express/SM/ and request
a new one.
Deadlines. The following schedule shows which activities are requested through
Northern-Express/SM/ and which require a form as well as the cut-off times or
dates that apply to each. The schedule does not include "Special Deadlines at
Quarter End," page 26, which you should consider depending upon the timing of
your requests.
Northern-Express/SM/ Deadlines
- --------------------------------------------------------------------------------
- - Enrollment Call before midnight on the business day before
- - Change your payday to be effective the following payday.
contribution rate
- --------------------------------------------------------------------------------
- - Change the way Call before 4:00 p.m.* EST the business day before
your future savings are payday to be effective that payday.
invested
- --------------------------------------------------------------------------------
- - Transfer Calls before 4:00 p.m.* EST are effective that
investment night based on the closing price on the day of the
fund balances call. Calls on or after 4 p.m.* EST are processed
the following night.
- --------------------------------------------------------------------------------
- - Regular Call before midnight EST the business day before
withdrawals payday for a check to be mailed during the week
- - Loan requests after-payday.
- --------------------------------------------------------------------------------
Forms Deadlines
- --------------------------------------------------------------------------------
- - Financial Paperwork approved by close of business each
hardship Tuesday for check in the mail by the end of the
withdrawals week.
- --------------------------------------------------------------------------------
- - Beneficiary Submit at the time of phone enrollment.
designations
- --------------------------------------------------------------------------------
- - Rollover requests Close of business two days before payday to be
deposited on payday.
- --------------------------------------------------------------------------------
- - Payouts upon Election form due by the end of the month of your
termination official termination date for distribution at the
end of the following month.
- --------------------------------------------------------------------------------
/*/Or Stock Market close if earlier.
25
Special Deadlines at Quarter End
Due to Securities and Exchange Commission (SEC) concerns, Northern Trust has a
policy which restricts employees from buying or selling Northern Trust Stock for
a period immediately before and after the end of each calendar quarter.
Therefore, if you request activity in your TIP account that would change your
balance in the Northern Trust Stock Fund, the deadline is 10 business days prior
to quarter end. Activity in this fund reopens the third business day after
earnings are announced following the quarter end. You'll hear restriction
reminders when you call Northern-Express/SM/.
Leaves of Absence
If you take an approved leave of absence (paid or unpaid), all of your absence
period service will be considered for TIP vesting.
Reemployment
If your employment ends and you are later reemployed by Northern, upon your
return, your past service will be counted for eligibility and vesting in the
Company's matching contributions. How your absence period is counted depends on
how long you were gone.
- - Less than one year. If you leave Northern and are reemployed within a year,
your absence period and your prior service will count toward vesting.
- - More than one year. If your absence period was greater than one year, only
your prior service (not your period of absence) will count toward vesting.
If you were eligible for TIP when you left Northern, you can start participating
in the plan as soon as you return.
Buy backs. If your break in service was less than five years, you may redeposit
the TIP distribution you received when you left the Company. If you redeposit,
or "buy back" the entire distribution, any Company contributions that were
forfeited when you left will be restored to your TIP account. You have up to
five years from your date of rehire to buy back the distribution.
A buy back deposit must be made in one cash payment, in an amount equal to the
value of the distribution at the time you left the Company. If you buy back your
distribution, the amount restored to your TIP account will equal the value of
the Company contributions you forfeited when you left. For example, suppose you
leave the Company when you are 80% vested and that the value of your Company
matching account is $15,000. That means that you take $12,000 with you (as
stock, cash or a combination) as your distribution, and forfeit $3,000. When you
return to the Company, you can get that $3,000 back in your Company matching
account by making one $12,000 cash payment to TIP within five years after you
return. It doesn't matter if you received stock as part of your distribution, or
what the stock is worth when you return. What matters is the value of your TIP
account when you left.
Taxes Upon Distribution
When you become eligible for a TIP distribution, you have three choices for the
taxable portion of your payout:
- - request a Direct Rollover to an IRA or another employer's qualified plan, in
which case you continue to defer paying taxes; or
- - have the distribution made payable to you, in which case it is considered
taxable income, and 20% for federal taxes will automatically be withheld;
Note: With this option you still have 60 days to roll over your lump sum
distribution to an IRA or other qualified plan.
or,
- - split your distribution to have some directly rolled over and some paid to you
with taxes withheld.
Two things you should know:
- - After-tax contributions are not subject to any taxes or penalties upon
distribution. Therefore, they cannot be rolled over.
- - If you have a loan outstanding at termination you may want to contact a
TIP/ESOP Representative to discuss loan prepayment in order to avoid the loan
balance becoming a taxable distribution. (See Access To Your Savings: Loans
and Withdrawals, "Repaying Your Loan," page 22.)
26
Five-year forward averaging. If you have at least five years of TIP
participation and are 59-1/2 years old or older, you may qualify under current
tax law for a tax advantage called "five-year forward averaging." In general,
five-year forward averaging can prevent payment of your account from forcing you
into a higher tax bracket. You can take advantage of five-year forwarding
averaging only once.
Ten-year forward averaging. This special tax treatment is available only if you
were at least age 50 before January 1, 1986 and you have at least five years of
TIP participation. It's similar to five-year forward averaging, only your taxes
are calculated over a 10-year period instead of a five-year period. You can take
advantage of this tax treatment only once, and you cannot use both five- and
10-year forward averaging.
Capital gains treatment. Capital gains treatment, in which income is taxed at a
special low rate, is limited to the portion of your payout attributable to pre-
1974 service. It's generally available only for distributions received before
1992 (subject to a special phase-out rule). However, if you were at least age 50
before January 1, 1986, you can get it at any time. If you elect capital gains
treatment on pre-1974 amounts, the rest of your payout may be taxed as ordinary
income or under the five- or 10-year averaging rules.
Excise tax.Current tax law imposes a 10% penalty on the taxable portion of any
distribution or withdrawal made before age 59-1/2. The taxable portion includes
all earnings and all contributions (both yours and the Company's) except any
after-tax dollars you had contributed to TIP.
The excise tax does not apply under any of the following circumstances:
- - You retire under the Early Retirement provisions of the Northern Trust Company
Pension Plan;
- - you are 59-1/2 or older;
- - the distribution is made to your beneficiary in the event of your death;
- - you become totally and permanently disabled (and you qualify for Social
Security disability benefits);
- - the distribution is rolled over to another tax-favored plan, such as a
rollover IRA or other qualified plan within 60 days of receiving the
distribution;
- - the withdrawal is used for tax deductible medical expenses (that is, those
expenses that are greater than 7.5% of your adjusted gross income); or
- - payment is made to an alternate payee, as mandated by a Qualified Domestic
Relations Order.
Tax laws are complicated and subject to change. Individual tax treatment can
vary greatly from employee to employee. You should consult a professional tax
counselor or financial advisor before making a withdrawal or receiving a
distribution.
27
The Employee Stock Ownership Plan, or "ESOP" for short, does something none of
our other benefit plans do. The ESOP allocates shares of Northern Trust
Corporation stock among all eligible Northern people. That makes you more than
a plan participant: it makes you an owner of the Company.
ELIGIBILITY AND PARTICIPATION
Virtually everyone employed by the Northern Trust Company is eligible to join
the ESOP. That includes everyone in Northern Trust affiliates and subsidiaries
who have adopted the ESOP, but excludes foreign nationals overseas. All we
require for participation purposes is that you finish a year of service with
Northern and that you're age 2l.
When Participation Begins
You are automatically an ESOP participant on the first day of the calendar
quarter (January 1, April 1, July 1 or October 1) after you meet the eligibility
requirements. There are no enrollment forms to complete.
Naming your beneficiary. You will be asked to complete a beneficiary designation
form. That tells us who your ESOP account should be paid to if you die before
you retire or leave Northern Trust. You may designate anyone you choose as your
ESOP beneficiary. However, if you are married, the IRS requires that your spouse
be named your beneficiary. The only exception to this is if your spouse signs
and files a notarized beneficiary waiver consent form with the Benefits
Division.
HOW THE ESOP WORKS
An employee stock ownership plan invests its assets in the stock of a sponsoring
employer. The Northern Trust ESOP was funded by a loan that was used to purchase
1.5 million shares (which later split in 1990 and 1992) of Northern Trust
Corporation common stock for plan participants. These shares of stock are held
in an ESOP trust fund. Everyone who participates in the ESOP has an account in
that fund, and all stock credited to you stays in your account for as long as
you work for the Company.
The Loan Agreement
Under the initial loan agreement, which is dated November 1988, the ESOP was
scheduled to repay the loan (plus interest) to the trust fund over a 10-year
period. To repay the loan, Northern makes an annual contribution to the trust
fund in an amount equal to the principal and interest due on the loan for that
year. As the ESOP makes this payment, the trust fund releases a portion of the
total shares and allocates it to participants' ESOP accounts.
Effective with the allocation for plan year 1996 and subject to concurrence by
the ESOP trustee, our lenders, and review by the Internal Revenue Service, the
original design of the ESOP will change in two ways.
First, the loan will be extended from the original 10 year period to 13 years.
That means that for the years 1996, 1997, and 1998, the number of shares to be
allocated annually will change from the originally planned 450,000 to 225,000.
It also means that for the years 1999, 2000, and 2001 (when there originally
would have been no allocation), that there will be 225,000 shares allocated each
year.
Second, Northern plans to make an additional one-time contribution for a stock
purchase for the plan year 2002. This purchase will enable the Plan to provide
an additional stock allocation for eligible participants.
1990 and 1992 stock splits. A two-for-one stock split was approved by the
shareholders, effective May 1, 1990. A three-for-two stock split was also
approved by the shareholders effective December 9, 1992. As a result, the number
of shares in the ESOP became 4,500,000, making the pre-1996 year's allocation
about 450,000 shares.
28
After The Loan Is Repaid
At the end of the loan agreement, the loan will be fully repaid and all stock in
the trust fund will have been credited to participants' accounts. Individual
ESOP accounts still exist after all of the stock has been allocated, and
whatever stock has been credited to your account stays there for as long as you
work for Northern. That means you still have the potential to benefit from
future increases in Northern stock value, as well as continue to enjoy the
privileges of being a shareholder. (See Your Rights As A Shareholder, page 31.)
Your Stock Is Tax-Free As Long As It Stays In Your Account
Under current tax laws, you are generally not required to pay federal (and in
most cases, state and local) income tax on the value of your ESOP account for as
long as it remains in the plan. (See Payment Of Your Account, page 32, for
information on how your stock is taxed upon distribution.)
The ESOP At A Glance
- - Ownership of Northern Trust stock. You get shares of stock and all the rights
and privileges that go with being a shareholder.
- - Your own ESOP account. Your shares of stock go into a special ESOP account set
up in your name.
- - Cash dividends. Dividends on your stock are paid to you in cash each year.
- - Tax advantages. Your shares of stock accumulate tax-free for as long as they
stay in your ESOP account.
Determining How Much Stock Is Credited To Your Account
While a total of approximately 225,000 shares of stock will be allocated
annually, the number of shares credited to your account each year is determined
by a formula. The formula takes into account how your pay relates to the pay of
all other ESOP participants.
Your pay Total number Number of shares
-------- x of shares to be = credited to your
Total pay credited for ESOP account
of ESOP the year
participants
Or, think of it this way: the value of the stock credited to your ESOP account
each year is expected to work out to be about 2.5% of your pay. Of course,
that's based on certain assumptions about share value and payroll growth over
time. Depending on the actual share value and payroll growth, you may receive
more or less than 2.5% of your pay.
An example. To show you how your allocation works, let's take an example that
assumes your annual pay is $25,000 and that the annual pay of all ESOP
participants is $250,000,000. Knowing that the total number of shares to be
credited for the year is 225,000, here's how the number of your shares would be
figured:
1. $25,000 = .0001 x 225,000 shares = 22.50
------------ shares
$250,000,000
2. 22.50 shares x $40.00 per share = $900.00
3. $900.00/$25,000 = 3.6% of your pay
About your pay. The ESOP uses your base annual salary plus shift differential.
Severance pay, overtime, bonuses and any other type of compensation are not
included. Also, keep in mind that the Internal Revenue Service places certain
restrictions on the maximum salary used for highly-paid executives. If you are
affected by this limitation, the Benefits Division will let you know.
29
When Stock Is Credited
Stock will be credited to participants' ESOP accounts each December 31. All you
have to do to receive an ESOP contribution for the year is be an eligible
participant on December 31 of that year. However, if you retire under the
provisions of the Pension Plan, become permanently disabled, die, or take an
authorized leave of absence during the year, your ESOP account will still be
credited with stock, using the pay you had earned to that date.
How And When Your Account Is Valued
Your ESOP account is made up of shares of stock and cash. The value of your
account (which is updated monthly) will vary depending on the number of shares
of stock in your account, the value of the stock, dividends paid on the stock,
plus any interest earned on the dividends. Stock value is based on the daily
closing price on the NASDAQ stock market. All ESOP participants are provided
with an annual statement which shows the current value of their account based on
the closing price on NASDAQ on the last business day of the year. You can also
check the latest month end value of your account by calling Northern-
Express/SM/.
An Example Of How Your ESOP Account Works
When the plan was first adopted back in 1989, the value of the stock credited to
you each year was expected to be about 5% of your salary. In fact, for six
consecutive years, the value of the ESOP allocation exceeded the 5% salary
target. In 1996 the plan changed to extend by three years and reduce by one
half, the annual share allocation.
In addition to the shares allocated, you received dividends on your ESOP shares.
The dividends grow annually as your cumulative number of shares grows.
In order to view a complete picture, let's look at an example which shows what
this benefit means to you over the years, assuming the following:
- - You've been in the plan since its inception.
- - Your annual salary at inception was $25,000.
- - Your salary increased 4% each year.
- - Company Payroll growth ranged from 2-12% a year.
Example:
Historical Performance
% of
Salary % of
# of Value Div. Salary
Year Salary Shares of ESOP Paid Paid In
Alloc. Alloc. Out Div.
- ------ --------- --------- --------- --------- -------
1989 $25,000 77.87 6.5% $ 9.31 .037
1990 26,000 72.06 5.5% 29.61 .114
1991 27,040 67.80 8.4% 60.92 .225
1992 28,122 66.12 9.8% 102.37 .364
1993 29,247 62.74 8.6% 150.27 .514
1994 30,417 64.56 7.5% 217.88 .716
1995 31,634 53.52 8.5% 237.80 .951
Proj.
Total: 464.67 shares $808.16 dividends
At the end of 1995, you would have over 460 shares of Northern Trust stock in
your ESOP account, and you would have earned over $800 in dividend income! As
an owner of Northern Trust stock, you have a shareholder's interest in
contributing to the continued success of the Northern.
To continue the example, look at what the value of your ESOP account could be
starting from the 1995 projected year end value and adding six more years of
allocations based on different stock price growth scenarios.
Projected Future Performance
Based on projected 12/31/1995 value of $18,586.80
(464.67 shares x projected $40/share price)
ESOP Account Value Scenarios
(including annual allocations)
------------------------------------
3% Increase 6% Increase
Year In Stock Value In Stock Value
------ ---------------- ----------------
1996 20,407 $21,001
1997 22,305 23,625
1998 24,287 26,471
1999 26,356 29,559
2000 28,515 32,907
2001 30,765 36,538
30
Let's look at a second example which illustrates the number of shares you will
receive if you are a newly eligible participant assuming the following:
- - Your first allocation is for the plan year 1996.
- - Your salary at inception is $25,000.
- - Your salary is projected to increase 4% each year
starting in 1997.
- - Company Payroll Growth is projected at 5% a year.
Example:
Projected
Year Salary Share Allocation
- -------- ---------- ----------------
1996 $25,000 23.31
1997 26,000 23.09
1998 27,040 22.82
1999 28,122 22.55
2000 29,247 22.39
2001 30,417 22.21
Total Projected Share Allocation 136.37
At the end of the ESOP loan in 2001, your projected allocation is 136 shares.
The value of these shares to you as a percentage of your salary at any given
point, will depend upon share price at the corresponding point in time. For new
participants, keep in mind the vesting provisions of the plan which are
described below.
VESTING
Your right to the shares of stock in your ESOP account grows over time, through
what's known as "vesting." Vesting means you have a non-forfeitable right to a
future distribution of your ESOP account. Naturally, this distribution is made
in accordance with applicable federal tax regulations and the provisions of the
ESOP.
Vesting Schedule
It takes two years of service with the Company to earn a right to a percentage
of your account. After that, your vested percentage increases each year you work
for Northern.
Years Of Service Vested Percentage
Less than 2 years 0%
2 years 20%
3 years 40%
4 years 60%
5 years 80%
6 or more years 100%
Situations that provide full vesting. The only time service is not used in
determining vesting is if you become permanently disabled or die. If either
happens, you will be considered 100% vested in your ESOP account, regardless of
your service at the time.
If You Leave The Company
You will receive the vested portion of your ESOP account when you leave the
Company. The non-vested portion of your account is forfeited. Any shares of
stock that are forfeited will be added to the total number of shares credited to
ESOP participants' accounts at the end of the year.
YOUR RIGHTS AS A SHAREHOLDER
As an ESOP participant, you are an owner of Northern Trust stock. That means you
are entitled to the same rights as any other shareholder, including receiving
cash dividends and being able to vote your stock.
Dividends And Interest
Each year, the Board of Directors determines the amount (if any) of the
dividend. This component of the Plan has historically resulted in approximately
a 10% growth rate per year! Dividends are paid as cash into your ESOP cash
account quarterly, and paid out once each year in November. (For example, the
dividend paid in January 1996 will be included in your November 1996 dividend
check.) You will receive your cash dividend on all shares of stock allocated to
your account, regardless of your vested status.
31
Any dividends held in your account until the November payout earn interest.
However, unlike the dividends themselves, which are paid out in cash each year,
the interest on the dividends stays in your ESOP cash account and continues to
earn more interest over time.
If you leave the Company during the year, you will still receive a dividend.
This dividend will be based on the stock in your account at the end of the
calendar month in which you leave. (If you leave in June, for example, your
dividend will be paid on the shares in your ESOP account as of June 30.)
Dividends on unallocated shares. The dividends on shares of stock that have not
been allocated to participants' ESOP accounts will be used to repay the loan.
Taxes on dividends. When you receive a cash dividend, you will be required to
pay taxes on it in the year you receive it. You will receive a 1099 DIV by
January 31 of the year following your dividend payment for use in filing your
taxes.
A fact worth noting. As you no doubt know, there are no guarantees where the
stock market is concerned. Northern Trust stock is no exception. Even though
Northern Trust stock has generally done exceptionally well, how its stock has
performed to date doesn't affect how it will do in the future. But Northern
Trust stock has paid a dividend every year since 1896. That's a fact worth
noting.
Voting Your Shares
Being a shareholder means you have right to instruct the Trustee how to vote the
shares of stock in your ESOP account. When issues come before shareholders for a
vote, you will receive a proxy statement and material explaining the matters
under consideration. You will also receive a proxy card. The proxy card is what
you use to indicate your vote. The way you vote is kept strictly confidential by
the Trustee.
The Trustee must follow ESOP participants' written instructions in voting shares
credited to participants' accounts. Although it has the power to vote otherwise,
the Trustee typically votes shares not yet allocated, and shares in
participants' accounts for which it receives no instructions, in the same
proportion as the shares voted by participants.
Tender offers. ESOP participation also gives you the right to confidentially
tell the Trustee, in writing, how to respond to a tender or exchange offer for
Northern stock in your account. (In general, tender or exchange offers are stock
transactions that relate to acquisitions.) Unless inconsistent with its
obligation to prudently manage the fund, the Trustee will not tender shares in
participants' accounts for which it receives no instructions, nor will it tender
or exchange shares not yet allocated.
PAYMENT OF YOUR ACCOUNT
The ESOP was established to enable you to share in Northern's success over the
long term. For that reason, you are not allowed to make withdrawals or borrow
against your account while you are actively employed by Northern. Keep in mind
that if you have a financial need, you may be eligible for a loan or a
withdrawal from your Thrift-Incentive Plan account. (See the TIP section of your
Sourcebook for more details.)
When Your Account Is Paid
You will receive the vested value of your ESOP account when your employment with
Northern ends. The distribution is made in shares of Northern stock. Partial
shares of stock will be paid in cash. If you have a sufficient cash balance, it,
too, can be converted to shares of Northern stock.
The Company will make every effort to ensure that you receive your distribution
approximately four weeks after the end of the month following your last day
paid. (See Other Information You Should Know, "Requesting A Distribution,"
page 35.)
32
Deferring Your Distribution
If the value of the stock in your ESOP account is more than $3,500, you don't
have to take your distribution right away. You may delay it to the earlier of
age 65 or death, in which case your balance will stay in your ESOP account. You
may request the entire balance at any time later on; however, payment will not
be made until four weeks following the end of the month in which your request is
made. When you do request a distribution, you will have the same payout options
that were available to you at the time you terminated. (See "Distribution
Options . . . And Their Tax Consequences," below.)
How Distributions Are Made
Here's how the distribution of your ESOP account takes place.
- - The ESOP shares in your account will either be registered in your name and
distributed to you or registered to your IRA and distributed to that
institution. Similarly, you will receive a check representing accrued
dividends and any remaining money in your cash account reflecting partial
shares and interest earned on dividends.
- - You have the option to request that remaining cash, including dividends, be
used to purchase whole share(s) of Northern Trust stock at current market
value. Naturally, you must have enough money in your ESOP cash account to do
this.
Distribution Options...And Their Tax Consequences
You have choices available when your shares are distributed to you. It is
important to understand the tax consequences of your decision for either a
direct rollover or one of the choices under a direct distribution.
Direct Rollover. You can request a direct rollover of your account balance to an
Individual Retirement Account (or another employer's qualified retirement plan).
If you elect a direct rollover no taxes will be withheld and you will defer
taxation until you take a distribution from the IRA.
Direct Distribution. You can request to have the shares of stock registered in
your name in which case you have several options. All direct distributions are
subject to mandatory tax withholding, which will be taken from your available
cash; stock will not be sold to satisfy withholding requirements.
- - 60 Day Rollover. You have 60 days following your distribution to roll over
your account balance to an Individual Retirement Account. You can roll it over
either by setting up the shares themselves in an IRA account or by selling the
shares and rolling over the proceeds.
- - Hold on to the stock. You can take your ESOP shares and hold on to them.
When you take your ESOP distribution, you will be responsible for paying the
income taxes that apply in the year you receive payment. The good news is that
you pay taxes only on the original purchase price of the stock when it went
into the ESOP (known as the "cost basis" of your shares). You do not pay taxes
on any increases in the value of the stock until you actually sell the stock.
- - Sell the stock. You can sell your distribution shares immediately and keep the
equivalent cash.
If you sell the shares and do not rollover the proceeds to an IRA or an other
employer's qualified plan, you will be taxed on the current market value of
the shares. If you take an ESOP distribution before you reach age 59-1/2, the
10% excise tax penalty for early distributions will apply. (See "Penalty On
Early Distributions," page 34.)
Taking advantage of current tax laws. If you have at least five years of ESOP
participation and are 59-1/2 years old or older, you may qualify under current
tax law for a tax advantage called "five-year forward averaging." In general,
five-year forward averaging can prevent payment of your account from forcing you
into a higher tax bracket. You can take advantage of five-year forward averaging
only once.
33
If you were at least age 50 before January 1, 1986 and you have at least five
years of ESOP participation, you can use ten year forward averaging. It's
similar to five-year forward averaging, only your taxes are calculated over a
10-year period instead of a five-year period. You can take advantage of this tax
treatment only once, and you cannot use both five- and 10-year forward
averaging.
Penalty On Early Distributions
In exchange for the tax advantages offered under employee stock ownership plans,
the Internal Revenue Service imposes a 10% excise tax on any distribution you
receive before you turn 59-1/2. The penalty tax is in addition to your regular
income taxes.
Exceptions to the rule. You may be able to avoid the 10% penalty by rolling your
account over to an IRA. The penalty tax also will not apply if:
- - You retire under the Early Retirement provisions of the Northern Trust Company
Pension Plan;
- - the distribution is made to your beneficiary in the event of your death;
- - you become totally and permanently disabled (and you qualify for Social
Security disability benefits);
- - the distribution is used for tax deductible medical expenses (that is, those
expenses that are greater than 7.5% of your adjusted gross pay); or
- - payment is made to an alternate payee, as mandated by a Qualified Domestic
Relations Order.
Tax laws are complicated and subject to change. Individual tax treatment can
vary greatly from employee to employee. You should consult a professional tax
counselor or financial advisor before taking a distribution from the ESOP.
OTHER INFORMATION YOU SHOULD KNOW
Diversification Of Your Account
As you approach retirement age, you can diversify a portion of your ESOP share
account into the Thrift-Incentive Plan's investment funds, or take the
diversification-eligible shares in cash. This lets you reduce the risk of a loss
in share value associated with stocks. To be eligible to diversify, you must
meet three criteria:
- - You must be 55 or older;
- - have at least six years of service with the Company; and
- - your ESOP share account must have a dollar value of at least $500.
Diversification is offered in March of each year. If you are eligible to
diversify, the Benefits Division will notify you. You should also be aware that
diversifications taken in cash are taxed as ordinary income and that a 10%
penalty tax may apply as discussed under "Penalty on Early Distributions," to
the left. You can elect to roll over this cash payment to an IRA account.
Otherwise, 20% tax withholding will apply.
Diversifications to TIP. You can diversify your ESOP shares into any of the TIP
funds except the Northern Trust Stock Fund. You'll find a detailed description
of these investment funds in the TIP section of this Sourcebook.
You have six years to complete the diversification. Once eligible, you have six
years to complete your investment diversification. In each of the first five
years, you may diversify up to 25% of the total number of shares credited to
your ESOP account. In the sixth year, up to 50% of the total number of shares
may be diversified. Keep in mind that the total number of shares you can
diversify reflects shares in your ESOP account minus any shares you have already
diversified. The diversification formula looks like this:
25%* x (12/31 closing balance + prior diversification) - prior diversifications
*50% in the sixth year
No redeposits. Once you diversify shares or receive cash from the ESOP, you will
not be able to redeposit the distribution to the ESOP. You may, however, change
the way your investment is divided among funds if you choose to diversify into
TIP.
34
Requesting A Distribution
You must complete an ESOP Payout Form in order to receive a distribution. You
will receive your distribution about four weeks after the end of the month
following your last day paid provided you have submitted your election form.
Leaves Of Absence
If you take an approved leave of absence (paid or unpaid), all of your absence
period will be considered for ESOP vesting.
Reemployment
If your employment ends and you are later reemployed by Northern, when you come
back, your past service will be counted for ESOP eligibility and vesting. How
your absence period is counted depends on how long you were gone.
. Less than one year. If you leave Northern and are reemployed within a year,
your absence period and your prior service will count toward vesting.
. More than one year. If your absence period was greater than one year, only
your prior service (not your period of absence) will count toward vesting.
If you were eligible for the ESOP when you left Northern, you will automatically
start participating again as soon as you return. If you left Northern before
January 1, 1989 (the effective date of the ESOP), but were a TIP participant
when you left, you are eligible for the ESOP immediately upon your return to
work at Northern.
Buy backs. If your break in service was less than five years, you may redeposit
the ESOP distribution you received when you left. If you redeposit (or "buy
back") the distribution, any allocations that were forfeited when you left will
be restored to your ESOP account. You have up to five years from your date of
rehire to buy back the distribution.
A buy back deposit must be made in one cash payment, in an amount equal to the
value of the distribution at the time you left. If you buy back your
distribution, the amount restored to your ESOP account will equal the value of
the Company contributions you forfeited when you left. For example, suppose you
leave the Company when you are 80% vested and that the value of your ESOP
account is $15,000. That means you take $12,000 with you (as stock, and cash) as
your distribution, and forfeit $3,000. When you return to the Company, you can
get $3,000 worth of shares at the current price back in your ESOP account by
making one $12,000 cash payment to the ESOP within five years after you return.
It doesn't matter what the stock is worth when you return. What matters is the
value of your ESOP account when you left.
Your $12,000 will remain as cash invested in a short term investment fund. When
you retire or subsequently terminate you will have the option of receiving the
$12,000 buy back in shares.
35
The previous sections of the Sourcebook describe the most important features
of the Pension Plan, ESOP and TIP. They've been written in everyday language
here, but each plan is governed by a legal, very formal, document. We tell you
this in case there is ever any difference between what a plan document says
and the way we've described the plan here, because if that happens, it is the
document that is followed in determining your benefits.
There are also a number of other facts you should know about the
administration of our benefits. While we think you should be aware of all of
this information, and would have given it to you anyway, the Company is
actually required by law to present it to you, in some cases in the words and
format you'll find here.
Future Of The Plans
Northern Trust has every intention of continuing the Pension Plan,
Thrift-Incentive Plan and Employee Stock Ownership Plan. But because conditions
might change unexpectedly, the Company reserves the right to amend, modify,
suspend, or even terminate any or all of the plans at any time. Termination of
the plans is unlikely. But if it happens, you will automatically be considered
fully vested in the benefits you had earned as of the termination date.
Plan Limitations
The Internal Revenue Service limits the amount you and the Company can
contribute to all retirement-type plans sponsored by the Company. If the total
combined benefit you receive from the ESOP, the Pension Plan and TIP exceeds
this limit, benefits from the Pension Plan will be adjusted. When this applies,
you may receive a payment from the Supplemental Pension Plan. Payments from this
plan are taxed as ordinary income and do not receive any of the special tax
treatment available for payments from the Qualified Pension Plan. In most cases,
these limits apply only to highly-paid executives. If you are affected, the
Benefits Division will notify you.
Tax Laws
Our plans are governed by the rulings of the Internal Revenue Service and
current tax laws. If there are any changes in the current tax laws or in the IRS
rulings, our plans will be amended to stay in compliance.
Insured Pension Benefits
Our Pension Plan benefits are protected by the Pension Benefit Guaranty
Corporation (PBGC). The PBGC is a government agency that insures certain
benefits provided by defined benefit plans (our Pension Plan, for example; TIP
and ESOP are what's known as defined contribution plans and, as such, are not
insured by the PBGC). The PBGC generally guarantees the payment of most vested
age-65 retirement benefits, early retirement benefits, and certain disability
and survivors' pensions just in case the plan terminates and does not have
enough assets to pay for benefits earned by employees. However, the PBGC does
not guarantee all kinds of benefits, and the amount of benefit protection is
limited.
The PBGC guarantees vested benefits at the level in effect on the date of plan
termination. However, if a plan had been in effect for less than five years, or
if benefits had been increased within five years of plan termination, the entire
amount of the plan's vested benefits or the benefit increase may not be
guaranteed. In addition, there is a ceiling, which is adjusted periodically, on
the amount of monthly benefit that the PBGC guarantees.
You can get more information on PBGC insurance from the Benefits Division or
from the PBGC itself. Write to: Pension Benefit Guaranty Corporation, Office of
Communications, 1200 K Street, N.W., Washington, D.C. 20005-4026 or call them at
(202) 326-4000.
36
Ownership Of Benefits
The benefits described here are exclusively for Northern Trust plan participants
and their beneficiaries. You cannot assign, transfer, or sell your benefits for
any reason except as provided by law. For example, in the event of a Qualified
Domestic Relations Order, benefits may be payable to someone other than your
designated beneficiary. (A Qualified Domestic Relations Order is a court order
providing for child support, alimony or marital property rights to a spouse,
former spouse, child or other dependent, according to a state domestic relations
law.)
How Benefits Can Be Forfeited Or Delayed
The Pension Plan, TIP and ESOP are designed to provide you with a source of
retirement income. But there are certain situations under which benefits can be
forfeited or delayed. Most of these circumstances are spelled out in each plan's
description, but you can also forfeit or delay payment of your benefit if:
. You (or your beneficiary) do not file an application for benefits;
. you do not furnish information requested to complete or verify your
application for benefits; or
. your current address is not on file with the Benefits Division.
Your Rights Under ERISA
Northern Trust has prepared this Sourcebook to help you understand how your
benefit plans work, the benefits they provide, and the steps you must follow to
take full advantage of them. The Employee Retirement Income Security Act of 1974
(ERISA) also provides you with certain rights regarding your Northern benefits.
Access to documents. In addition to the information in this Sourcebook, ERISA
requires that you have access to other facts about your benefits. A summary of
each plan's annual financial report is due to you annually. Also, the detailed
report called a "5500," is available for your review. You may also examine plan
documents (plan texts, for example) and other documents Northern files with the
U.S. Department of Labor. These are available for you to examine without charge
in the Benefits Division during normal working hours.
You can get a copy of any of these documents, at a reasonable charge, by making
a written request to the TIP/ESOP or Pension Plan Representatives. Northern
Trust will respond promptly. If you request any plan documents in writing and do
not receive them within 30 days (unless the delay is beyond the Company's
control), you have the right to file suit in a federal court. Northern Trust may
be required to pay you up to $100 for each day's delay.
Statements. Throughout your career with Northern Trust, you'll be kept
up-to-date on your benefits through a series of personalized statements: TIP
statements are prepared and distributed quarterly; ESOP once a year; and a
comprehensive benefit statement that includes a snapshot of your Pension Plan
benefits is also given out annually. Your annual statement shows what you've
earned to date and what you can expect at retirement from all three plans.
If you don't automatically get this information from us in a particular year,
here's what you have a right to know: whether you have a benefit under the
Pension Plan at normal retirement age (age 65) and if so, what your benefits
would be at normal retirement age if you stop participating now. If you do not
have a right to a benefit under the Pension Plan, you will be told how many more
years you have to participate to get one. You can get this information once a
year, free of charge, by requesting it in writing from the Pension Plan
Representative.
Fiduciaries. You also have the right to expect that the people who are
responsible for the operation of the plans act prudently and in the best
interest of all participants. These people are called "fiduciaries" and it is
the Company's policy that they actively safeguard your retirement benefits. If a
fiduciary violates the requirements of ERISA, he or she may be removed.
Exercising Your Rights
There are a number of federal laws that protect your rights as a Plan
participant. Northern Trust cannot dismiss you or discriminate against you to
prevent you from either getting your benefits or exercising any of your rights.
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There are steps you can take to enforce your rights under ERISA. For instance,
if a fiduciary has misused funds or if you are discriminated against for
asserting your rights, you may ask the Department of Labor for help or you may
file suit in a federal court. We doubt that you will ever find it necessary to
go to court or sue, but the right is yours nonetheless.
If Your Claim Is Denied
If you are denied benefits, or are dissatisfied with the benefits provided, you
can request a review of your claim from the Benefits Division. The Benefits
Division will explain the reasons for the denial.
If you still believe that you are entitled to benefits that were denied, you may
file a written claim for benefits with the Employee Benefit Administrative
Committee (The "Committee").
Within 90 days after receipt of your claim, the Benefits Division will provide
you with written notice of the Committee's determination. If the claim is
denied, the notice will explain:
. The specific reasons for the denial;
. Specific reference to pertinent plan provisions on which the denial is based;
. A description of any additional material or information necessary for you to
perfect the claim and an explanation of why such material or information is
necessary; and
. Appropriate information as to the steps to be taken if you wish to submit your
claim for further review.
If you are dissatisfied with the determination of the Committee, a final written
appeal may be made to the Committee requesting that the claim be reconsidered
with any new information that is available. Your final appeal must be filed
within 60 days of the date you receive the denial notice. A second decision will
then be made by the Committee according to the provisions of the Plan, no later
than the date of the Committee meeting which immediately follows the Committee's
receipt of your request for review, unless the request for review is filed
within 30 days preceding the date of such meeting. In such case, a decision will
be made no later than the date of the second meeting following the Committee's
receipt of your request for review.
You will be notified of the decision within a reasonable time after the
Committee meeting in which your request for review is considered. The
Committee's decision shall be in writing and include specific reasons for the
decision, as well as specific references to the pertinent Plan provisions on
which the decision is based.
If your application for benefits is denied or ignored, entirely or partially,
you have the right to sue in state or federal court. The court will decide who
should pay the court costs and legal fees. If you win, the court may order
Northern to pay the costs or fees; if you lose, the court may order you to pay
these costs and fees (for example, if it finds your claim frivolous).
Where to find more information. If you need additional information or have any
questions about your plan benefits or your rights under the law, contact a
TIP/ESOP Representative. If you have any questions about this statement or about
your legal rights, you may contact the nearest Area Office of the U.S.
Labor-Management Services Administration, Department of Labor, in which case,
you will need the plan facts on the following page.
38
Plan Facts
Employer/Plan Sponsor
The Northern Trust Company
A complete list of participating employers may be obtained from the Plan
Administrator.
Address
50 South LaSalle Street
Chicago, Illinois 60675
Telephone
(312) 630-6000
Employer Identification Number (EIN)
36-1561860
Plan Administrator
The Northern Trust Company
Employee Benefit Administrative Committee
50 South LaSalle Street
Chicago, Illinois 60675
(312) 630-6000
Plan Year
January 1 - December 31
Trustee
The Northern Trust Company
50 South LaSalle Street
Chicago, Illinois 60675
Agent for Service of Legal Process
Any attorney in the Legal Department of The Northern Trust Company at the above
address.
- --------------------------------------------------------------------------------------------------
Plan Official Name Type of Plan Number Plan Funding Source of
Administrator Medium Contributions
Pension The Northern Defined benefit 001 Employee Trust Funded entirely
Plan Trust Company pension Benefits Agreement with Company
Pension Plan Administrative contributions as
Committee actuarially
determined
TIP The Northern Defined 002 Employee Trust Funded with
Trust Company contribution Benefits Agreement employee
Thrift-Incentive profit-sharing Administrative contributions
Plan Committee and Company
contributions
ESOP Northern Trust Defined 003 Employee Trust Funded entirely
Employee Stock contribution Benefits Agreement with Company
Ownership Plan stock bonus Administrative contributions
Committee
- --------------------------------------------------------------------------------------------------
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Calendar of Events
- -----------------------------------------------------------------------------------------------------------------------------------
January February March April May June
1 4th Quarter 1 Annual ESOP 17* Restriction on 1 1st Quarter ESOP 17* Restriction
ESOP dividend statement Northern Trust dividend paid into on Northern
paid into account distributed Stock Activity account Trust Stock
in TIP starts Activity
in TIP starts
1 Quarterly Enrollment 20 ESOP 1 Quarterly 30* Annual Statement
Date diversification Enrollment Date of Benefits
elections due distributed
19* Restriction on 1 Age 70-1/2
Northern Trust initial
Stock Activity distributions
in TIP ends . TIP
. ESOP
. Pension
30 4th Quarter TIP 19* Restriction on
statement Northern Trust
distributed Stock Activity
in TIP ends
30 1st Quarter TIP
statement
distributed
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
July August September October November December
1 2nd Quarter 17* Restriction on 1 3rd Quarter 30 ESOP 17* Restriction on
ESOP dividend Northern Trust ESOP dividend dividends Northern Trust
paid into account Stock Activity paid into paid out Stock Activity
in TIP starts account in cash in TIP starts
1 Quarterly 1 Quarterly 31 TIP Company
Enrollment Enrollment Match awarded
Date Date
19* Restriction on 19* Restriction on 31 ESOP stock
Northern Trust Northern Trust allocation
Stock Activity Stock Activity
in TIP ends in TIP ends
31 Age 70-1/2
ongoing
distributions
30 2nd Quarter TIP 30 3rd Quarter TIP . TIP
statement statement . ESOP
distributed distributed . Pension
- -----------------------------------------------------------------------------------------------------------------------------------
*Dates are approximate and may change by year.+
(C) The Northern Trust Company
January, 1996
40