Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committee on Labor, to which was referred S.B. No. 687 entitled:

begs leave to report as follows:

The purpose of this measure is to amend section 78-23, Hawaii Revised Statutes, to authorize the State to implement an Internal Revenue Service (IRS) approved special pay retirement plan for state and county employees separating from service.

A Special Pay Plan is a qualified retirement plan under section 401(a) of the Internal Revenue Code (IRC), which allows employees separating from service to avoid all taxes on special pay (usually vacation pay) at the time of termination and the employer (i.e., the State or county) to permanently avoid paying social security and Medicare taxes on qualified special pay. The result is a savings of 7.65 per cent to the State and 7.65 per cent to the employee.

AIG/VALIC testified in support of this measure. The Hawaii Government Employees Association, AFSCME Local 152, AFL-CIO testified in support of the intent of this measure. The Department of Human Resources Development provided comments.

Your Committee finds that matters affecting employee pay are subject to collective bargaining negotiations pursuant to Chapter 89, Hawaii Revised Statutes. Accordingly, input from the employee unions should be considered with regard to plan implementation and selection of eligible classes of employees.

Your Committee determines that section 401(a) of the IRC mandates that all eligible employees of the selected class participate in the plan. However, it is not a mandatory requirement that every employee participates in the program as the employer, (State or county) may exclude certain classes of employees. This enabling legislation does not compromise the choice of the employee. Participating employees are eligible to withdraw their funds immediately, keep the money in the plan or roll their funds into other approved retirement plans.

Your Committee finds that cities, states, counties, school districts and other governmental entities are taking advantage of this IRS special pay plan across the country. However, your Committee is concerned that employees under the age of 55 who wish to immediately receive their special pay would be subject to a 10 per cent IRS early withdrawal penalty. Your Committee believes this can be addressed by allowing the State or county to pay employees under age 55 who elect to immediately receive their special pay within 60 days of separation of service, an additional 2.35 per cent in special pay. Combined with the 7.65 per cent savings the employee receives on FICA/Medicare taxes the employer will make the employee "whole" and the State would still enjoy a 5.3 per cent savings in FICA/Medicare taxes that are permanently saved.

Accordingly, your Committee has amended the measure by adding new language to allow employees under the age of 55 who elect early withdrawal from the special pay plan within 60 days of the effective date of separation from service to be reimbursed by the employer the difference between FICA/Medicare tax savings and any early withdrawal penalty imposed by the IRS.

As affirmed by the record of votes of the members of your Committee on Labor that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 687, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 687, S.D. 1, and be placed on the calendar for Third Reading.