BILL ANALYSIS

C.S.H.B. 3347

By: Truitt

Pensions, Investments & Financial Services

Committee Report (Substituted)

BACKGROUND AND PURPOSE

Current law requires that a Teacher Retirement System of Texas (TRS) retirement plan operate as a qualified plan under the federal Internal Revenue Code of 1986. A qualified plan is one that meets the applicable requirements of the federal tax code enacted by the United States Congress and of Internal Revenue Service (IRS) regulations. When Congress enacts new laws and the IRS issues new regulations, state plans like TRS are required to adopt new provisions to remain qualified. Because Congress recently enacted several new tax laws affecting pension plans, updates to state laws governing TRS are necessary.

C.S.H.B. 3347 updates statutes governing the TRS retirement plan to ensure it is in compliance with federal tax code requirements for qualified plans.

RULEMAKING AUTHORITY

It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution.

ANALYSIS

C.S.H.B. 3347 amends the Government Code to include in the definition of "salary and wages" for purposes of determining member compensation subject to contributions and credit in the Teacher Retirement System of Texas (TRS) and to the extent required by applicable provisions of the federal Internal Revenue Code of 1986, differential wage payments received by an individual from an employer on or after January 1, 2009, while the individual is performing qualified military service. The bill provides that an individual receiving such wages is considered employed by that employer and the differential wage payments are considered earned compensation. The bill requires TRS to determine how contributions attributable to differential wage payments are made.

C.S.H.B. 3347 provides that, to the extent required by applicable provisions of the federal Internal Revenue Code of 1986, the designated beneficiary of a member who dies on or after January 1, 2007, while the member was performing qualified military service, is eligible to receive additional benefits to the same extent as if the member had resumed employment and been employed at the time of death.

C.S.H.B. 3347 provides that, with respect to a distribution made on or after January 1, 2002, an otherwise eligible portion of a rollover distribution that consists of after-tax employee contributions not includable in gross income is a distribution eligible for direct rollover from TRS to an eligible employee-specified retirement plan. The bill authorizes a transfer of this portion only to an individual retirement account or annuity or qualified plan described in applicable provisions of the federal Internal Revenue Code of 1986; for distributions occurring on or after January 1, 2007, to a qualified defined benefit plan; or to an annuity contract described in applicable provisions of the federal Internal Revenue Code of 1986 that agrees to separately account for amounts transferred and the earnings on those amounts, including for the portion of the distribution that is includable in gross income and the portion of the distribution that is not includable.  The bill adds to the eligible retirement plans under these direct rollover provisions, with respect to a distribution made on or after January 1, 2002, a plan that is eligible under applicable provisions of the federal Internal Revenue Code of 1986 and that is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state that agrees to separately account for amounts transferred into the plan from the retirement system; and, with respect to a distribution made on or after January 1, 2002, an annuity contract and, with respect to a distribution made on or after January 1, 2008, a Roth IRA, both as described in applicable provisions of the federal Internal Revenue Code of 1986.  The bill removes a provision stating that, in the case of an eligible rollover distribution to a surviving spouse, an eligible retirement plan under these direct rollover provisions is an individual retirement account or individual retirement annuity.

C.S.H.B. 3347 revises the definition of "distributee" for purposes of an eligible rollover distribution from TRS to clarify that the term includes a surviving former spouse, as well as a surviving spouse, who is the alternate payee under a qualified domestic relations order, as defined in applicable provisions of the federal Internal Revenue Code of 1986. The bill provides that, with respect to a distribution made on or after January 1, 2007, a distributee includes a beneficiary who is a designated beneficiary, as defined in applicable provisions of the federal Internal Revenue Code of 1986, of an employee or former employee and who is not the spouse, surviving spouse, or alternate payee of an employee or former employee. The bill provides that a direct trustee-to-trustee transfer on  behalf of a distributee beneficiary who is not a spouse is an eligible rollover distribution and authorizes a distributee beneficiary who is not a spouse to rollover the distribution only to an individual retirement account or individual retirement annuity that is established for the purpose of receiving the distribution and that is considered an inherited account or annuity to which  applicable provisions of the federal Internal Revenue Code of 1986 apply. The bill requires a trust maintained for the benefit of one or more designated beneficiaries to be treated in the same manner as a trust maintained for a designated beneficiary, to the extent provided by federal law.

EFFECTIVE DATE

September 1, 2009.

COMPARISON OF ORIGINAL AND SUBSTITUTE

C.S.H.B. 3347 differs from the original by providing that an individual receiving differential wage payments from an employer while the individual is performing qualified military service is considered employed by that employer and the differential wage payments are considered earned compensation, whereas the original requires the individual and the wage differential to be treated as such. The substitute removes a provision from the original requiring this provision regarding the treatment of an individual to be applied to all similarly situated individuals in a reasonably equivalent manner.  The substitute differs from the original by requiring TRS to determine how contributions attributable to different wage payments are made, whereas the original authorizes TRS to do so.

C.S.H.B. 3347 removes a provision from the original authorizing a transfer of an otherwise eligible portion of a rollover distribution that consists of after-tax employee contributions not includable in gross income to a qualified defined contribution plan. 

C.S.H.B. 3347 makes clarifying language changes to the original, including references to "a distributee beneficiary who is not a spouse" rather than a "nonspouse beneficiary," as in the original.

C.S.H.B. 3347 differs from the original by requiring a trust maintained for the benefit of one or more designated beneficiaries to be treated in the same manner as a trust maintained for a designated beneficiary to the extent provided by federal law, rather than to the extent provided in rules provided by the U.S. Secretary of the Treasury, as in the original.