03/31/2015 01:30 PM House FINANCE

HOUSE BILL NO. 135                                                                                                            
                                                                                                                                
     "An Act establishing a Roth contribution program for                                                                       
     the public employees' deferred compensation program;                                                                       
     and providing for an effective date."                                                                                      
                                                                                                                                
3:29:50 PM                                                                                                                    
                                                                                                                                
ANDY    MILLS,    LEGISLATIVE   LIAISON,    DEPARTMENT    OF                                                                    
ADMINISTRATION,  explained  that   the  Deputy  Commissioner                                                                    
could not  be present for  the current meeting.  He reviewed                                                                    
HB 135. He related that the  bill was a way for employees to                                                                    
control   the  timing   of   taxation   of  their   deferred                                                                    
contributions. Currently the  deferred compensation plan was                                                                    
a  pre-tax  option. Taxes  would  be  paid  at the  time  of                                                                    
retirement.   The   bill   allowed  for   another   deferred                                                                    
compensation option  that was a  post-tax plan.  Taxes would                                                                    
not be paid  in the future. Employees could then  have a mix                                                                    
of  pre-tax   and  post-tax  options  in   their  retirement                                                                    
portfolios. He  furthered that current Alaska  statutes only                                                                    
allowed  for tax  deferred contributions  into the  plan and                                                                    
was  passed in  1973. In  2011, Congress  passed legislation                                                                    
that  enabled  state governments  to  provide  the Roth  457                                                                    
option. He deduced that the  Roth 457 was another option for                                                                    
public  employees to  diversify  their retirement  portfolio                                                                    
and merely offered another deferred compensation option.                                                                        
                                                                                                                                
Co-Chair  Thompson asked  whether the  post-tax contribution                                                                    
earnings were taxable.                                                                                                          
                                                                                                                                
KATHY  LEA, CHIEF  PENSION OFFICER,  DIVISION OF  RETIREMENT                                                                    
AND BENEFITS,  DEPARTMENT OF ADMINISTRATION,  explained that                                                                    
the  objective of  a designated  ROTH contribution  was that                                                                    
the earnings  were not taxed  upon distribution if  they met                                                                    
the  qualification rules.  The qualification  rules required                                                                    
that the  Roth account  was intact for  five tax  years, and                                                                    
the member's age was 59 and a half.                                                                                             
                                                                                                                                
Representative  Guttenberg asked  what the  benefit for  the                                                                    
employee was by opening the  Roth through the state. Ms. Lea                                                                    
explained  that the  designated  Roth contribution  differed                                                                    
from  the private  sector Roth  IRA because  it took  on the                                                                    
characteristics of a  deferred compensation plan. Therefore,                                                                    
the total contribution was greater  than what was allowed in                                                                    
the  private sector  Roth accounts.  In addition.  there was                                                                    
not an income requirement to participate in the plan.                                                                           
                                                                                                                                
Representative   Guttenberg    asked   what    the   maximum                                                                    
contribution  was.  Ms.  Lea   responded  that  the  maximum                                                                    
contribution for deferred compensation  was $18 thousand per                                                                    
year. She continued  that the employee could elect  a pre or                                                                    
post tax plan  or contribute to both options.  The state was                                                                    
required to account for both options differently.                                                                               
                                                                                                                                
3:35:05 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg   asked  whether  there   was  an                                                                    
expected rate  of return. Ms.  Lea stated that Roth  457 was                                                                    
not  an investment  option  it was  a  taxation option.  She                                                                    
indicated  that  the  investment vehicles  in  the  deferred                                                                    
compensation plan remained  the same and the  rate of return                                                                    
depended upon the investment plans the employee chose.                                                                          
                                                                                                                                
Co-Chair Thompson  asked whether  the $18 thousand  limit on                                                                    
deferred compensation contributions applied  to both pre and                                                                    
post tax  options. Ms. Lea  answered that the  limit applied                                                                    
to  both options  and was  the total  limit if  the employee                                                                    
chose a combination.                                                                                                            
                                                                                                                                
Co-Chair Neuman wondered why  the deferred compensation plan                                                                    
was  not  set  up  with  both  options  when  the  plan  was                                                                    
implemented.  Ms. Lea  explained that  the Roth  option only                                                                    
became available on January 1, 2011.                                                                                            
                                                                                                                                
Representative  Pruitt  expressed  concerns with  the  state                                                                    
taking  on  the additional  role  of  financial advisor.  He                                                                    
wondered how the  state could convey the  information to the                                                                    
employees  in  a  way  that  they  could  relay  the  proper                                                                    
information   to  their   personal   financial  advisor   or                                                                    
correctly  manage their  retirement accounts  on their  own.                                                                    
Ms. Lea reported  that a contribution to the  state ROTH 457                                                                    
would not prohibit  an employee from also  contributing to a                                                                    
private  sector  Roth  IRA.  The  plan  also  provided  some                                                                    
optional  financial  education   and  advice  to  employees.                                                                    
Representative  Pruitt misunderstood  the  plan and  thought                                                                    
that  $18  thousand  limit  was  the  full  contribution  an                                                                    
employee could make in both the state and private plans.                                                                        
                                                                                                                                
3:40:08 PM                                                                                                                    
                                                                                                                                
Mr. Mills commented that  retirement investments were highly                                                                    
personalized and  noted the probable benefits  of a post-tax                                                                    
option.  He  thought  that the  additional  plan  "empowered                                                                    
employees with options."                                                                                                        
                                                                                                                                
Vice-Chair Saddler  stated that  the Roth  457 was  simply a                                                                    
different vehicle to manage deferred compensation.                                                                              
                                                                                                                                
3:41:19 PM                                                                                                                    
                                                                                                                                
HB  135  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.