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. (SD2)

THE SENATE

S.B. NO.

2878

TWENTY-SECOND LEGISLATURE, 2004

S.D. 2

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 to part II, subpart B, to read as follows:

"§88- Federal tax limits on annual compensation. (a) Effective July 1, 1996, compensation used to determine "average final 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) Non-tax-qualified benefit: 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 at the earliest age the member could retire with an unreduced benefit, based on the member's years of credited service and the member's average final compensation as of June 30, 2004, without regard to the limit in section 401(a)(17) of the Internal Revenue Code of 1986, as amended; and

(2) The tax-qualified pension benefit that would be payable at the earliest age the member could retire with an unreduced benefit, based on the member's years of credited service as of June 30, 2004, and the member's average final compensation as limited by section 401(a)(17) of the Internal Revenue Code of 1986, as amended, as of the earliest age the member could retire with an unreduced benefit, or upon the member's termination of service, if earlier.

(c) Payment of a non-tax-qualified benefit: The non-tax-qualified benefit under subsection (b) shall be determined and paid in a single lump sum within the time required to meet federal tax withholding and reporting obligations for the first year the benefit is taxable. The lump sum shall be the actuarial equivalent of a single life annuity payable at the earliest age the member could retire with an unreduced benefit, assuming that the compensation limit in effect under section 401(a)(17) of the Internal Revenue Code of 1986, as amended, at the time the benefit is taxable will increase by two per cent annually. The actuarial equivalent of the single life annuity shall be calculated based on the following assumptions:

(1) An eight per cent discount rate;

(2) The 1994 Group Annuity Mortality ("GAM94") Static Table (Males and Females), published in the Transactions of the Society of Actuaries 1995, vol. 47 (table 18), using a blended mortality table that is a fifty per cent – fifty per cent blend of the Group Annuity Mortality table for males (GAM94 males) set back two years and the 1994 Group Annuity Mortality table for females (GAM94 females) set back one year; and

(3) A two and one-half per cent per year simple interest cost-of-living adjustment to the original annuity.

(d) Equalization payment: At the earliest age the member could retire with an unreduced benefit, or upon the member's termination of service if earlier, the member shall be entitled to an additional payment if the actual compensation limit then in effect under section 401(a)(17) of the Internal Revenue Code of 1986, as amended, is less than the limit that was assumed to be in effect under subsection (c) as of the date that was assumed to be the member's unreduced retirement benefit age. The additional payment, if any, shall be the difference between:

(1) The benefit that would have been paid under subsection (c) if the member's unreduced retirement benefit age and the actual limit under section 401(a)(17) of the Internal Revenue Code of 1986, as amended, in effect at the earlier of the member's unreduced retirement benefit age or termination of service has been known and used; and

(2) The benefit that was paid under subsection (c).

The amount of any additional payment shall be adjusted for interest at eight per cent from the date of payment under subsection (c) to the date of payment under this subsection.

(e) 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; provided that the University of Hawaii and the departments and agencies subject to section 88-125 shall reimburse the State for the respective amounts payable on the account of the employees of the University of Hawaii or in those departments and agencies; and

(2) County members shall be paid by the respective counties pursuant to assessments made and received by the system.

(f) Section 88-91 shall apply to non-tax-qualified benefits."

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.