Pension Protection Act of 2006

1. Pension Protection Act of 2006 Board of Retirement October 18, 2006 Presented by: Roberto L. Peña Retirement Administrator And Becky Van Wyk Assistant Retirement Administrator

2. Introduction

3. Introduction • One of the most significant pieces of pension legislation in 30 years • Affects both private sector and government sponsored plans • Originally intended to bail out the airlines • Makes the provisions of EGTRRA permanent • Clarifies rules related to service credit purchases and minimum distributions • Expands some benefits to public safety employees, teachers, and school employees

4. Private Sector Plans Changes • Requires most private-sector, single-employer pension plans to be 100% funded over a 7-year period • Requires accelerated contributions for “at-risk” plans • Requires immediate funding of benefit increases for plans that are less than 80% funded • Prevents increased benefits for plans that less than 60% funded

5. Government Plans Changes • Makes permanent EGTRRA Benefit Provisions • In-service transfer to purchase “air time” and upgraded retirement service credit • Clarifies minimum distribution requirements • Tax exempt payment of insurance premiums • Allows transfer of Excess Pension Assets to Pay Future Retiree Health Care Benefits

6. Caveat • All information presented today is based on preliminary review and analysis of the law. • It is not known when the Internal Revenue Service will issue regulations or guidance on this law. • FCERA will be working closely with legal counsel and other public retirement systems to develop policies and procedures to implement the Pension Protection Act of 2006.

7. Economic Growth and Tax Relief Reconciliation Act

8. EGTRRA • Economic Growth and Tax Relief Reconciliation Act of 2001 • Expanded pension portability through rollovers and transfers between 457, 403(b), and qualified governmental defined benefit plans • Set to expire on 12/31/2010 • Made permanent all provisions

9. In-Service Transfers

10. In-service transfers • In-service transfer – transfer from an eligible deferred compensation fund to FCERA to purchase service credit • Upgraded service – conversion of general service time to safety service, for example with Special Guard • Purchase of air time

11. What Needs To Be Done • FCERA is ready to accept the in-service transfer of funds to upgrade service credit • The County’s deferred compensation plan must modify its plan document to allow the transfers to occur for upgraded service • County has not adopted required government code sections to allow the purchase of air time

12. Minimum Distributions

13. Minimum Distribution • Established by IRC 401(a)(9) • Requires members to begin drawing a retirement by 4/1 of the year following retirement or by age 70 ½, whichever is later • Grandfathered the provisions for governmental plans to prevent the reduction of accrued benefits

14. What We Need To Do • Identify impacted members • Establish educational materials • Determine affect of broken reciprocal agreement on retirement benefits • Retire impacted members or refund contributions to beneficiaries

15. Tax Free Payment of Insurance Premiums

16. Tax Free Payment of Insurance Premiums • Available to retired public safety officers • Maximum of $3000 per year • Used to pay insurance premiums for medical and long term care • Effective for distributions after 1/1/07 • Administrative cost recovery

17. Definition of Public Safety Officers • Section 1204 (9)(A) of the Omnibus Crime Control and Safe Streets Act of 1968 (42 U.S.C. 3796b(9)(A) • Specific Classifications within FCERA • Beneficiaries

18. Law Enforcement Officer • 42 USC 3796b(6) • Individual involved in • Crime and juvenile delinquency control or reduction • Enforcement of the criminal laws • May include police, corrections, probation, parole, and judicial officers

19. 42 USC 3796b(9)(A) • “Public safety officer” • Individual serving a public agency in an official capacity • As a law enforcement officer, firefighter, chaplain, member of a rescue squad or ambulance crew

20. Possible FCERA Job Classifications • Deputy Sheriffs (all classifications) • Correctional Officers (all classifications) • Criminologists (all classifications) • Firefighters • Chief of Investigations (all classifications) • District Attorney Investigators (all classifications) • Sherriff (all classifications) • Juvenile Correctional Officers (all classifications) • Probation Officers (all classifications) • Court Commissioners • District Attorneys, Defense Attorneys, Defense Investigators, and Public Defenders (all classifications)

21. Beneficiaries • Tax free payment extends to spouse and minor children • Tax free status may not extend to domestic partners • Tax free status does not extend to ex-spouses or other beneficiaries

22. Requirements • Premiums paid directly to the insurance provider by FCERA • Election by the retiree • Disabled or service retirement beyond “normal retirement age” • Must be coordinated with any other retirement plan offered by the employer

23. What We Need to Do • Define “normal retirement age” • Identify eligible benefit recipients • Determine Administrative Cost Recovery amount, if desired • Establish policies and procedures program including the addition of insurance providers • Develop and circulate election forms • Establish payment process with bank and County Personnel or other insurance providers • Establish a monitoring process

24. Excess Pension Assets

25. Transfer of Excess Pension Assets • Requires the establishment of a 401(h) account • To fund retiree health benefits • Qualified future transfers • Collectively bargained transfers

26. Excess Pension Assets • Not the same as undistributed earnings • Defined as: (A) the lesser of the fair market value of the plan’s assets (reduced by the prefunding balance and funding standard carryover balance determined under section 430(A) or the value of plan assets as determined under section 430(g)(3) after reduction under section 430(f), over (B) 120% of the sum of the funding shortfall and the target normal cost determined under section 430 for such plan year

27. Qualified Future Transfer • Limited to the amount expected to be paid out for the year of the transfer and up to 9 additional years • Employer must maintain the funded status at the minimum level required for the transfers • Employer costs under the health care plan may not be reduced over the transfer period and for four years thereafter • Assets exceeding the greater of the accrued (actuarial) liability (including normal cost) or 120% of the Current Liability (accrued to date)

28. Collectively Bargained Transfers • Governed by a complex set of laws • Assets exceeding the greater of the accrued (actuarial) liability (including normal cost) or 120% of the Current Liability PLUS the amounts expected to be paid out over multiple consecutive years • Transfer is limited to collectively bargained health liabilities

29. Wrap Up • In-service transfers – FCERA does not need to do anything. Consider notifying Deferred Compensation Oversight Committee of modification needed to accommodate requests • Minimum distribution requirements – identify population and process retirements or refunds • Public Service Medical Premiums – FCERA has lots of work to do • Excess pension transfers – Consider establishing a 401(h) account as the future maximum transferable is determined from the date of inception of the plan

30. Wrap Up (continued) • Tax free medical premiums • Define eligible classes narrowly or broadly • Modify state law or regulations • Policy adopted only by the Board of Retirement or regulation adopted by the Board of Supervisors • Create a due process procedure to add new providers • Definition of “normal retirement age” would impact several areas of benefits

31. Questions?