Legislature(2015 - 2016)BUTROVICH 205
04/16/2015 09:00 AM STATE AFFAIRS
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HB 135-PUBLIC EMPLOYEE ROTH CONTRIBUTIONS 9:19:39 AM CHAIR STOLTZE announced the consideration of HB 135. 9:20:05 AM JOHN BOUCHER, Deputy Commissioner, Alaska Department of Administration, Juneau, Alaska, provided an overview of HB 135 as follows: HB 135 is an act establishing a Roth contribution option for public employees who choose to participate in the deferred compensation program. This legislation enables plan members to take control of one portion of their retirement portfolio that they currently do not have a choice over, essentially that is the timing of the taxation of the contributions that they make to their deferred compensation plan. The current statute has been in effect since 1973 and the statute currently only allows deferred compensation to be made as part of a pretax contribution. HB 135 is an effort to modernize and update the options that are available to members of the plan to comport with changes that have been made on a national level with other deferred compensation plans. CHAIR STOLTZE asked if the new opportunities are because of federal laws. MR. BOUCHER answered correct. He continued his overview as follows: In January of 2011, Congress passed legislation enabling governments to implement a designated Roth contribution option and HB 135 would allow for the incorporation of this option to public employees who participate in the State of Alaska deferred compensation plan. The bill enables members to control the timing of the taxation of their deferred compensation contributions, whether it be at the time that the contribution is made to the deferred compensation plan or at the time of distribution. Should HB 135 pass as purposed, it would enable members to choose to have their contributions taxed at the time of contribution, which would mean that the income could be considered tax-free at the time of a qualified dividend distribution. The default option for existing members would be the current pre-tax plan and members would have to positively elect to a Roth investment to have their contributions changed to a taxable status. This proposed legislation is in response to requests by members to the Division of Retirement & Benefits to offer this option to members. 9:21:58 AM SENATOR WIELECHOWSKI joined the committee meeting. CHAIR STOLTZE asked if the request was from organized employee groups or individuals. MR. BOUCHER replied that the request came from individual employees. CHAIR STOLTZE asked if there have been any formalized requests from any employee groups or retired groups. 9:23:46 AM KATHY LEA, Chief Pension Officer, Division of Retirement and Benefits, Alaska Department of Administration, Juneau, Alaska, explained that the requests have come to the division through its regional counselors who travel all over the state and meet individually with members. She specified that the option was published a couple of years ago when Congress inaugurated the bill and the option has been a topic of conversation. SENATOR WIELECHOWSKI asked if the option is common in other states. MS. LEA answered that more states are adding a designated Roth option. She detailed that approximately 12 states offered the option. SENATOR WIELECHOWSKI asked if the maximum that can be deferred is the same as the current maximum. MS. LEA answered that the current limit is $18,000. She detailed that the Roth option would take on all of the rules and contribution limits of the deferred compensation plan. SENATOR WIELECHOWSKI asked if contributions can be "stacked" where $18,000 is deferred to each plan or "split" where $9,000 is deferred to each plan. 9:25:36 AM MS. LEA answered the contributions can be split as long as the $18,000 limit is not exceeded. SENATOR HUGGINS noted that education and healthcare workers have a Roth 403(b) contribution option. He asked what the differences were in the various retirement plans. MS. LEA answered that she is not versed in Roth 403(b) details because the division does not administer the plan. SENATOR HUGGINS asked why public employees are not covered by Social Security and how that came about officially. MS. LEA explained that the early 1950s, the state's teachers had an opportunity to come into Social Security and the option at that time was the teachers did not need to opt into Social Security due to an existing retirement plan. The State of Alaska signed an agreement with Social Security that their teachers would not participate, many states did the same. She revealed that in 1980, state employees held a referendum and voted for a Social Security replacement plan, the Alaska Supplemental Annuity Plan. She noted that the option to choose has sunset and Social Security only allows an option choice for new entities; for example, when a borough and city merges. 9:28:28 AM SENATOR HUGGINS asked if Ms. Lea had history on whether the teachers supported the state not opting into Social Security. MS. LEA answered that the division does not have any public records. SENATOR WIELECHOWSKI assumed that the same investment options would be available that would be treated like deferred compensation. He asked if there would be a separate state account or could the deferred compensation be directed to a personal Roth Individual Retirement Account (IRA). He inquired that if there is a state account, would the same Alaska Supplemental Annuity Plan (SBS-AP) and deferred compensation investment options be offered. MS. LEA answered as follows: This is an option within the deferred compensation program, so you would not be able to direct it to a private IRA and this type of option is only allowed in a 457 plan because the limits are higher for contribution, it is a taxation option so the investment lineup that are in the deferred compensation plan don't change, it is the same investments. SENATOR WIELECHOWSKI asked if the investments are the same investments that currently exist in the deferred compensation. MS. LEA answered correct. SENATOR WIELECHOWSKI asked if a state employee has the option of rolling their Roth IRA into their own private Roth IRA when the individual leaves state-service. MS. LEA answered yes. She specified that the investment product is "rollable" and can go into a Roth IRA. 9:30:38 AM SENATOR WIELECHOWSKI asked if there is any opposition to the bill. MR. BOUCHER answered that he is not aware of any opposition. SENATOR WIELECHOWSKI commented that the proposition looks like another employee option. MR. BOUCHER answered correct. He opined that the option depends on how the future of taxation is viewed where a person decides between the certainty in current rates and the uncertainty in future rates. He noted that one option could be setting aside a portion of tax-free income for an individual's heirs. He summarized that the option is just another tool. SENATOR COGHILL asked to verify that taxes are paid prior to deferral. MR. BOUCHER answered yes. SENATOR COGHILL asked what tax rates are applied prior to deferral. MS. LEA answered that an individual is taxed at the applicable rate during the time of the pay period contribution. SENATOR COGHILL asked to verify that an individual decides on what percentage of income is deferred. MS. LEA answered correct. She specified that the contribution is a positive election that the employee has to make. 9:33:46 AM SENATOR WIELECHOWSKI assumed that excess money after taxes of $18,000 could be put into a Roth IRA. He asked if a person has to wait a certain amount of time for withdrawal. MS. LEA answered that there are some restrictions that are different from a personal IRA and withdrawal is allowed under the following conditions: · Account must be maintained for at least 5 years. · In the case of a disability. · A survivor may remove the money. · Age 59-1/2 and employment has been terminated. MS. LEA summarized that any investment earnings on the contributions are not taxed as long as the qualifiers are met. SENATOR WIELECHOWSKI asked to verify that a person strictly pays taxes on the dividends or interest if money is withdrawn from the plan within the first five years. MS. LEA answered that money cannot be removed from a deferred compensation plan unless a person is terminated from employment. CHAIR STOLTZE asked if the plan can be used as a loan account where an individual can borrow on the money and repay with interest to oneself. 9:35:33 AM MS. LEA answered that the state plans do not allow for a loan option. She specified that a loan option is considered "leakage" from an individual's retirement plan. She remarked that loans on a retirement plan is considered robbing from an individual's future. CHAIR STOLTZE asked if the policy Ms. Lea described was a decision that she made in presenting the bill and offering the programs. MS. LEA replied that the policy decision was made by the Legislature when the deferred compensation plan was created. CHAIR STOLTZE assumed that the policy decision was made with guidance from the Department of Administration. SENATOR HUGGINS asked if there is a provision that allows for rolling over a different Roth IRA into the public employees' Roth IRA. 9:37:19 AM MS. LEA answered that private IRA roll-in is permissible except for the SIMPLE (Savings Incentive Match PLan for Employees) IRA. SENATOR COGHILL asked how a catch-up contribution works. MS. LEA answered that a catch-up provision is allowed within three years of an individual's normal retirement date. She specified that contributions can be doubled in each of the three catch-up years where the limit is $36,000 rather than $18,000. SENATOR WIELECHOWSKI asked to verify that funds from a private Roth IRA can be rolled into the bill's Roth IRA if the legislation is passed. MS. LEA answered yes. SENATOR WIELECHOWSKI asked if unlimited amounts maybe rolled into the plan. MS. LEA answered that she is not sure what the limitation is. 9:39:05 AM At ease. 9:40:09 AM CHAIR STOLTZE called the committee back to order. He asked Mr. Boucher if he had any closing comments. MR. BOUCHER commented that the plan is a fantastic option for people who may want to choose to have a portion of their retirement income not taxed or taxed now and not taxed in the future. CHAIR STOLTZE asked to verify that the bill has a zero fiscal note. MR. BOUCHER answered correct. 9:41:23 AM SENATOR COGHILL moved to report HB 135, [version 29-GH1015\A], from committee with individual recommendations and the attached zero fiscal note. 9:41:37 AM CHAIR STOLTZE announced that hearing no objection, [HB 135 moved out of Senate State Affairs Standing Committee].