IN THIS ISSUE
• IRS Guidance on Self-Correction under SECURE 2.0
• SECURE 2.0 Provides Flexibility in Overpayment Recovery
• Tri-Agencies Propose Sweeping Changes to Mental Health Parity Rules
• Hospital and Fixed Indemnity Proposed Rule
• IRS Issues Guidance on COVID-19 Testing and Preventive Care for High Deductible Health Plans
On September 26, 2023, the National Association of State Retirement Administrators (NASRA) updated its issue brief, Employee Contributions to Public Pension Plans. The brief analyzes employee contribution plan designs, policies and recent trends.
According to the brief, almost all state and local government employees are required to contribute to the cost of their retirement benefits. The report also indicates that about 25% to 30% of state and local government employees do not participate in Social Security. In many cases, those who do not participate in Social Security have a higher pension benefit and higher required contributions as compared with those who do participate in Social Security. The median contribution rates have increased to 6.3% of pay for employees who participate in Social Security and 9.0% for those employees who do not participate in Social Security.
As reported in the brief, since 2009, 40 state governments increased their employee contribution rates. The legality of increasing employee contributions varies by state. In some states, courts have ruled that legislative efforts to increase employee contributions are a violation of the state constitution or contractual rights. However, in other states, higher employee contributions have either withstood or have not been subject to legal challenges.
The brief also includes an appendix of employee contribution rates for over 100 public pension plans and identifies whether or not plan members have Social Security coverage.
The brief is available here.
On September 19, 2023, the Congressional Research Service (CRS) published its report, The Windfall Elimination Provision (WEP) in Social Security: Proposals for a New Proportional Formula. The WEP affects Social Security benefits paid to individuals that earn Social Security benefits from Social Security covered employment, but also earn pension benefits from state or local government employment not covered by Social Security. In these cases, Social Security benefits are lowered by the WEP.
Social Security benefits are designed to replace a larger percent of pre-retirement income for lower-paid workers than for higher-paid workers. This is done by: 1) calculating an employee’s average indexed monthly earnings (AIME) from employment covered by Social Security; and 2) calculating the employee’s primary insurance amount (PIA) using a formula that applies a higher replacement percentage to lower earnings than to higher earnings.
In 2023, two legislative bills were introduced that would replace the current-law WEP approach with a proportional formula for certain individuals that would become eligible for Social Security benefits in 2025 or later. The bills include: 1) the Public Servants Protection and Fairness Act of 2023 (H.R. 4260); and 2) the Equal Treatment of Public Servants Act of 2023 (H.R. 5342).
The proportional formula for the WEP provides workers that have some earnings from noncovered employment the same replacement rate as those workers that worked their entire careers in covered employment, whereas the current-law WEP can only approximately do so.
According to the report, “in 1983, the Social Security Administration (SSA) lacked the data on noncovered earnings needed to make the benefit adjustment under the proportional formula so Congress adopted the current WEP formula instead. As of 2017, SSA has 35 years of data on earnings from both covered and noncovered employment. This data’s availability means that the proportional formula is now an option for Congress to consider.”
The report also compares the current WEP and the proportional formula. In addition, it provides the SSA’s Office of the Chief Actuary (OCACT) cost estimates and funding rules for each of the legislative bills.
The report is available here.
On September 7, 2023, S&P Global released its report, U.S. State Pension and OPEBs: Funding Progress is Likely to Pick Up in 2023 After Slipping in 2022. S&P Global reported that the funded ratios of U.S. state pension and other postemployment benefit plans are projected to improve for the fiscal year ended in June 30, 2023. The improvement is expected to be marginal and will likely exceed the potential near-term pressures to states’ debt and liabilities.
According to S&P Global, “absent prudent risk management over time, a confluence of factors, structural demographic shifts including an aging population, and medical cost growth, could add budgetary pressure tied to pension and other postemployment benefit (OPEB) funding longer term.”
Other key highlights include:
The report is available here.
On September 5, 2023, the National Association of State Retirement Administrators (NASRA) released its issue brief, State Hybrid Retirement Plans, which updates an earlier version published in July 2022. The brief provides new information on statewide cash balance and combination hybrid plans as well as a map that illustrates the percentage of public employees who participate in mandatory or optional hybrid plans in states that administer such plans for groups of general, public safety or K-12 educational employees.
While the majority of public employee retirement systems are traditional defined benefit plans, some public-sector plans are considering hybrid plans that contain elements of both defined benefit (DB) and defined contribution (DC) plans. The brief examines two types of hybrid plans: 1) cash balance plans that combine elements of a traditional DB plan and individual accounts into a single plan; and 2) “DB+DC” plans that combine a smaller traditional DB pension plan with separate individual DC retirement savings accounts.
The brief also provides overviews of cash balance and DB+DC plans that have been established in various states, with some dating back several decades. According to the brief, public-sector hybrid plans have diverse combinations of retirement plan designs to address the cost and risk factors of various state or local governments. However, most continue to include features that meet fundamental retirement plan objectives including: mandatory participation, shared financing, professionally managed pooled investments, benefit adequacy and lifetime benefit payouts. Typically, traditional public-sector DB plans that contain hybrid plan elements include benefits or employee contributions that are linked to the plan’s investment performance or actuarial condition.
The brief also contains an appendix providing descriptions of various hybrid plan designs and financing arrangements.
The brief is available here.
Jim Anderson and Mark Buis will present at the Fall 2023 Michigan Association of Public Employee Retirement Systems (MAPERS) conference covering the topic “Long-term Policy Implications with an Aging Population.”
Overview: Public sector pension plans, already under intense scrutiny, face a new and evolving challenge of dealing with an aging population and demographic shifts. By understanding the implications of an aging population and pandemic-related views on the future of the workforce, the ever-changing demands of the public sector workforce can be addressed.