Report Title:

Employees Retirement System; Federal Tax Limit

Description:

Applies the federal tax limits on pension compensation effective 7/1/96, and adds a non-tax-qualified arrangement to protect benefits accrued in excess of the federal tax limits for the period 7/1/96, through 6/30/04. Appropriates $357,350 to pay the non-tax-qualified benefits.

THE SENATE

S.B. NO.

2878

TWENTY-SECOND LEGISLATURE, 2004

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO THE FEDERAL TAX LIMIT ON COMPENSATION APPLICABLE TO THE EMPLOYEES' RETIREMENT SYSTEM.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The employees' retirement system of the State of Hawaii (the "system") is intended to be a tax-qualified retirement plan under section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Section 401(a)(17) of the Code limits the annual compensation that may be taken into account in determining benefit accruals under the system. Section 401(a)(17) was first effective with respect to the system on July 1, 1996. Currently, there is no provision in chapter 88, Hawaii Revised Statutes, applying the section 401(a)(17) limits. The legislature finds that chapter 88, Hawaii Revised Statutes, should be amended to apply the federal tax limit on compensation in accordance with federal tax law.

Under article XVI, section 2, of the Constitution of the State of Hawaii, membership in the system is a "contractual relationship"; a member's "accrued benefit" may not be "diminished" or "impaired." The legislature finds that the Constitution of the State of Hawaii limits what the legislature may do to bring the system into retroactive compliance with federal tax law. If the "accrued benefits" cannot be provided under a tax-qualified plan, they must be provided under a non-tax-qualified plan.

This Act amends chapter 88, Hawaii Revised Statutes, to apply the federal tax limits on pension compensation effective July 1, 1996, and adds a non-tax-qualified arrangement to protect benefits accrued in excess of the federal tax limits for the period July 1, 1996, through June 30, 2004. This Act also appropriates funds to pay the non-tax-qualified benefits.

SECTION 2. Chapter 88, Hawaii Revised Statutes, is amended by adding a new section immediately following section 88-81 to be designated as section 88-81.5 and to read as follows:

"88-81.5 Federal tax limits on annual compensation. (a)  Effective July 1, 1996, "compensation" under section 88-21.5 used to determine "average annual compensation" under section 88-81 and employee contributions picked up by the employer under section 88-46, shall be subject to the annual limit set forth in section 401(a)(17) of the Internal Revenue Code of 1986, as amended.

(b) Notwithstanding subsection (a), any member who accrued a benefit prior to July 1, 2004, based on annual compensation in excess of the limit set forth in section 401(a)(17) of the Internal Revenue Code of 1986, as amended, shall receive a non-tax-qualified pension benefit equal to the difference between (1) the pension benefit that would be payable under chapter 88 without regard to the limit in section 401(a)(17) and (2) the tax-qualified pension benefit as limited by section 401(a)(17). The non-tax-qualified benefit shall be determined using the member's years of credited service and average final compensation as of June 30, 2004, and shall be paid in a single lump sum in the first year taxable. The lump sum shall be the actuarial equivalent of a single-life annuity payable at retirement. The non-tax-qualified benefit shall be administered by the board of trustees, provided that:

(1) State members shall be paid with funds appropriated from the State's general revenues; and

(2) County members shall be paid by the respective counties pursuant to assessments made by the employees' retirement system."

SECTION 3. There is appropriated out of the general revenues of the State of Hawaii the sum of $357,350, or so much thereof as may be necessary for fiscal year 2004-2005, to carry out the purposes of this Act, including the pension payments and administrative expenses. The sum appropriated shall be expended by the employees' retirement system of the State of Hawaii for the purposes of this Act.

SECTION 4. New statutory material is underscored.

SECTION 5. This Act shall take effect upon its approval; provided that section 2 shall take effect retroactive to July 1, 1996.

INTRODUCED BY:

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BY REQUEST