HBA-MPM H.B. 2031 77(R) BILL ANALYSIS Office of House Bill AnalysisH.B. 2031 By: Isett Pensions & Investments 3/9/2001 Introduced BACKGROUND AND PURPOSE Numerous companies offer employees a defined contribution plan rather than a defined benefit plan. In a defined contribution plan, the company typically contributes a given percentage of an employee's salary, often at an amount that matches the percentage withheld from the employee's check. In a defined benefit plan, the employee has no ability to self-direct those retirement dollars into stock market-based investments. The employee is required to stay with the employer until retirement to benefit from any of the contributed money by the employer. Many employees, particularly those who are younger or are working short-term, prefer a defined contribution plan because it allows them to take advantage of market rates of return and allows them to take part or all of the employer-contributed money when they change employers. Currently, the State of Texas does not offer its employees the option of choosing a defined contribution plan. House Bill 2031 requires the Employees Retirement System of Texas to establish and administer an optional defined contribution plan for eligible state employees. RULEMAKING AUTHORITY It is the opinion of the Office of House Bill Analysis that rulemaking authority is expressly delegated to the board of trustees of the Employees Retirement System of Texas in SECTION 1 (Sections 820.002 and 820.012, Government Code) of this bill. ANALYSIS House Bill 2031 amends the Government Code to require the Employees Retirement System of Texas (ERS) to establish and administer an optional defined contribution plan (plan) that uses a qualified plan. Under the plan, eligible persons are authorized to elect to pay contributions to the plan for the purchase of investment products selected by the participant from among those authorized to be provided under a qualified plan and that are offered by companies authorized to provide the products in Texas. The bill requires the board to adopt rules for the selection of companies to provide investment products that provide a selection of vendors of a variety of investment products authorized for a qualified plan. The bill requires ERS to select vendors every two years. The bill provides that a provider of investment products is exempt from the payment of franchise or premium taxes issued under the plan (Secs. 820.001 and 820.002). The bill sets forth eligibility requirements for persons to participate in the plan and authorizes an eligible person to elect to participate in the plan no later than the 90th day after the date the person begins service in a position included in ERS coverage. The bill specifies that an election to participate in the plan is irrevocable, unless the person retires or terminates employment and assumes or resumes, after a month following the month of retirement or termination of employment, a position included in the coverage of ERS. A person who resumes or assumes a position becomes an active member unless the person opts to resume participation in the plan. The bill specifies that a plan participant who changes employment to another position included in ERS coverage continues to participate in the plan (Secs. 820.003, 820.004, and 820.007). The bill authorizes a person participating in the plan to withdraw benefits attributable to contributions as provided by law. The bill provides that benefits in the plan that are attributable to a member's contribution vest in a participant immediately and sets forth a schedule of the vesting of benefits. The bill specifies that a person terminates participation without losing benefits by death, retirement, or termination of employment. The bill provides the benefits of the plan become available under the terms of the plan, but not before the member terminates participation under the provisions specified above or attains 70-1/2 years of age. Benefits in the plan that are not vested in a participant who terminates participation shall be used to offset state contributions. The bill prohibits a member from establishing credit in ERS for service performed when the person was participating in the plan (Secs. 820.005, 820.006, and 820.008). H.B. 2031 authorizes a plan participant to authorize the payment of investment advisory fees from the amount in the participant's custodial account or product and establishes conditions under which the payments cane be made. The bill requires a participant to make contributions to the plan at the same rate as a member of ERS is required to make for current service, and requires the state to make contributions at the same rate as it makes for contributing members of ERS. The bill requires a plan participant and the participant's employer to execute an agreement regarding the contribution amount (Secs. 820.009 and 820.010). The bill authorizes ERS to establish a governmental excess benefit arrangement as provided by the Internal Revenue Code of 1986 and regulations adopted under the IRS provisions for the purpose of providing plan participants any portion of a participant's benefits that would otherwise be payable under the terms of the plan, except for limitations. The bill authorizes the board to adopt any rules necessary to administer the plan. ERS is required to offer participation in the plan beginning September 1, 2002 (Secs. 820.011, 820.012, and SECTION 4). EFFECTIVE DATE On passage, or if the Act does not receive the necessary vote, the Act takes effect September 1, 2001.