By: Y. Davis of Dallas H.B. No. 3988

A BILL TO BE ENTITLED

AN ACT

relating to certain deferred retirement option plan benefits under public retirement systems for police and firefighters in certain municipalities.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Sections 6.14(e), (e-2), (e-3), (e-4), and (g), Article 6243a-1, Revised Statutes, are amended to read as follows:

(e) Except as provided by Subsection [Subsections] (e-1), (e-4), or [and] (l) of this section, the balance in the DROP account of a member who terminated from active service on or before September 1, 2017, or who terminates from active service shall be distributed to the member in the form of an annuity, payable either monthly or annually at the election of the member, by annuitizing the amount credited to the DROP account over the life expectancy of the member as of the date of the annuitization using mortality tables recommended by the pension system's qualified actuary. The annuity shall be distributed beginning as promptly as administratively feasible after the later of, as applicable:

(1) the date the member retires and is granted a retirement pension; or

(2) September 1, 2017.

(e-2) The annuitization of a DROP account under Subsection (e) of this section must reflect the accrual of interest on the amount in the DROP account [as of September 1, 2017, over the annuitization period applied to the account under this section]. The interest rate applied under this subsection must be a rate as reasonably equivalent as practicable to the interest rate on a note issued by the United States Department of the Treasury or other federal treasury note with a duration that is reasonably comparable to the annuitization period applied to the account, as determined by the board. [The portion of an annuity attributable to amounts credited to a member's DROP account on or after September 1, 2017, may not reflect the accrual of this interest on annuitization.]

(e-3) The board may by rule allow any person receiving an annuity from the annuitization of a DROP account under this section to[:

[(1)] assign the distribution from the person's [annuitized] DROP account to a third party provided the pension system receives a favorable private letter ruling from the Internal Revenue Service ruling that such an assignment will not negatively impact the pension system's qualified plan status[; and

[(2) subject to Subsection (e-4) of this section, in the event of a financial hardship that was not reasonably foreseeable obtain a lump-sum distribution from the person's DROP account resulting in a corresponding reduction in the total number or in the amount of annuity payments].

(e-4) A DROP participant may at any time, including on the date the participant retires and is granted a retirement pension, make an election in the form and manner prescribed by the [The] board to receive the balance of the person's DROP account, including interest earned on the balance, in a full lump-sum distribution made at a time selected by the participant. The board shall adopt rules necessary to implement this subsection [Subsection (e-3)(2) of this section, including rules regarding what constitutes a financial hardship for purposes of that subdivision]. In adopting the rules, the board shall provide flexibility to persons receiving an annuity from the annuitization of a DROP account.

(g) The provisions of Sections 6.06, 6.061, 6.062, 6.063, 6.07, and 6.08 of this article pertaining to death benefits of a qualified survivor do not apply to amounts held in a member's or pensioner's DROP account. Instead, a member or pensioner who participates in DROP may designate a beneficiary to receive the annuity payments under this section over the remaining annuitization period in the event of the member's or pensioner's death, subject to [any rights provided under] Subsection (e-3) or (e-4) of this section, and in the manner allowed by Section 401(a)(9) of the code and any policy adopted by the board. A member or pensioner who is or becomes married is considered to have designated the member's or pensioner's spouse as the member's or pensioner's beneficiary, notwithstanding any prior beneficiary designation, unless the member or pensioner has made a different designation in accordance with a policy adopted by the board. If a member or pensioner does not have a spouse or the spouse predeceases the member or pensioner, the member's or pensioner's, as applicable, DROP account will be distributed to the member's or pensioner's, as applicable, designee. Notwithstanding anything in this section to the contrary, if a member or pensioner has previously designated the member's or pensioner's spouse as the beneficiary or co-beneficiary of the DROP account and the member or pensioner and spouse are subsequently divorced, the divorce automatically results in the invalidation of the designation of the spouse as a beneficiary and, if there is no additional beneficiary designated, the member's or pensioner's DROP account shall be distributed as provided by Subsection (e) of this section or, if applicable, Subsection (e-3) or (e-4) of this section. If there are beneficiaries who survive the deceased member or pensioner, the surviving beneficiaries share equally in that portion that would have otherwise been payable to the former spouse.

SECTION 2. Section 6.141(b), Article 6243a-1, Revised Statutes, is amended to read as follows:

(b) Notwithstanding Section 6.14 of this article and solely to avoid the possibility of an early distribution tax penalty under Section 72(t)(4) of the code:

(1) a pensioner subject to this section may until the pensioner attains 59-1/2 years of age:

(A) [subject to Subsection (c) of this section,] continue to participate in DROP;

(B) have the same amount of the pensioner's service retirement pension credited to the pensioner's DROP account as has been credited since the pensioner's service retirement pension was initially granted; and

(C) defer annuitization or other distribution of the pensioner's DROP account under Section 6.14 [6.14(e)] of this article; and

(2) once a pensioner subject to this section attains 59-1/2 years of age:

(A) the pensioner may not have any portion of the pensioner's service retirement pension credited to the pensioner's DROP account; and

(B) as soon as administratively feasible, the balance in the pensioner's DROP account shall be annuitized and distributed to the pensioner in accordance with Section 6.14(e) of this article, subject to Section 6.14(e-4) of this article.

SECTION 3. Sections 6.14(f-1) and 6.141(c), Article 6243a-1, Revised Statutes, are repealed.

SECTION 4. This Act takes effect September 1, 2025.