HBA-SEB S.B. 1179 76(R) BILL ANALYSIS Office of House Bill AnalysisS.B. 1179 By: Wentworth Pensions and Investments 5/21/1999 Engrossed BACKGROUND AND PURPOSE Currently, the Employees Retirement System of Texas (ERS) does not offer an optional defined contribution plan to its members. S.B. 1179 requires ERS to establish and administer an optional defined contribution plan under which persons eligible for membership in ERS may elect to pay contributions to the optional defined contribution plan for the purchase of investment products. This bill sets forth eligibility requirements for participation in the plan as well as rates of contribution for a plan participant and for the state. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the Employees Retirement System of Texas in SECTION 1 (Sections 820.002 and 820.013, Government Code) of this bill. SECTION BY SECTION ANALYSIS SECTION 1. Amends Subtitle B, Title 8, Government Code, by adding Chapter 820, as follows: CHAPTER 820. OPTIONAL DEFINED CONTRIBUTION PLAN Sec. 820.001. DEFINITIONS. Defines "optional defined contribution plan" and "qualified plan." Sec. 820.002. ESTABLISHMENT OF PLAN. (a) Requires the Employees Retirement System of Texas (ERS) to establish and administer an optional defined contribution plan that is a qualified plan and under which persons eligible for membership in ERS may elect to pay contributions to the optional defined contribution plan for the purchase of investment products. Provides that the investment products are selected by the participant from among products that are authorized to be provided under a qualified plan and that are offered by companies authorized to provide the products in this state and selected by ERS. (b) Requires ERS to adopt rules for the selection of companies to provide investment products under the optional defined contribution plan. Establishes that the rules must provide for the selection of vendors of a wide variety of investment products authorized for a qualified plan. Requires ERS to select vendors every two years. (c) Exempts a provider of investment products from the payment of franchise or premium taxes on products issued under the optional defined contribution plan. Sec. 820.003. ELIGIBILITY AND ELECTION TO PARTICIPATE IN PLAN. Provides that a person who holds a position included in the coverage of ERS is eligible to participate in the optional defined contribution plan unless the person is participating in the optional retirement program. Establishes that participation in the optional defined contribution plan is an alternative to participation as a contributing member of ERS for the same period. Authorizes an eligible person to elect to participate in the plan not later than the 90th day after the date the person begins service in a position included in the coverage of ERS. Provides that the election must be on a form prescribed by and filed with ERS. Establishes that a person is considered to have elected to begin or continue active membership in ERS if the person does not make an election to participate in the optional defined contribution plan. Specifies that an election made under this section is irrevocable except as provided by Section 820.007. Sec. 820.004. EFFECT OF EMPLOYMENT CHANGES. Establishes that a person participating in the optional defined contribution plan continues to participate in the plan when the person changes employment to another position included in the coverage of ERS. Sec. 820.005. WITHDRAWAL OF RETIREMENT SYSTEM CONTRIBUTIONS. Authorizes a person who participates in the optional defined contribution plan to withdraw accumulated contributions from ERS in a specific manner. Sec. 820.006. VESTING OF BENEFITS; TERMINATION OF PARTICIPATION. Provides that benefits in the optional defined contribution plan vest in a participant on the first anniversary of the person's participation in the plan. Establishes that a person terminates participation in the optional defined contribution program, without losing any vested benefits, by death, retirement, or termination of employment in all positions included in the coverage of ERS. Establishes that the benefits of a product purchased under the optional defined contribution plan become available under the terms of the product but not before the member terminates participation or attains the age of 70-1/2 years. Sec. 820.007. RESUMPTION OF RETIREMENT SYSTEM MEMBERSHIP. Provides that a participant in the optional defined contribution plan is not eligible to begin or resume active membership in ERS unless the person terminates participation under Section 820.006 and assumes or resumes, after the month following the month in which plan participation is terminated, a position included in the coverage of ERS. Establishes that a person who assumes or resumes a position becomes an active member of ERS unless the member elects to resume participation in the optional defined contribution plan in the manner and within the time provided for beginning participation under Section 820.003. Sec. 820.008. CREDITABLE SERVICE. Prohibits a member from establishing credit in ERS for service performed during a period in which the person was participating in the optional defined contribution plan. Sec. 820.009. INVESTMENT ADVISORY FEES. (a) Authorizes a participant in the optional defined contribution plan to authorize the payment of investment advisory fees from the amount in the participant's custodial account or product under specific circumstances. Authorizes the participant's authorization if the investment advisory fees for each fiscal year do not exceed two percent of the annual value of the participant's custodial account or product as of the last day of that fiscal year, the fees comply with applicable regulations of the Securities and Exchange Commission, the investment advisor meets certain qualifications, the participant and the investment advisor enter into a contract for services that may be terminated by either party at any time and that provides for the payment of fees as provided by this section, and ERS has received an official determination from the Internal Revenue Service (IRS) that payment of investment advisory fees as prescribed by this section is not a distribution of funds that is prohibited or subject to taxation and penalty under the Internal Revenue Code of 1986, as amended. (b) Requires the executive director of ERS to request an official determination from the IRS concerning whether the payment of investment advisory fees is a distribution of funds that is prohibited or subject to taxation and penalty. Requires the executive director to file an official determination from the IRS with the secretary of state's office for publication in the Texas Register. Sec. 820.010. CONTRIBUTIONS. Requires a participant in the optional defined contribution plan to make contributions to the plan at the same rate that a member of ERS is required to make for current service. Requires the state to make contributions to the plan for each participant at the same rate as is made for contributing members of ERS. Requires a participant in the optional defined contribution plan and the participant's employer to execute an agreement under which the salary of the participant is reduced by the amount of the required contribution. Establishes that an agreement under this subsection is irrevocable until the participant terminates participation in the plan under Section 820.006. Requires participant contributions to be made in a certain manner and state contributions to be made a certain manner. Sec. 820.011. EXCESS BENEFIT ARRANGEMENT. Authorizes ERS to establish a governmental excess benefit arrangement for the purpose of providing to participants in the optional defined contribution plan any portion of a participant's benefits that would otherwise be payable under the terms of the plan, except for a certain limitation on benefits. Sec. 820.012. ENROLLMENT AND ANNUAL FEE; ACCOUNT. Requires a person who elects to participate in the optional defined contribution plan to pay an enrollment fee of $15 and an annual administrative fee of $10 accompanied by a form prescribed by and filed with ERS. Requires fees collected under this section to be deposited to the credit of the ERS optional defined contribution account in the general revenue fund. Authorizes the fees to be appropriated only to ERS for administration of this chapter. Sec. 820.013. RULES. Authorizes ERS to adopt any rules necessary to administer this chapter. SECTION 2. Amends Section 812.101(a), Government Code, to make a conforming change. SECTION 3. Amends Sections 815.403(b), (d), and (e), Government Code, as follows: (b) Requires ERS, before November 2 of each even-numbered year, to certify to the Legislative Budget Board and the budget division of the governor's office an estimate of the amount necessary to pay the state's contribution under Section 820.010(a). Makes a conforming change. (d) Requires ERS, by September 1 of each year, to certify to the state comptroller of public accounts an estimate of the amount necessary to pay the state's contribution under Section 820.010(a) for the following fiscal year. Makes a conforming change. (e) Makes conforming changes. SECTION 4. Requires ERS to offer participation in the optional defined contribution plan beginning September 1, 2000. Authorizes a contributing member of ERS who has not more than five years of service credit in ERS on September 1, 2000, to elect to participate in the optional defined contribution plan in the manner prescribed by Section 820.003 not later than November 30, 2000. Authorizes a contributing member of ERS, during the summer enrollment period in 1999 for other ERS programs, to pay a preenrollment fee of $15 and an annual administrative fee of $10 to cover the first year of participation in the optional defined contribution plan. Establishes that the enrollment fee for such a person is $30 and the first year's annual administrative fee is $20, notwithstanding Section 820.012, Government Code, as added by this Act. SECTION 5.Emergency clause. Effective date: upon passage.