Tax Glitch Affects Transfer to Tier II Hybrid Plan

  • jrojas
  • 27 Mar 2012
  •   Comments Off on Tax Glitch Affects Transfer to Tier II Hybrid Plan
> NEW: Expanded Q & A on Hybrid Plan (4/4/12)
> NEW: Recorded ARP to SERS Hybrid Webinar (4/13/12)
ARP to SERS Hybrid Transfer Plan
(Comptroller’s Website)
Includes rate chart for those using TIAA encumbered funds to purchase prior service.
> Hybrid Plan Summary Description (Comptroller’s Website)
> SEBAC ARP Grievance “SAG” Award (Comptroller’s Website)
Includes information and estimators for pursuing this option should the IRS grant approval.

Updated 4/5/12: A new and expanded Q & A on the Hybrid Plan has been added (see top link) The most significant change is that we have dealt successfully with a tax glitch that concerned the Tier II Hybrid which threatened to derail the entire process. The IRS has changed its view on one aspect that affects the Tier II Hybrid Plan.  The result is that those switching to the Tier II Hybrid will contribute 5% of salary to their retirement plan with 3% going to the Hybrid and 2% going to their ARP account. All ARP participants who were hired before July 1, 1997 (Tier II) and who are considering switching to the Tier II Hybrid Plan, should pay very careful attention to this issue, which is reflected in Question 2.

SERS Hybrid Transfer Delay
Updated 3/27/12

The State Comptroller’s Office is NOT going to have the past service credit estimators ready by their original April 1 deadline. These estimators will allow those who are considering the Hybrid Plan to determine how much it will cost to purchase past service credit and how much past service credit their ARP and other qualifying retirement funds will buy.

The Comptroller’s office has told SEBAC that while they have the actuarial charts in hand, the complexity of the actuarial issues involved in creating the estimators and testing them means that they will not be available for “about two weeks.”  We are obviously disappointed by this news and will let you know the new date when we have one.

Status Report on Implementation of Hybrid Plan for Employees with Pre 7/1/11 Hire Dates
Updated 2/22/2012

1)      The “window” for choosing to transfer with or without the purchase of past service will be open no later than April 1, 2012, and will close as previously announced – 90 days following the IRS ruling on the “SAG” award.  Those participants choosing to purchase past service credit in the Hybrid Plan will be required to do so at the time of transfer.

2)       Funds available to use for purchase of service will be those In the participant’s ARP account and other state funds.  All unencumbered ARP funds may be used to purchase past service in accordance with the previously agreed actuarial charts.

3)      Encumbered funds subject to yearly release due to TIAA-CREF rules will be available as well, but will require agreement to the provisions of the Individual Encumbered Funds Form. That form guarantees that encumbered funds are available to the SERS system upon their release, and uses the discounted present value of those funds for the purpose of purchase of past service in the Hybrid Plan. [The form is still being finalized]

4)      The window for transfer and possible purchase of past service credit for participants in the ARP who are not participants in the Social Security  system will be open on April 1 along with other ARP participants.  The Comptroller has determined that there is no possibility that retroactive coverage in the Social Security system (and its concomitant retroactive tax liability) will be required.  So non-Social security covered ARP participants will be eligible to purchase service with everyone else on April 1st.  Those ARP participants who join the ARP will become social security eligible on a prospective basis only.

Background Information:

SEBAC 2011 created a new Hybrid retirement plan option for professional employees of Higher Education institutions.   The plan was created by Paragraph II.C. 7 of the Agreement, which reads:

Hybrid Defined Benefit/Defined Contribution Plan for Employees in Higher Education: Individuals hired on or after July 1, 2011 otherwise eligible for the Alternate Retirement Plan (hereinafter referred to as “ARP”) shall be eligible to be members of the new Hybrid Plan in addition to their existing choices. Individuals who are currently members of the ARP shall be eligible to join the Hybrid Plan on a one time option at the full actuarial cost. The Hybrid plan shall have defined benefits identical to Tier II/IIA and Tier III for individuals hired on or after July 1, 2011, but shall require employee contributions three percent (3%) higher than the contribution required from the Applicable Tier ll/IIA/lll Plan. An employee shall have the option, upon leaving state service, of accepting the defined benefit amount, or electing to receive a return of his/her contributions to the Hybrid Plan, plus a five percent (5%) employer match, plus four percent (4%) interest (hereinafter referred to as the “cash out option” . In the event the employee elects the cash out option, he/she shall permanently waive any entitlement they may have to health insurance as a retired state employee unless they convert the cash out option to a periodic payment as would be required under the current ARP plan.

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