By Marsha Shuler
Capitol news bureau
June 24, 2012
Gov. Bobby Jindal on Friday ordered his top budget adviser to seek an Internal Revenue Service decision on any potential tax consequences of Louisiana’s new 401(k)-type pension plan for future state employee hires.
Earlier in the day, the Louisiana State Employees Retirement System board voted to do the same thing, with members wanting to know whether the so-called “cash balance” system would be a “qualified plan” under IRS regulations and enjoy tax-exempt status.
Otherwise, employees’ vested contributions and system trust earnings would be subject to taxation, LASERS Executive Director Cindy Rougeou told the board at its monthly meeting.
“There are tremendous ramifications for our members and the system,” she said.
Jindal issued an executive order authorizing Commissioner of Administration Paul Rainwater to apply to the IRS for one or more “determination letters” on the tax-qualified status of the cash-balance plan.
Under the order, Rainwater also is supposed to seek a ruling on whether the new pension plan would meet the test of offering benefits that are equivalent to Social Security.
The LASERS board voted earlier Friday to ask the administration to expedite a request to Social Security because such decisions take on average six months. The plan is supposed to go into effect July 1, 2013.
A LASERS tax lawyer advised, that if it’s not equivalent, some employees would have to be enrolled in Social Security — adding state costs, Rougeou said. State employees are not in Social Security today.
“It is the responsibility of the employer — the state of Louisiana — to provide the equivalent benefit. They are the ones going to be on the hook for paying for Social Security,” Rougeou said.
The LASERS board briefly went into secret session to discuss potential litigation related to the cash balance law. It took no action upon returning to the open meeting.
If problems arise on either front, the Legislature would have “lots of time” to fix them in the 2013 regular session, said Senate Retirement Committee Chairman Elbert Guillory, D-Opelousas, a LASERS board member.
Cash balance would be the plan for new nonhazardous-duty state employees as well as those working in higher education. LASERS and the Teachers Retirement System of Louisiana are affected the most.
The 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 investment earnings attributed to the account. The 1 percent would be set aside in a reserve fund as a hedge against investment losses. The reserve fund is not created in the new statute.
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.
Jindal argued that the plan would help stem increasing state retirement system financial liabilities while providing a sustainable pension benefit for employees.
According to Jindal’s executive order, the state of Louisiana as pension plan sponsor is “the appropriate party” to file applications with the IRS. It notes that LASERS is not the only one of the state’s four retirement systems for which a determination must be made.
The order states that it is better to coordinate applications “in a manner that avoids multiple, duplicative and conflicting submissions.”
After Jindal issued the order, Rougeou said it is uncertain whether it will be necessary for LASERS to proceed with the IRS determination letter.
“We look forward to discussing coordination efforts with the administration,” Rougeou said.