La. retirement system seeks info on tax unknowns

By Marsha Shuler
Capitol news bureau
June 12, 2012

The Louisiana State Employees Retirement System has hired a tax lawyer as it considers potential ramifications of a new 401(k)-like retirement plan for future state hires.

In addition, LASERS Executive Director Cindy Rougeou said the system is looking at who has standing to file a lawsuit challenging the new plan that Gov. Bobby Jindal calls “a game changer for Louisiana’s retirement systems.”

“Do we have a duty as the fiduciary to seek a court opinion before we implement it?” Rougeou asked.

The so-called cash balance plan would operate similar to a private sector 401(k) except funds would be protected from investment losses. It would be the pension plan for all new state employees, including those in higher education, hired on or after July 1, 2013.

An employee would contribute 8 percent of pay and the employer — the state — 4 percent with all but 1 percent of investment earnings attributed to the account. The 1 percent would be set aside in a reserve fund as a hedge against investment losses.

LASERS opposed the plan, contending it would not provide sufficient retirement income for state employees who have no Social Security safety net. The only other state with a cash balance system is Nebraska, where employees also have Social Security.

Current retirement plans are defined benefit and guarantee a lifetime benefit based on pay and years of employment. Jindal claims that plan is too expensive and the state needed to limit its future pension liabilities.

The Louisiana House-passed bill proposed allowing current employees to move to the cash balance plan. However, Jindal policy adviser Rina Thomas said the provision was removed in the Senate because of questions that were raised about tax qualification status as well as administrative issues.

Opponents said the plan was subject to legal challenge because it passed the House on a majority vote but required two-thirds because of the costs associated with current employees who were in the bill at the time.

Before the plan can be implemented, Rougeou said two key determinations must be made: one involving the Social Security Administration and the other the Internal Revenue Service. LASERS is getting advice from tax lawyer Bob Tarcza, of New Orleans.

An inquiry must be made to the SSA to determine whether the plan would provide an equivalent benefit to Social Security. Otherwise, affected state employees would have to be enrolled in Social Security with required employee and employer contributions.

According to the state treasurer’s office, which is Louisiana’s Social Security administrator, a plan generally meets the requirement if the benefit under the system is a least 1.5 percent of average compensation during an employee’s last three years of employment, multiplied by the employee’s number of years at work.

Also, there must be an IRS ruling on whether cash balance is a “qualified plan” which would be tax-exempt.

Plan disqualification can result in serious tax consequences to the plan and its members, including: members’ vested contributions or vested accrued benefits may be immediately taxable; and distributions from the plan would not be eligible for rollover into another tax-qualified vehicle.

“To get those determinations, it can be very expensive. Is that something the system is paying for?” Rougeou asked. The issues are complex and answers from the federal entities take time, she said.

House Retirement Committee Chairman Kevin Pearson said the cash balance plan will meet the Social Security standards.

“As a long-term state employee, it is going to give you a benefit certainly better than Social Security and probably considerably better than Social Security and an income you cannot outlive,” said Pearson, R-Slidell.

For a state employee who works 10 years, then moves into the private sector, Pearson said, “it’s something you can take and roll over into an IRA and start a career in another field.” At that point, they would be in Social Security, he said.

If investment returns keep up with the projections, there would be a sufficient balance in the reserve account to make it comparable to the defined benefit plan, which meets the Social Security test, LASERS actuary Shelly Johnson said.

For members who work less than 10 years, the balance in the account is likely going to be less than what they receive in defined benefit, she said. “It’s going to depend clearly on the investment return in those 10 years. There could be a smaller benefit because of the (market) volatility,” she said.

During the legislative session that ended June 4, Pearson and Senate Retirement Committee Chairman Elbert Guillory, D-Opelousas, said they would send a joint letter to the IRS requesting a determination.

Guillory said he and Pearson were advised that either the legislative auditor or the state treasurer or both should be the ones writing the IRS letter. He said a meeting has been scheduled for this week to decide how to proceed.

“The fiscal agents, the state fiscal agents are the appropriate people. They would have standing,” Guillory said.

Treasurer’s office spokesman Jason Redmond said the office is willing to work with anyone from the administration, the Legislature or the retirement system to help seek clarification on any issue within its role as Louisiana’s Social Security administrator.

“If the leadership of the Legislature asks me to do that, I would certainly help them with it,” Legislative Auditor Daryl Purpera said. “Let’s say nobody does it, it might come back to me from the perspective of doing the audit whether the agency followed material law for potential liability.”