S.B. 248 (H-1): COMMITTEE SUMMARY JRS/DEFINED CONTRIBUTION PLAN
Senate Bill 248 (Substitute H-1, as passed the House) Sponsor: Senator Dianne Byrum
Senate Committee: Appropriations House Committee: Appropriations Date Completed: 12-9-96
The bill would amend the Judges Retirement Act to provide for a defined contribution retirement plan. The bill would require all new members on or after March 31, 1997, to become qualified participants of the Tier 2 (defined contribution) plan. All persons who were members of the Judges Retirement System (JRS) prior to March 31, 1997, would have the option of remaining in the Tier 1 (defined benefit) plan or elect to become a qualified participant in Tier 2. In addition, all members would be eligible to receive health care benefits as prescribed in the proposed bill. Currently, all members of the JRS are members of a defined benefit retirement plan. The defined benefit plan provides a guaranteed lifetime retirement benefit provided the member vests in the system and attains the minimum age and service requirements. The proposed defined contribution retirement plan is outlined below.
Under the proposed bill, the current plan would be divided into two types of membership. Tier 1 members would be defined as those employees who are members of the original retirement system prior to March 31, 1997, and who do not elect to become a qualified participant of Tier 2. Tier 2 members would be defined as Tier 1 members who elect to become qualified participants of Tier 2 and all new employees hired on or after March 31, 1997.
The JRS would have to give it’s current members the opportunity to terminate membership in Tier 1 and become a qualified participant in Tier 2. Such an election would be irrevocable. The JRS would have to accept written elections from January 2, 1998 to April 30, 1998, for members choosing to switch to the Tier 2 retirement plan. An employee who elects to change from a Tier 1 member to a Tier 2 member would elect to do all of the following:
1. Cease to be a member of Tier 1, effective 12 midnight, May 31, 1998.
2. Become a qualified participant in Tier 2, effective 12:01 a.m., June 1, 1998.
3. Waive all rights to a pension, an annuity, a retirement allowance, an insurance benefit, or any other benefit under Tier 1, effective 12 midnight, May 31, 1998.
These same provisions would be made for deferred members and nonvested members that return to become a judge or State official. However, their election to stay in Tier 1 or change to Tier 2 would have to be submitted to the retirement system in writing within 60 days of their
reemployment. The effective dates for these employees would depend on the dates that they are reemployed.
For current, deferred, or former nonvested members that would elect to terminate membership in Tier 1 and become a qualified participant in Tier 2, the retirement system would direct the State Treasurer to transfer a lump sum amount from the appropriate fund to the qualified participant's account in Tier 2. The retirement system would calculate the amount to be transferred based on the actuarial present value of the member's accumulated benefit obligation plus his or her accumulated contributions. The calculation of estimated and actuarial present value of the member's or deferred member's accumulated benefit obligation and personal contributions would be based upon methods adopted by the Department of Management and Budget and the retirement system's actuary in consultation with the retirement board.
After consulting with the retirement system's actuary, the Department of Management and Budget would calculate for each fiscal year any cost savings that have accrued to the State as a result of adopting a defined contribution plan over the costs that would have been incurred by the State had a defined contribution plan not been implemented. The savings would not be used to decrease the actuarial rate charged by the retirement system, but instead would be deposited in a health insurance fund. The amount deposited in a health fund could not be expended until the actuarial accrued liability for health benefits is 100% funded.
Under the bill, the State Treasurer would be entrusted with the following duties and responsibilities:
* Administer the Tier 2 plan and invest the plan’s assets. The State Treasurer would be the fiduciary and trustee of the Tier 2 plan. The State Treasurer could appoint an advisory board to assist in carrying out duties as fiduciary and trustee.
* Determine the provisions and procedures of Tier 2 in conformity with the act and the Internal Revenue Code.
* Employ or contract with personnel for services that the State Treasurer determines necessary for the proper administration of and investment of the assets of the Tier 2 plan.
The individuals that become qualified participants in the defined contribution plan (Tier 2) would direct the investment of their accumulated employer and employee contributions and earnings to one or more investment choices within the available categories of investment funds provided by the State Treasurer. The administrative costs of the Tier 2 plan would be paid by the qualified participants, former qualified participants, and refund beneficiaries with active accounts.
In the new Tier 2 plan, the State would contribute 4% of a qualified participant's salary to the individual's account. In addition, the participant would be allowed to contribute up to 3% of his or her compensation to his or her account, with the employer making a matching contribution up to a maximum of 3%. The qualified participant could also make additional contributions beyond those mentioned up to the maximum allowed by the State Treasurer and the Internal Revenue Code.
A qualified participant would be immediately 100% vested in his or her personal contributions into a Tier 2 plan. The individual would become vested in the employer's contributions as follows:
|
2 years of credited service |
50% |
|
3 years of credited service |
75% |
|
4 years of credited service |
100% |
A qualified Tier 2 participant would become vested in health insurance coverage after completing four years of service as a qualified participant and was not a member, deferred member, or former nonvested member in Tier 1. If a member, deferred member, or former nonvested member of Tier 1 elects to participate in Tier 2, then that participant would have to meet the service requirements that he or she would have been required to meet under Tier 1 in order to vest in health benefits. Qualified participants who were members, deferred members, or former nonvested member of Tier 1 who elect to participate in Tier 2 would be credited with the years of service accrued under Tier 1 for the purposes of meeting the vesting requirements of Tier 2. Health insurance coverage would be available to vested qualified participants and their eligible dependents. The State would pay the following amounts of the health insurance premium for former qualified participants who were not members, deferred vested members, or nonvested members of Tier 1:
4 years of credited service 50%
5 years of credited service 75%
6 years of credited service 90%
These former qualified participants would be required to pay to the retirement system the portion of the premium not paid by the State.
For former qualified participants that were members of Tier 1 and elect to become qualified participants in Tier 2, the State would pay the same portion for their health insurance premiums as it does for Tier 1 members.
All insurance premium payments would be based on a cash disbursement method.
Upon leaving the State's employment, a former qualified participant would be eligible to receive distribution of his or her accumulated balance in their defined contribution account. Upon death of a qualified participant, the accumulated balance in the deceased participant's account would be paid to the refund beneficiary, or if none is stated, to the legal representative or the deceased participant's estate.
A former qualified participant or refund beneficiary could elect one or a combination of several of the following methods of distribution:
(a) Lump sum.
(b) Lump sum direct rollover to another qualified plan.
(c) Periodic distributions as authorized by the State Treasurer.
(d) No distribution, balance remains in the account until person decides, to the extent allowed by Federal law.
In addition, all disbursements of employer contributions (the mandatory 4%) and the earnings on those contributions, plus the employee and matched employer contributions (up to a maximum of 6%) and the earnings on those contributions, would be exempt from State, county, municipal, or other local tax. Any contributions made by the employee beyond the first 3% would be subject to all taxes.
Finally, if the Department of Management and Budget receives notification from the IRS that a section or a portion of a section of the law for each retirement system would cause the retirement system to be disqualified for tax purposes under the Internal Revenue Code, then the portion that would cause disqualification would not apply.
MCL 38.2214 et al. Legislative Analyst: J. Carrasco
The exact fiscal impact of the Tier 2 plan is indeterminable. Any cost savings that would arise would be placed into the health insurance fund of the retirement system. The bill contains a provision stating that any cost savings would not be used to decrease the actuarial rate charged by the retirement system, but instead would be deposited in a health insurance fund. Because health insurance costs may continue to rise, so too would the contribution rate for health insurance for the remaining Tier 1 plan. However, in the future when the health insurance fund contains sufficient funds to cover the actuarial accrued liability for health benefits, the contribution rate for health insurance for the Tier 1 plan would decrease.
Additionally, the administrative costs for the defined contribution plan would be paid by the qualified participants, former qualified participants, and refund beneficiaries from the earnings on their investments.
Fiscal Analyst: J. Carrasco
S9596\S6206 (H-1)SA
This analysis was prepared by nonpartisan Senate staff for use by the Senate in its deliberations and does not constitute an official statement of legislative intent.