Retirees to seek tax ruling

“In the majority of scenarios it does not appear to meet the Social Security equivalency test.” Roy mongrue, lawyer for Teachers Retirement System of Louisiana

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.

Comments

1) Comment by Scrooge - 05/12/2012

Since these cash balance plan are such a good deal, Sadow will certainly transfer his retirement savings, or is ideology a separate reality?

2) Comment by RODEO CLOWN - 05/12/2012

One can present a myriad of calculations, predicting this/predicting that, nevertheless, the last few years have proven/demonstrated/reinforced the fact that nothing and I mean NOTHING is guaranteed. To state that the plan "will be insured against loses" is a fanciful way of "BS'ing" the public thinking they want be able to read between the lines. In the age of the Maddoff's, Stanford's, etc., to employ such an approach serves in highlighting the desperation on the Jindal administrations to privatize any and all aspects of government at any/all cost. There is an old saying which the administration would be well to heed: "you can fool some of the people some of the time/some of the people part of the time--but you can't fool all those bastards all the time"(Huey P Long).

3) Comment by bettergovt - 05/12/2012

@jeffshadow The agencies I know of have more than doubled their appointed employees, sometimes quadrupled. Not all unclassified are appointees, some are university employees and others are agencies that dont report to the governor. If you take out the reductions to non appointed unclassified, you will see that the number of unclassified appointed by the governor has increased tremendously. By the way how much of your political science education covered finance or pension calculations. It sounds like you need to retake some classes.

4) Comment by jeffsadow - 05/12/2012

@lawyerdan65, actually, if you assume a 4 percent rate of return for the average salary across a 40 year work period that would match the 8 percent LA employees put in to equal the average saved IRA funds for people who have worked continuously up to 55 ($233,800; that is, we assume they also put in 8 percent and adjust for a 4 percent return over that period, or about $37,000 a year), retiring at 66 next year the 401(k) recipient is about $35 a month ahead of what the SS recipient would get, assuming a 30-year monthly annuity at that 4 percent. Of course, state employees have a much sweeter deal, being able to retire at 55 and, at the $37,000 level, a higher monthly payout, while having contributed less. So SS is hardly a "safety net," and state or any employees can simulate its effect by maximizing their contributions voluntarily, which presently can be up to $35,000 a year for anybody making less than $105,000 annually (more on a one-time basis is you are over 50). @bettergovt, we know state FTE employment is down about 15,000 over the Jindal era, with about 17,000 coming from the classified ranks while the unclassifieds have gone up about 2,000. But there's no evidence that the "appointees," of whom there are roughly 5,000 across all three branches of government of the 33,000 unclassified, "have increased tremendously." In fact (unfortunately, DSCS does not make public these figures) that number probably has gone down a little given budgetary pressures. The main growth of unclassified employment has come in health and hospitals, although that may be changing in the near future.

5) Comment by bettergovt - 05/12/2012

The stop loss is funded by taking 1% and depositing it in a separate fund that is used to cover any losses. It is a combination of 1/3 employer contribution and 2/3 employee contribution. And yes state employees are paid by the taxpayers, regular classified state employees whose ranks have decreased tremendously over the last 5 years along with appointees whose ranks have increased tremendously over the last 5 years.

6) Comment by LawyerDan65 - 05/12/2012

But private sector people have the safety net of Social Security, current State employees do not and under the new plan they will not. Though the administratino keeps calling it a 401k it really is not. If it is not deemed SS exempt, then the new plan wqill actually cost the State twice what the current system does.

7) Comment by tball - 05/12/2012

I would bet the majority of people that have 401K plans want to be in the state run one, where you don't have investment losses. How is this guaranteed? By taxpayers dollars!!!!!!!!!!