Phoenix, Arizona
supplemental defined
contribution plans
Authorizes the boards or fund managers of eligible employee groups to establish and administer a supplemental defined compensation (DC) plan retirement option in addition to their existing defined benefit (DB) plan. Repeals the statutes allowing members to elect a DC plan option under the state’s retirement systems.
A defined benefit (DB)
retirement plan guarantees a qualified employee specific benefits upon
retirement. The benefit is calculated according to a statutorily prescribed
formula. Under a defined compensation (DC) plan, the employer contributes a
specified percentage of the member’s salary to an employee’s individual
account. The employee may be required to make contributions as well. Benefits
are derived from the total amount accumulated in the account and the accrued
value of investment earnings.
In 1999, the Legislature established an DC retirement plan for state term-limited elected officials and exempt state officers and employees as an alternative to the DB plan offered by the state retirement systems (Laws 1999, Chapter 329, section 6). S.B. 1100 repeals the existing DC plan as an alternative to the DB plan (except those individuals who have already elected the DC plan must continue their participation with that plan) and provides a supplemental DC plan option to the existing DB plan for eligible employee groups of the state’s four retirement systems.
Also in 1999, the legislature permitted legislative employees and state term-elected officials the option of participating in a tax deferred annuity and deferred compensation program (5% matching contribution plan) as an alternative to either the Elected Officials Retirement Plan (EORP) or the Arizona State Retirement System (ASRS) (Laws 1999, Chapter 329, section 1 and 2). S.B. 1100 terminates the tax-deferred annuity and deferred compensation pilot program for state term-elected officials and legislative employees.
A fiscal note has been requested from the Joint Legislative Budget Committee.
1. Authorizes the boards or fund managers of eligible employee groups to establish and administer a supplemental DC plan option in addition to their existing DB plan for all contributing members of the state’s retirement plans.
2. Repeals the current DC retirement plan option and related session law regarding fund management.
3. Provides administrative provisions that allow the Boards or Fund Managers to employ services necessary for the management of the supplemental DC plan, to contract with multiple vendors, to perform all acts necessary and proper for the protection of the plan, and to enter into intergovernmental agreements.
4. Requires that a supplemental DC plan be designed to be a qualified governmental plan under section 401(a) of the IRS code.
5. Instructs that the legislature intends for a supplemental DC plan to be a qualified plan under section 401 of the IRS code, as amended, or successive provisions, and tax free under section 501 of the IRS code.
6. Includes definitions regarding the supplemental DC plan.
7. Specifies that employee contributions be paid by the employer in the form of a redirection of an employee’s compensation or an offset against future salary increases and prohibits employees in the plan from choosing to receive the contributed amounts directly.
8. Specifies that employee contributions be treated as employer contributions under section 414(h) of the IRS code and be excluded from employees’ gross income for state and federal income tax purposes except for the taxable year in which they are distributed.
9. Removes the requirements that as a condition of membership in any of the state’s retirement systems employers eliminate any existing retirement program administered on behalf of a designated employee group and formally agree not to initiate any retirement program exclusive of the state’s retirement systems and the social security system.
10. Prohibits the exclusion of any member of an eligible group that establishes a supplemental DC plan from participation.
11. Specifies that any salary deferred under the plan be included as compensation when calculating the employee’s earned retirement or pension benefits.
12. Requires a participating employee to contribute at least one percent of the employee’s gross salary to the supplemental DC plan and authorizes the employee to annually increase or decrease the contribution in one percent intervals up to the maximum amount allowed by law.
13. Permits an employer to match, in a uniform manner, pre-tax contributions at a rate set by the employer.
14. Requires employee contributions, employer contributions, and earnings to be vested immediately.
15. Terminates the pilot program that allows legislative employees and state elected officials the option of participating in a tax deferred annuity and deferred compensation program, but allows legislative employees and state elected officials to remain in the program if they elected to participate before the effective date of this measure.
16. Terminates the pilot program that allows certain exempt state officers or employees and state elected officials subject to term limits the option of participating in a defined contribution retirement plan and requires the individuals who elected to participate in the plan to remain in the program due to the irrevocable election required to begin participation.
17. Specifies that the decision to participate is irrevocable and must be for at least one year.
18. Makes technical and conforming changes.
19. Provides for a general effective date.
Prepared by Senate Staff
February 22, 2001