House of Representatives

SB 1295

retirement benefits; defined contribution supplement

Sponsors: Senator Cirillo

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

SB 1295 repeals the optional Defined Contribution (DC) plan and the tax deferred annuity and deferred compensation plan, establishes the supplemental DC plan, provides permanent health insurance premium subsidy increases and makes numerous changes to retirement benefits.

History

Normal Retirement Multiplier

Currently, normal retirement eligibility for ASRS members is achieved when the member is 65 years of age, or age 62 with 10 years of credited service, or any combination of age and years of credited service totaling 80 points. The normal retirement benefits are calculated by multiplying 2.1% times the average monthly salary times the years of credited service. Laws 1999, Chapter 327, changed the normal retirement multiplier to 2.1% from 2% and provided a 5% permanent benefit increase to current retirees, effective July 1, 2000.

Optional Forms of Retirement

Currently in ASRS statutes, members may select their retirement benefit from among optional forms. One form is the joint and survivor annuity. This option allows the survivor, after the member’s death, to continue to receive all, two-thirds or one-half of the retirement benefit during the lifetime of the contingent annuitant (survivor).

The second optional form is the straight life annuity, which is equal to the calculated retirement benefit and paid during the remainder of the member’s lifetime. The third optional form is the period certain and life annuity. This option is actuarially reduced with payments for five, ten or fifteen years that are dependent on the continued lifetime of the member but whose payments continue for the member’s lifetime beyond the five, ten or fifteen year period. Finally, the last optional forms that may be selected are actuarially reduced optional benefits prescribed by the ASRS board.

Benefit Increases

Permanent benefit increases are also known as cost of living adjustments (COLAs) and are derived from excess investment earnings over a set percentage and apply to persons eligible for benefit increases. Members who retired 10 or more years ago have the same COLA as recent retirees, and benefits based on the rate of compensation at the time of retirement do not keep up with inflation.

Health Insurance Premium Subsidy

Current law requires ASRS to administer group health and accident coverage for eligible retired and disabled members and their dependents. Currently, all four state retirement systems are under the jurisdiction of ASRS. The law requires that a portion of a retired member’s health care premium be subsidized. The subsidy amounts differ between the four state retirement systems and whether or not members, survivors or dependents are eligible for medicare. The portion of a member’s health care premium not covered by the subsidy is paid from the member’s retirement benefit or out of the member’s pocket.

Supplemental Defined Contribution Retirement Program

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

Termination Options

· Allows employers to offer a termination option to eligible, active members of ASRS that have attained normal retirement age that allows a member to work up to 36 months after the effective date of the agreement and purchase up to 36 months of credited service by contributing to the DC plan and receive an additional 36 months of credit.

· States that the employer and the member shall not make contributions to ASRS for the period of credited service.

· States that the cost of the credited service that may be purchased will be the amount equal to the ASRS normal cost rate multiplied by the member’s rate of compensation multiplied by the number of years of credited service being purchased.

· Requires the member and employer to make contributions, as agreed, during the term of the agreement. The contributions will be paid into the DC plan for the purchase of additional credited service.

· Clarifies that a member who does not complete the terms of the agreement forfeits any credited service provided under the agreement, except employer and member contributions are the property of the member or the member’s estate.

· Requires an employer who does not fulfill the terms of the agreement to make all required contributions to the DC plan.

· States that a member who enters into an agreement is not eligible to purchase other credited service for public service such as reinstatement, public service credit, leave of absence or military service.

Normal Retirement Multiplier

· Establishes a graduated retirement multiplier as follows:

1) 2.1 per cent if the member has less than 20 years of credited service.

2) 2.15 per cent if the member has at least 20 years of credited service but less than 25 years.

3) 2.2 per cent if the member has at least 25 years of credited service but less than 30 years.

4) 2.3 per cent if the member has at least 30 years of credited service.

· Creates a cap for a member’s monthly life annuity of 80 per cent of the member’s average monthly compensation for persons becoming members after the effective date.

· Clarifies that the 80 per cent cap does not preclude COLA increases.

Optional Forms of Retirement

· Allows a member to receive at the time of retirement a lump sum payment equal to not more than 36 months of the member’s retirement benefit, beginning July 1, 2002.

· Specifies that the member’s benefit will be actuarially reduced based on the lump sum payment.

· Specifies that any benefit increase granted to a lump sum member would be based on the actuarially reduced retirement benefit, if the benefit increase is a percentage increase of the member’s retirement benefit.

· States that COLA increases shall be calculated without regard to the lump sum payment.

Enhanced Benefit Increases

· Prescribes that the monies available for future benefit increases (COLAs) shall earn interest at a rate of eight per cent per year and held in reserve for the COLA.

· Specifies that this interest will be used to pay enhanced COLAs for retired members with more than 10 years of credited service based on the number of years a member has been retired at an incremental increase for each five years of retirement.

Supplemental Defined Contribution Retirement Program

· 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.

Miscellaneous

· Enables state university employees participating in the Board of Regents optional retirement program to withdraw employer contributions as a lump sum upon retirement.

· Make technical and conforming changes.

· Appropriates $2,613,700 from the ASRS administration account in FY 2001-2002 to ASRS for the administrative implementation of this act.

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· 45th Legislature

· First Regular Session 5 May 3, 2001

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