STAND. COM. REP. 2691

Honolulu, Hawaii

, 2004

RE: S.B. No. 2878

S.D. 2

 

 

Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Ways and Means, to which was referred S.B. No. 2878, S.D. 1, entitled:

"A BILL FOR AN ACT RELATING TO THE FEDERAL TAX LIMIT ON COMPENSATION APPLICABLE TO THE EMPLOYEES' RETIREMENT SYSTEM,"

begs leave to report as follows:

The purpose of this measure is to apply the federal tax limit on compensation that may be taken into consideration in determining pension benefits under the Employees' Retirement System's tax-qualified retirement plan.

This measure also:

(1) Establishes a non-tax-qualified pension benefit plan to allow members of the Employees' Retirement System who accrued benefits from July 1, 1996 to June 30, 2004 to retain those benefits;

(2) Establishes that the non-tax-qualified benefit shall be paid to the retirant as a single lump sum payment that is equivalent to a single life annuity; and

(3) Appropriates $357,350 to pay the non-tax-qualified benefits for affected members of the Employees' Retirement System.

Your Committee finds that the benefits provided under the Employees' Retirement System are intended to be a tax-qualified retirement plan under section 401(a) of the Internal Revenue Code of 1986, as amended. Your Committee further finds that, pursuant to section 401(a)(17) of the Internal Revenue Code, the annual compensation that may be taken into account in determining benefit accruals under the Employees' Retirement System is limited. However, under Hawaii law, no provision was in place to address such salary limits with respect to the Employees' Retirement System on July 1, 1996. Additionally, article XVI, section 2, of the Constitution of the State of Hawaii prohibits either the diminishment or impairment of an Employees' Retirement System member's accrued benefit. Therefore, your Committee determines that, in order to accomplish retroactive compliance with section 401(a)(17) of the Internal Revenue Code of 1986, as amended, accrued benefits must be provided under a non-tax-qualified plan for the affected members, with the necessary funds being appropriated to the non-tax-qualified plan for the payment of the accrued benefits.

Your Committee has amended the measure to conform to recommended drafting procedures by:

(1) Replacing a reference to a nonexistent section of law in chapter 88, Hawaii Revised Statutes, with provisions that enable the execution of the measure's intent without such a reference;

(2) Adding a provision that further explains the formulas used to derive non-tax-qualified benefits as opposed to tax-qualified benefits;

(3) Adding a provision that further explains the formula to be used to determine the value of a single life annuity;

(4) Adding a provision that enables the Employees' Retirement System to pay a member, upon the attainment of the age at which the member could retire with an unreduced retirement benefit, or upon the member's termination of service, an equalization payment if the actual compensation limit that was in effect under section 401(a) of the Internal Revenue Code of 1986, as amended, is less than what was originally assumed;

(5) Establishing a formula to determine the amount of the equalization payment;

(6) Clarifying that, with regard to how non-tax-qualified benefits are to be administered, agencies such as the University of Hawaii, the Office of Hawaiian Affairs, and certain other state agencies shall reimburse the State for their employees;

(7) Establishing that the non-tax-qualified benefits provided under the measure are not subject to state taxes or garnishment, except for garnishment actions initiated by the State; and

(8) Making technical, nonsubstantive amendments for the purposes of clarity and style.

As affirmed by the record of votes of the members of your Committee on Ways and Means that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2878, S.D. 1, as amended herein, and recommends that it pass Third Reading in the form attached hereto as S.B. No. 2878, S.D. 2.

Respectfully submitted on behalf of the members of the Committee on Ways and Means,

____________________________

BRIAN T. TANIGUCHI, Chair