House of Representatives

SB 1100

supplemental defined contribution plans

Sponsors: Senator Cirillo, Bundgaard

DPA	Committee on Retirement & Government Operations
X	Committee on Ways & Means
	Caucus and COW
	As Passed the House

SB 1100 repeals the optional Defined Contribution (DC) plan and the tax deferred annuity and deferred compensation plan and establishes the supplemental DC plan.

History

A defined benefit (DB) retirement plan guarantees a member specific benefits upon retirement. The benefit is calculated according to a formula prescribed in statute. DC plan benefits are derived from the total amount accumulated in the member’s account and the accrued value of investment earnings. The employer contributes a specified percentage of the member’s salary to an employee’s individual account and the employee may be required to make contributions as well.

Laws 1999, Chapter 329, section 6, established the optional DC retirement plan for state term limited elected officials and exempt state officers and employees, except state university officers and employees of the Department of Public Safety (DPS). The optional DC retirement plan is offered as an alternative to the benefits of the defined benefit (DB) plan.

The fund manager of the Public Safety Personnel Retirement System is required to administer and offer the optional DC retirement plan. The plan became effective December 1, 2000 and is funded by employee and employer matching (2.66%) contributions. A one-time election period that began December 1, 2000 and ended December 30, 2000 was initiated that required all eligible members to make an irrevocable election to transfer the actuarial accrued liability of the employee’s DB plan to the optional DC retirement plan. Anyone (qualified positions) hired after the effective date of the optional DC retirement plan has to elect, at the time of employment, to belong to the optional DC retirement plan, otherwise, they automatically become a member of their respective DB plan.

Laws, 1999, chapter 329, sections 1 and 2, established for state term-limited elected officials and employees of the Legislature an optional tax deferred annuity and deferred compensation plan (5% matching contribution plan) in lieu of participation in either the Elected Officials Retirement Plan (EORP) or the Arizona State Retirement System (ASRS) DB plan.

Provisions

· Repeals the optional DC retirement plan (Title 38, chapter 5, article 8) and the tax deferred annuity and deferred compensation program (Laws 1999, chapter 329, section 8) and makes numerous conforming changes that relate to the repeals.

· Defines board, eligible group, employer, fund manager and plan.

· Allows the ASRS Board or the Fund Manager to establish, administer, manage and operate a supplemental DC plan for all contributing members of the retirement systems and plans they administer. If the supplemental DC is established the Board or Fund Manager may delegate authority to implement the plan.

· States that the supplemental DC plan is in addition to the employees existing DB retirement plan, allows any contributing member of an eligible group to participate in the supplemental DC plan and makes conforming changes that relate to the eligible groups.

· Allows the Board or the Fund Manager to employ services necessary for the operation and administration of the supplement DC plan, contract with multiple vendors, perform all acts necessary and proper for the protection of the plan and enter into intergovernmental agreements.

· Requires the supplemental DC plan to be a qualified governmental plan under section 401(a) of the Internal Revenue Code and requires the plan to be tax-exempt under section 501 of the Internal Revenue Code. Allows the Board or Fund Manager to adopt additional provisions to fulfil the qualified governmental plan intent.

· Requires employee contributions to be picked-up and paid by the employer, either through a reduction in the employee’s salary or an offset against future salary increases or both, and requires that they be treated as employer contributions under section 414(h) of the Internal Revenue Code and excluded from the employees gross income for tax purposes only, prior to being taxed.

· States that participation in the plan authorizes the employer to make reductions or deductions in the member’s salary. Any salary deferred under the supplemental DC plan shall be included as regular compensation or salary when computing the retirement and pension benefits by participating employees.

· Authorizes the employer to initiate salary reductions or deductions for the supplemental DC plan as directed by each employee.

· Requires employers to submit any reports required by the supplemental DC plan.

· Requires an employee, if electing to participate in the supplemental plan, to contribute at least 1% of the employee’s gross salary and irrevocably contribute for at least one year and allows the employee to annually increase or decrease the contributions in increments of 1% up to the maximum allowed by law (25% of total contributions).

· Allows the employer to elect to match the contributions made by the employee for the supplemental DC plan or any other program established by the employer, including any 401(a), 403(b) or 457 at a rate determined by the employer with the employer rate determined at the beginning of the employer’s budget cycle and terminating at the end of the budget cycle.

· Specifies that an employee participating in the supplemental DC plan does not have the option of choosing to receive the contributions directly instead of the employer paying the amounts to the plan.

· Specifies that employee contributions and earnings on employee contributions are immediately vested.

· Provides a vesting schedule on employer matching contributions and the earnings on employer matching contributions as follows:

1) one year but less than two years of credited service in an eligible group = 20%

2) two years but less than three years of credited service in an eligible group = 40%

3) three years but less than four years of credited service in an eligible group = 60%

4) four years but less than five years of credited service in an eligible group = 80%

5) five years of credited service in an eligible group = 100%

· States that all nonvested employer contributions and earnings may be used for the administrative costs of the supplemental DC plan.

· Provides session law language that terminates the optional DC retirement plan and the tax-deferred annuity and deferred compensation pilot program while allowing those who have already elected to participate in these plans to continue to do so and the employer is required to continue to make the appropriate employer contributions.

· Makes technical and conforming changes.

SB 1100 was amended in the Retirement and Government Operations Committee as follows:

· Expands the definition of eligible group to include an optional retirement program established pursuant to statute.

· Allows the employer of an eligible group to be included in the establishment of and administrative duties related to the operation of a single supplemental defined contribution plan.

· Allows the employer to delegate authority to implement a supplemental defined contribution plan to its internal benefits administrator or designee.

· Requires notification from the Internal Revenue Service (IRS) that employee contributions picked up will not be included in gross income for income tax purposes until the time that the contributions are distributed by pension payments before the pickup date may be considered effective.

· Allows any employee member to participate in the supplemental defined contribution plan if ASRS establishes the plan and an employer member of ASRS elects to participate in the supplemental plan.

· Specifies that an employee is not required to contribute to a supplemental option in order to qualify for an employer match and allows the employer match to accrue from any program established by the employer.

· Makes technical and conforming changes.

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· 45th Legislature

· First Regular Session 3 April 6, 2001

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