Honorable Robert Bunda

President of the Senate

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committee on Labor, to which was referred S.B. No. 2878 entitled:

begs leave to report as follows:

The purpose of this measure is to apply the federal tax limit on compensation that may be taken into consideration in determining pension benefits under the Employees' Retirement System's (ERS) tax-qualified retirement plan.

This measure also:

Testimony in support of this measure was submitted by the Department of Budget and Finance and the Employees' Retirement System.

Your Committee finds that the ERS is intended to be a tax-qualified retirement plan under section 401(a) of the Internal Revenue Code. Your Committee further finds that pursuant to section 401(a)(17) of the IRC of 1986, as amended, the annual compensation that may be taken into account in determining benefit accruals under the ERS is limited. However, under Hawaii law, no provision is in place to address such salary limits with respect to the ERS on July 1, 1996. Additionally, Article XVI, Section 2, of the Constitution of the State of Hawaii prohibits either the diminishment or impairment of an ERS member's accrued benefit. Therefore, your Committee determines that in order to accomplish retroactive compliance with section 401(a)(17) of the IRC of 1986, as amended, accrued benefits must be provided under a non-tax-qualified plan for the affected members, with the necessary funds being appropriated to such non-tax-qualified plan for the payment of the accrued benefits.

Accordingly, your Committee has amended the measure by making technical, nonsubstantive amendments for purposes of clarity and style.

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. 2878, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 2878, S.D. 1, and be referred to the Committee on Ways and Means.