Retirees to seek tax ruling

The Teachers Retirement System of Louisiana voted Tuesday to file an analysis with the IRS that shows the Jindal administration’s 401(k)-type pension plan for future state employee hires could add to state taxpayer and employee costs.

The information will be submitted by the system’s tax attorney as a supplement to the Jindal administration’s recent “private letter ruling request” to the IRS in regard to whether the so-called “cash balance” pension plan meets Social Security equivalent status, TRSL executive counsel Roy Mongrue said.

In addition, TRSL will seek a ruling on “tax qualified status” of the plan.

The Division of Administration’s chief of staff, Steven Procopio, was the lone dissenter in the board vote.

Procopio said that the administration is “confident that the cash balance plan meets all the required standards.”

Adverse decisions could subject the employees’ vested contributions and retirement system trust earnings to taxes. In addition, some employees would have to be enrolled in Social Security if the state benefit is not equivalent and the employee and state pay those extra costs.

The new cash balance plan is scheduled to go into effect July 1 for new state employee hires, including those in higher education. Teacher members of TRSL would not be affected.

The Louisiana State Employees Retirement System recently voted to ask the Legislature to delay implementation until IRS and Social Security status of the plan is determined.

Approval of the plan is under legal challenge. The Retired State Employees Association of Louisiana filed a lawsuit contending the change did not get the constitutionally required vote for it to pass the 2012 Legislature.

Nineteenth Judicial District Court State Judge William Morvant, of Baton Rouge, refused Monday to dismiss the lawsuit. He set a Jan. 24 trial date.

TRSL tax attorney Terry A.M. Mumford previously had provided the board with an analysis of some of the tax issues involved with the “cash balance” plan.

At its Tuesday meeting, pension system actuary Shelley Johnson presented various cash balance scenarios using different salaries and years of employment.

“In the majority of the scenarios it does not appear to meet the Social Security equivalency test,” Mongrue said.

The cash balance plan won approval during the 2012 legislative session. The new pension plan would go into effect for new state employee and higher education hires beginning July 1.

It would operate similar to a private-sector 401(k)-plan, except funds would be protected from investment losses.

An employee would contribute 8 percent of pay and the employer — the state — 4 percent with all but 1 percent of the investment earnings going toward an individual’s pension. The 1 percent would act as a reserve to guard against investment losses.

Gov. Bobby Jindal said the change is necessary to provide a sustainable pension plan that reduces state long-term obligations. He noted the growing unfunded liability of TRSL and LASERS.

LASERS said the plan would not provide retirement security for employees who do not have the “safety net” of Social Security.

Mongrue said governor’s DOA asked that the cash balance plan be treated as a defined contribution plan even though it’s a defined benefit. He said the approach relies on a prior IRS ruling in a single instance.

“That may or may not fly. If it doesn’t, it’s going to have to be judged by a defined benefit program,” he said. “It’s two different tests for equivalency.”

Procopio said the plan provides the best features of defined benefit and defined contribution plans.

“For the limited purpose of evaluating whether the cash balance plan meets IRS standards to retain our Social Security tax exemption, the criteria states that as long as plans contribute 7.5 percent of an employee’s salary toward investments to be used for retirement, the plan will not have to also include Social Security,” Procopio wrote in a letter to TRSL Executive Director Maureen Westgard.

Since the plan contributes 12 percent of salary, Procopio said it “easily” meets the standard.