Honorable Robert Bunda

President of the Senate

Twenty-Third State Legislature

Regular Session of 2006

State of Hawaii

Sir:

Your Committee on Labor, to which was referred S.B. No. 2274 entitled:

begs leave to report as follows:

The purpose of this measure is to exclude from membership in the hybrid plan, members of the employees' retirement system (ERS) who received in-service refunds of pension contributions made under section 414(h)(2) of the Internal Revenue Code of 1986, as amended.

This measure also repeals the provision allowing members a one-time withdrawal of the member's contributions to the ERS in the event of economic hardship.

Testimony in support of this measure was submitted by the ERS Board of Trustees and the Hawaii State Teachers Association.

Your Committee finds that the tax-qualified retirement plan status of the ERS may be in jeopardy due to certain provisions of the law regarding the ERS. Section 414(h)(2) of the Internal Revenue Code of 1986, as amended, provides for favorable tax treatment for employee contributions "picked up" by the employer for the employee to a tax qualified retirement plan established by a State or county. The tax-qualified status of the ERS is currently compromised by allowing members to receive a refund of contributions made under section 414(h)(2) while the member is employed by the State or county or if the member received a refund while the member was employed by the State or county and the member is subsequently allowed to have additional contributions made on the member's behalf under section 414(h)(2).

Your Committee further finds that, under the current law, a member is allowed to make a one-time withdrawal of accumulated contributions to the ERS in the event of economic hardship while still employed by the State or county. However, testimony given by the ERS has indicated that this provision also jeopardizes the ERS's tax-qualified status.

Your Committee determines that in order to maintain the ERS' tax-qualified retirement plan status, the law must be amended to bring the ERS in compliance with the Internal Revenue Code. Although this measure will prevent certain members of the ERS from participating in the new H class of service, the prohibition is limited to those members who had previously made an election to change their membership status and receive their contributions from the ERS. This is a limited group of members who at one time were offered an election, which is now irrevocable. Your Committee believes in the importance of making necessary changes to the law for the preservation of the tax-qualified retirement plan status with the Internal Revenue Service as the ERS continues to move forward, improve, and evolve, including through the establishment of the new H class of service.

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. 2274 and recommends that it pass Second Reading and be referred to the Committee on Ways and Means.