Legislature(2005 - 2006)HOUSE FINANCE 519
04/12/2006 01:30 PM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB475 |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 399 | TELECONFERENCED | |
| += | HB 470 | TELECONFERENCED | |
| += | HB 475 | TELECONFERENCED | |
HOUSE BILL NO. 475
"An Act describing contributions to the health
reimbursement arrangement plan for certain teachers and
public employees; clarifying eligibility for membership
in that health reimbursement arrangement plan; relating
to the 'administrator' of the Public Employees'
Retirement System of Alaska; and providing for an
effective date."
REPRESENTATIVE PAUL SEATON, sponsor of HB 475, referred to
the revisions in the sponsor statement throughout his
testimony (copy on file.) He addressed Number 6:
"Clarifies requirements for non-vested Tier II or Tier III
employees who wish to transfer to Tier IV." It establishes
a 12-month window with an extension for another 12 months.
A transferee would have to pay for their previous years
before they could count those years for a defined benefits
plan.
Representative Kerttula asked for information about buying
back time for someone that wants to transfer into a defined
contribution plan.
1:50:22 PM
Representative Seaton explained that there are two elements.
One is someone coming back into the system. Someone who was
employed and had left the system would have to initiate a
buy back before 2010. The conversion from the defined
benefits plan to the defined contribution plan is only for
people who are not vested. The employer must make a
selection, but first must get an accounting of the person's
liability. It is a liability on employers.
Representative Kerttula commented that the employer has to
approve of the transfer. Representative Seaton said that is
correct - the employer must make a selection.
1:53:23 PM
Representative Seaton addressed revision Number 7:
"Clarifies the basis for calculation employer contribution
rates."
KATIE SHOWS, STAFF, REPRESENTATIVE PAUL SEATON, explained
this revision. The contribution rates have all been
previously calculated on the entire wage base. With the
adoption of a Tier IV, employees do not have the past
service cost associated with them. This language clarifies
that the past service cost rate that will be applied to the
employer, will be applied to the entire wage base, which
means it will include the salaries of both defined
contribution and defined benefit employees. It is the same
dollar amount as the past service cost. She termed it an
accounting procedure. Representative Seaton added that it
would amortize the employer's past service cost rate over a
period of 25 years.
1:55:39 PM
Representative Seaton addressed Number 8: "Gives regulatory
authority to the appropriate party." He related that it
reassigns authority to the commissioner.
Representative Seaton briefly addressed Number 9: "Changes
the basis for calculation HRA employer contributions to meet
IRS tax qualifications." It would be 3 percent of the
average wage across all employer groups. Everyone gets
exactly the same contribution rate. Number 10 addresses
changes to definitions.
Representative Seaton read Number 11: "Disallows employment
with NEA as counting towards Tier IV retirement
eligibility."
1:57:23 PM
Number 12: "Establishes provisions for employer termination
of participation in the plan." Currently an employer can
terminate from the defined benefit program, which was an
omission from SB 141.
Number 13: "Clarifies defined benefit and defined
contribution components of the plan." Number 14:
"Establishes adherence to IRS limitations." Those
limitations are maximum amounts that can be contributed by
an individual. They could also apply to someone who is
converting from a defined benefits plan to a defined
contribution plan.
1:58:13 PM
Representative Seaton referred to a memorandum regarding the
differences between Version I, which is what came out the
State Affairs Committee and Version L. The difference
between S and L is drafting errors. He noted that the Ice
Miller study helped to make sure everything was IRS
compliant. He mentioned the sectionals available to read.
Co-Chair Meyer noted that all of that information is in
members' packets.
1:59:28 PM
Representative Weyhrauch asked about the intent of the bill
regarding employers in over-funded status. Representative
Seaton stated his intent that Sections 3, 38, 77, 79, and 80
apply only to employers that are over funded. The
applications of these sections would not legally allow
employers funding status to drop below 100 percent.
Representative Weyhrauch said that addresses it and an
amendment is not needed.
Representative Weyhrauch asked about a letter ruling by the
IRS. He noted that the analysis on page 3 indicates that if
the amendment is not adopted, the IRS may not recognize and
apply the special rules of the Section 414 K structure,
which may result in an IRS plan determination failure. He
asked for clarification. Representative Seaton explained
that after a plan is in place there will be a review by the
IRS to determine compliance. Representative Weyhrauch said
that runs contrary to what the Division says. He suggested
that the Division elaborate on this section.
2:02:18 PM
Representative Kerttula asked if an employer opts out of the
defined contribution plan, what happens to employees. She
wondered if they would have to seek social security.
Representative Seaton responded that if an employee opts
out, employees immediately become vested in the plan. He
suggested the Department of Retirement and Benefits speak to
that issue. Representative Kerttula noted that this applies
only to municipalities and the state cannot opt out.
Representative Seaton said that is his understanding.
2:04:04 PM
MELANIE MILLHORN, DIRECTOR, DIVISION OF RETIREMENT AND
BENEFITS, DEPARTMENT OF ADMINISTRATION, addressed
Representative Weyhrauch's question about the Division
requiring rulings by the IRS in order to implement SB 141 on
July 1, 2006. She said the answer is no, but the Division
has worked closely with Ice Miller, a legal tax advisor, in
order to conform to IRS rulings. The Division is working
to obtain plan determination letters and private letter
rulings as a result of incorporating these provisions found
in HB 475. It takes time for the IRS to provide those. She
emphasized that the Division does not need any rulings right
now.
Representative Kerttula restated her question about what
happens to employees if the employer opted out of the
defined contribution plan. Ms. Millhorn responded that they
would have to have some type of retirement or pension system
in place, or social security could also satisfy that.
Ms. Millhorn commented that the plan provisions need to be
adopted, and the bill needs to pass out of committee and
become enacted by the legislature in order to avoid a plan
determination failure.
2:08:28 PM
Co-Chair Meyer asked what would happen if the bill does not
pass this session. He wondered if it could be passed
retroactive to July 1, 2006. Ms. Millhorn replied that
there would be a number of adverse effects. The death and
disabilities benefits in Sections 73 and 77 would not be
funded properly because employers would not be funding them.
Entitlement disputes would arise. Co-Chair Meyer said his
concern is that this would go into effect July 1 and there
could be something wrong with it. He wondered if an error
could be fixed retroactively or if it would be better to
postpone the effective date.
Ms. Millhorn saw no advantage to postponing the bill. She
stressed that the changes encompassed in HB 475 address all
of the issues for proper implementation.
VIRGINIA RAGLE, ASSISTANT ATTORNEY GENERAL, LABOR AND STATE
AFFAIRS, DEPARTMENT OF LAW, reported about survivor benefits
not being allowed under federal tax codes if this is not
changed on July 1. The constitution does not allow for
those benefits to be changed.
2:12:37 PM
Representative Hawker recalled that the same thing was said
this time last year when he suggested that the plan would
not qualify. It did not undergo a judicious review. He
pointed to eleven statements regarding failure to comply
with IRS determinations. He noted two statements regarding
no funding source for benefits if the bill does not pass.
He expressed concern and suggested deferring the effective
date pending a legal review.
Ms. Millhorn responded that these provisions passed last
session are unique in the sense that this is a hybrid plan.
The legislature has conferred fixed and guaranteed benefits
for both the defined contribution plan and the defined
benefits plan. Last year it was noted that if there were a
defined benefit benefit, there would be challenges
associated with it. She related the legal tax review that
has been done by Ice Miller. Due diligence was completed
and every issue was identified. The Department of
Administration is comfortable with the bill. Representative
Hawker stressed that benefits should not be conferred until
the complexities and consequences of the bill are
understood.
2:17:45 PM
Representative Kerttula referred to Section 16, survivor
benefits. She wondered if the individual contribution would
be received when the pension runs out.
Ms. Ragle responded that the way it is structured now, that
is taken into account. A new survivor benefit is being
setup in lines 12-23, based on advice by legal council, to
make it a true hybrid plan, which would comply with the tax
code.
2:20:54 PM
Representative Kerttula pointed out that it is called a
pension. She wondered if that is the benefit. She asked
about employer contributions. Ms. Ragle replied that
contributions would have to be made by the employer on
behalf of the employee. Representative Kerttula summarized
that after the survivor pension is gone, the other account
is used. Ms. Ragle agreed.
Representative Kerttula asked if there are changes in
occupational disability. Ms. Ragle replied that it is
slightly different in that it includes the concept that if
comparable employment is available outside of PERS, that
would also result in the end of occupation disability
benefits. Representative Kerttula asked if comparable work
were available, a person would not have to go off of
benefits. She wondered if the new change is more of a
bright line. Ms. Ragle said she does not know if it is a
bright line, but it fits the Division's definition of when
occupation disability benefits should end.
2:23:58 PM
Ms. Millhorn provided an example of an Alaska Supreme Court
decision, the Morton Case, where a person receiving
disability benefits received a higher PERS disability
benefit. Representative Kerttula requested a copy of the
case.
2:25:21 PM
Representative Kerttula inquired about Section 40 of the new
CS where "credited service" is not creditable under the
section. She asked what that applies to. Ms. Ragle replied
that in last year's bill, SB 141, a number of provisions
were removed. This one was not caught. It has to do with
reinstatement of service that is being taken out, effective
in 2010. Representative Kerttula asked if Ms. Ragle agreed
with Representative Seaton's statements about reinstatement
payments begun before 2010. Ms. Ragle said yes.
2:27:39 PM
NANCY DUEZ, FAIRBANKS EDUCATION ASSOCIATION, FAIRBANKS,
expressed confusion about the bill. She emphasized that it
is too important an issue to rush. She said implementation
in 11 weeks is too short. She asked for a delay of SB 141
so that many questions could be answered. She questioned if
vested employees could become eligible for social security
because they would then come under the social security
windfall elimination provision in government pension offset.
2:30:11 PM
TOM HARVEY, EXECUTIVE DIRECTOR, NEA-ALASKA, noted he has
provided written testimony (copy on file). He pointed to an
error on page 2, line 3, of HB 475 regarding what
assumptions will be used. He suggested that AS 24.08.036
places a specific burden on the legislative body. He
questioned if the burden has been met. He maintained that
employer rates for past service costs will continue to rise
as amortized liability is applied to a shrinking payroll
paid to members of the defined benefits plan. He suggested
that an increased liability has been created. He suggested
amending HB 475 by delaying implementation until July 1,
2008.
Mr. Harvey spoke of his recent experience going through the
IRS determination process. He suggested getting it right
before implementing, instead of implementing and then going
through a process with the IRS. His company applied for a
voluntary compliance process with the IRS, which took almost
two years. He suggested that the proposal to delay until
2008 the effective date of the provision in SB 141 that
establishes a floor on employer contributions, does not add
liability to the claims or to the taxpayers. These are
unfunded plans, so some employers have overpaid and some
have underpaid. If the date is delayed, those who have
underpaid don't have to meet minimum contributions, and
liability of the plan is increased. He suggested looking at
a method for extension for those who have overpaid, and
having the rest pay a minimum rate.
2:36:03 PM
Mr. Harvey spoke to the death and disability issue. He was
surprised that the benefits were not the same as the defined
benefits plan. He termed it a faulty decision. He
suggested that last year the same benefits were planned for
police and firefighters as those in the present plan. The
sponsor indicated that there would be no policy changes.
Mr. Harvey sought clarification about the calculation of
employer contribution rates. He wondered why past service
cost rate escalating to over 100 percent is a problem. SB
141 changed the way the ad hoc post retirement pension
adjustment is awarded. It requires that the funds reach 105
percent.
Mr. Harvey noted that he raised other questions in his
written testimony. He observed that he supports the section
that addresses NEA because it no longer qualifies as a TRS
or PERS employer. NEA now provides its own retirement
system. He said that NEA Alaska's criticism is not a
reflection of the sponsor. If the sponsor had been given
time to develop HB 238 last year, it could have led to a
hybrid plan that met approval. He requested that HB 475 be
amended to delay the implementation of SB 141 until July 1,
2008.
2:41:56 PM
Co-Chair Chenault inquired if NEA was in favor of taking NEA
out of the bill because it has its own plan. Mr. Harvey
replied that NEA was covered by a defined benefits plan for
many years and is now covered by a defined contribution
plan. The employees have requested to go back to a defined
benefits plan, but cost was too high. They regret the
decision to go to a defined contribution plan. He added
that NEA's staff is far more highly compensated than PERS
employees are.
2:43:12 PM
JIM DUNCAN, ALASKA STATE EMPLOYEES ASSOCIATION, stated
opposition to the defined contribution plan. He addressed
the question of the IRS determination. He said he heard Ms.
Millhorn say that a plan determination failure would have a
major adverse impact on plan participants. He opined that
one cannot pre-judge what the IRS will say about the defined
contribution plan compliance. He spoke of his background
with taxes and financial planning. He warned that you never
know what an IRS determination will be. He concurred that
in July of 06, a contribution plan not in compliance will
have major adverse impacts. He encouraged a later effective
date of at least a year. It may take a year to get a final
determination.
2:47:44 PM
Representative Kerttula asked what happens when there is a
plan determination failure by the IRS. Mr. Duncan replied
if members are not in compliance, then employer/employee
contributions would both be taxable. That would be a major
impact on plan participants and on future retirement
benefits.
2:49:08 PM
Representative Weyhrauch pointed out that last year there
was an issue about long and short-term costs to the state.
He wondered if the fiscal note analysis in the bill is
legally sufficient.
2:50:58 PM
Ms. Ragle said it complies with statutory requirements.
Representative Weyhrauch termed the IRS a "black hole". He
suggested an amendment stating if the plan is not in
compliance with the IRS then the effective date would be
deferred to a later date until they do comply. Ms. Ragle
responded that if the plan goes into effect on July 1, it is
hard to understand how that amendment would have effect.
Representative Weyhrauch read the rest of the amendment that
said that employees hired after June 30, 2006 would be
considered hired only if Section A becomes a reality. If
IRS issues a non-compliance ruling, those employees would be
covered. Ms. Ragle said there still could be vesting
problems in the defined contribution plan from those who
have rights under that plan that they don't want to
relinquish. Representative Weyhrauch said the key question
is how to address the IRS risk.
2:53:48 PM
Representative Kerttula suggested that the plan could be
contingent upon favorable ruling by the IRS. Ms. Ragle
replied that the effective date would have to be delayed for
that to work. Representative Kerttula agreed that it could
be delayed until the ruling from the IRS.
Representative Kelly suggested notifying new employees of
the possible risks and the pending IRS ruling, and not
delaying the bill.
2:56:36 PM
Ms. Duez restated her question regarding employees'
ineligibility for social security when an employer opted
out. Alaska is a non-social security state and as of July
1, will be the only non-social security state with a defined
contribution system. She asked what the impact on employees
would be.
Ms. Millhorn responded that now, under the defined benefits
plan, employees are subject to the windfall elimination
provision and the government pension offset. Once they
leave they are still subject to these provisions. If they
worked for an employer that participates in social security,
they would continue to earn benefits under social security.
Ms. Duez hoped that this concern is being addressed. She
wished for more clarification when the employer decides not
to participate. Ms. Millhorn said she would call Ms. Duez
and discuss it further.
3:00:24 PM
Co-Chair Chenault asked for the results of that conversation
to be shared with the committee.
Ms. Millhorn noted that the Division has received expert tax
advice. She addressed what would happen if this plan does
not work. It would result in a plan qualification failure.
At that point remedies would be worked out with the IRS to
correct those issues. She expressed confidence in
proceeding because of the excellent legal advice the
Division has received.
HB 475 was heard and HELD in Committee for further
consideration.
3:02:24 PM
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