The Jindal administration’s new 401(k)-type pension plan for future state employees is not uniformly equivalent to Social Security and could expose the state to additional costs, a Louisiana State Employees Retirement System financial adviser said Friday.
An analysis by Shelley Johnson, an actuary of Louisiana State Employees Retirement System, called LASERS, shows that if an employee leaves state service after 10 years or less does not appear to meet the Social Security equivalency test for defined benefit retirement plans. Those plans guarantee lifetime benefits at a certain level based on years of employment and salary.
Current LASERS members are exempt from participating in Social Security because the state provides a retirement benefit that is at least equivalent to that of Social Security.
If the new “cash balance” plan is determined not to be equivalent, then the state would be required to immediately enroll into Social Security those employees who are not receiving the required benefit, LASERS Executive Director Cindy Rougeou said. The state would have to pay into Social Security 6.2 percent of payroll for those members as well as any contribution required by the “cash balance” plan, she said.
The cash balance plan approved by the Legislature earlier this year is scheduled to go into effect July 1. Supporters argued that the new “cash balance” plan would save state taxpayers money.
The Retired State Employees Association of Louisiana has filed suit alleging that the new pension plan did not get the required constitutional vote to gain passage.
The LASERS board on Friday authorized its staff to provide the information to the Internal Revenue Service as a supplement to a letter submitted by the Jindal administration seeking a determination and arguing that the cash balance plan meets the test.
The Teachers Retirement System of Louisiana earlier authorized its staff to provide similar supplemental information affecting its future higher education system members who would be required to be a part of the cash balance pension plan.
The cash balance plan would operate similar to a private sector 401(k) 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 attributed to the account. The 1 percent would be set aside in a reserve fund as a hedge against investment losses.
The governor’s Division of Administration is seeking an expedited ruling. The Division also asked the IRS to use a defined contribution test in making its determination.
LASERS tax advisers have said the traditional defined benefits test should be used because the cash balance plan would otherwise be eligible for the system’s defined benefit plan. Under the cash balance plan, members forfeit all but their employee contributions if they withdraw with less than five years of employment.
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