ARIZONA STATE SENATE
Phoenix, Arizona
FINAL
REVISED
retirement benefits; defined
contribution supplement
Background
In 1999, the Legislature
established the optional defined contribution (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) (Laws 1999, Chapter 329, section 6).
The optional DC retirement plan is offered as an alternative to the benefits
of the defined benefit (DB) plan.
The fund manager of PSPRS 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 percent) 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.
Also in 1999, the Legislature established for state term-limited elected officials and employees of the Legislature an optional tax deferred annuity and deferred compensation plan (five percent matching contribution plan) in lieu of participation in either the EORP or ASRS DB plan (Laws 1999, Chapter 329, sections 1 and 2). Under this optional plan, only a state elected official subject to term limits or employee of the Legislature may elect this optional five percent plan at the time of employment. S.B. 1295 extends the DC plans to all members of Arizona’s four retirement systems.
ASRS actuary estimates there will be no immediate fiscal impact to the retirement funds associated with this portion of the measure.
Currently, an ASRS member
who meets the requirements for retirement benefits at normal retirement (any
combination of age and service totaling 80 points) receives a monthly life
annuity that equals the number of whole and fractional years of credited
service multiplied by 2.1 percent, multiplied by the member’s average monthly
compensation. This remains the same
even if the member continues to work past normal retirement. In order to encourage members to continue to
work past normal retirement, S.B. 1295 gives active members who have attained
at least a normal retirement age, an opportunity to receive and to purchase
additional credited service.
ASRS estimates that this
portion of the bill will increase the contribution amount by three basis
points.
Permanent Benefit Increase Enhancement
Permanent benefit increases
(PBIs) are also known as cost of living adjustments (COLAs) and refer to money
available to fund retirement benefit increases based on the amount of earnings
the various retirement systems earn over a set percentage. Members who have retired ten or more years
ago receive the same COLA amount as recent retirees, and benefits based on
one's rate of compensation at the time or retirement often do not keep pace
with inflation. S.B. 1295 would give
members who have been retired five or more years an additional PBI based on
years of retirement.
ASRS estimates the cost to
the ASRS fund for this part of the bill to be an increase in the contribution
rate of ten basis points.
Currently, a retired member’s monthly compensation is calculated by the member’s years of service multiplied by 2.1 percent. This was last changed in 1998 (Laws 1998, Chapter 327) when the retirement formula multiplier was increased from 2.0 percent to the present 2.1 percent, giving all defined benefit ASRS members and retirees a five percent monthly compensation increase. According to ASRS administrators, a graded multiplier would reward longer service and may aid in retaining employees.
ASRS estimates the increase in the contribution rate to be 92 basis points for this part of the measure.
Partial
Lump Sum Option
Currently, retirees of ASRS
have seven different forms of retirement payment available to them, including a
life annuity and a joint and survivor option.
Members of the three smaller retirement systems do not elect a payment
option -- they are paid a monthly pension and their spouses are automatically
provided with a pension if the member dies before them. None of the retirement systems offer a lump
sum payment.
This bill allows a member to
receive a sum of money for a purchase or investment. Under this bill, if a member should elect to receive, for
example, two years' worth of his pension at once, the member would continue to
receive a monthly pension, but it would be actuarially reduced by the amount of
the lump sum payment.
ASRS states that there will
be no fiscal impact to the retirement funds associated with this portion of the
bill.
A Joint Legislative Budget
Committee fiscal note has been ordered for this measure.
1. Allows the Board or the Fund Manager to establish, administer, manage and operate a supplemental DC plan for all contributing members of ASRS, PSPRS, CORP and EORP.
2. Grants the Board or the Fund Manager the authority to implement the supplemental DC plan that is in addition to the employees existing DB retirement plan and requires the employer to initiate salary deductions for the supplemental DC plan as directed by each employee.
3. 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.
4. 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.
5. Specifies that in a supplemental DC plan, employee contributions picked up are to be included in gross income for income tax purposes until the time the programs involved receive a private letter ruling from the IRS making them pre-taxed contributions. Until that time, they remain after-tax contributions.
6. 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.
7. Requires an employee, if electing to participate in the supplemental plan, to contribute at least one percent of the employee’s gross salary and irrevocably contribute for at least one year. Allows the employee to annually increase or decrease the contributions in increments of one percent up to the maximum allowed by law (25 percent of total contributions).
8. Allows an employer to establish, administer, manage and operate a supplemental DC plan, and allows the employer to delegate authority to implement the plan to its internal benefits administrator or designee.
9. Specifies that in a supplemental DC plan, the employee is not required to contribute in order to qualify for an employer match, and the employer match may accrue from any program established by the employer.
10. Specifies that all employee contributions and earnings are immediately vested.
11. Stipulates that employer contributions and earnings on employer matching contributions are vested as follows:
· If the employee has less than one year of credited service in an eligible group, zero percent.
· If the employee has at least one year but less than two years of credit service, 20 percent.
· If the employee has at least two years but less than three, 40 percent.
· If the employee has at least three years but less than four, 60 percent.
· If the employee has at least four years but less than five, 80 percent.
· If the employee has at least five years of credited service, 100 percent.
12. Allows all nonvested employer contributions and earnings to be used for administrative costs of the plan.
13. Adds to those who qualify as an "eligible group" an optional retirement program established by a community college district or the board of regents.
14. Allows state university employees participating in the Board of Regents optional retirement program to withdraw employer contributions as a lump sum upon retirement.
15. Repeals Title 38, chapter 5, article 8, the optional DC retirement plan.
16. Terminates the tax-deferred annuity and deferred compensation pilot program and the optional DC retirement plan. However, those who have already elected to participate in these plans will continue to do so.
17. Allows employers to offer active members of ASRS who have reached the normal retirement age, an agreement that would include the following:
18. Requires the member and employer to make contributions according to the agreement between them to the supplemental defined contribution plan for the purpose of purchasing additional credited service.
19. Stipulates that if a member does not complete the terms of the agreement, the member forfeits any credited service provided under the agreement. However, any member contributions made in accordance with the agreement are the property of the member or the member’s estate.
20. Stipulates that if an employer fails to complete the terms of the agreement, the employer must make all contributions required by the agreement to the supplemental defined contribution plan.
21. Prohibits a member who enters into an agreement of this sort from purchasing other credited service for other public service due to reinstatement, federal government employment, leave of absence or military service.
22. Specifies that monies available for future benefit increases must earn interest at a rate of eight percent per year, and that this interest must be used to pay additional benefit increases for members who have at least ten years of credited service.
23. Enhances the permanent cost of living benefit increase graduated by the number of years since retirement for members who have been retired for at least five years and based on interest realized divided by the actuarial present value of monthly retirement benefits as of June 30 of the year prior to the year in which the increase is granted.
24. Establishes a graduated retirement multiplier that begins at 2.1 percent for members with less than 15 years of service, and increases as follows:
25. Creates a cap for a member’s monthly life annuity of not more than 80 percent of the member’s average monthly compensation for those who become members on or after December 31, 2001.
26. Allows a member, beginning July 1, 2002, to elect to receive a lump sum payment equal to up to three years of the member’s retirement benefits.
27. Requires that the member’s benefit must be actuarially reduced to provide for the lump sum payment.
28. Stipulates that an elected lump sum payment will be made at the time of retirement.
29. Requires that any benefit increases be based on an amount less the lump sum payment if increases are calculated as a percentage of the member’s benefit amount.
30. Requires that any benefit increase based on years of service be calculated without regard to the lump sum payment.
31. Appropriates $2,613,700 from the ASRS administration account in fiscal year 2001-2002 to the ASRS for the administrative implementation of this act.
32. Makes technical and conforming changes.
33. Provides for a general effective date.
Amendments Adopted by Committee
1. Provides a formula for calculating the monthly permanent benefit increase amount.
2. Enables state university employees participating in the Board of Regents optional retirement program to withdraw employer contributions as a lump sum upon retirement.
3. Removes statutory references to the eliminated pilot program and deals with those participants of this program in session law in an effort to clean up the bill. This amendment also allows employers to match employer contributions to the alternative DC plan in a 401(a), 403(b) or 457 plan in order to retain employees and allow employees to save more toward retirement. The amendment also adds a vesting schedule to the bill.
Amendments Adopted by the House of Representatives
1. Appropriates $2,613,700 from the ASRS administration account in fiscal year 2001-2002 to the ASRS for the administrative implementation of this act.
2. Eliminates the health care premium benefit increase.
3. Clarifies the method of calculating the permanent benefit increase.
4. Adds to those who qualify as an "eligible group" an optional retirement program established by a community college district or the board of regents.
5. Allows an employer to establish, administer, manage and operate a supplemental DC plan, and allows the employer to delegate authority to implement the plan to its internal benefits administrator or designee.
6. Specifies that in a supplemental DC plan, employee contributions picked up are to be included in gross income for income tax purposes until the time the programs involved receive a private letter ruling from the IRS making them pre-taxed contributions. Until that time, they remain after-tax contributions.
7. Specifies that in a supplemental DC plan, the employee is not required to contribute in order to qualify for an employer match, and the employer match may accrue from any program established by the employer.
8. Eliminates the delayed effective date of this act and provides for a general effective date.
9. Makes technical and conforming changes.
Amendments
Adopted by Conference Committee
1. Increases the graded multiplier to 2.3 at thirty years of credited service instead of 35 years of service and eliminates the change in the multiplier at 35 years.
2. Raises the number of years required for a dispatcher to achieve normal retirement under CORP from 20 to 25 years.
Senate Action House Action
FIN 2/26/01 DPA 8-0-0-0 RGO 3/27/01 DPA 7-0-0-3
3rd Read 3/14/01 24-5-1-0 3rd Read 4/26/01 56-0-4-0
Final Read 5/2/01 20-7-3-0 Final Read 5/3/01 52-0-8-0
Signed by the Governor 5/8/01
Chapter 380
Prepared by Senate Staff
May 24, 2001