Chapter 6: The New Year Brings Compliance With Pension Reform

Although there has been much talk, good and bad, about California’s recent attempt at public pension reform, the fact is that the Public Employees Pension Reform Act of 2013 (PEPRA) is now the law of the State and public employers are obliged to comply with it. For those of you who have not had time to focus on PEPRA until now, you may be interested in the following documents and summaries:

  1. A.B. 340 (Chaptered) http://leginfo.ca.gov/pub/11-12/bill/asm/ab_0301-0350/ab_340_bill_20120912_chaptered.html;
  2. CalPERS Summary of PEPRA http://www.calpers.ca.gov/eip-docs/employer/program-services/summary-pension-act.pdf;
  3. Chang, Ruthenberg & Long’s Summary of PEPRA http://www.seethebenefits.com/showarticle.aspx?show=5878.

FIXES AND CLARIFICATIONS ON THE WAY
Even before the new law was to take effect, legislative staff had been receiving numerous questions and comments concerning the intent and scope of A.B. 340. Not surprisingly, technical corrections bills (S.B. 13 and S.B. 24) already have been introduced and are expected to fix or clarify a number of provisions, including:

  1. Clarifying that PEPRA does not prohibit the adoption of new defined contribution plans;
  2. Elimination of the legislative approval requirement for new defined benefit formulas that are determined to be less expensive than those required by PEPRA;
  3. How the “normal cost rate” for defined benefit plans is to be determined for cost-sharing purposes;
  4. What “similarly situated” means for cost-sharing purposes;
    That the new restrictions regarding health benefit vesting should only apply to new members hired on or after January 1, 2013.

LESSONS LEARNED
Because, with the exception of PEPRA changes directly within the purview of CalPERS, CalSTRS, or ’37 Act systems, there is no administrative body with the authority or responsibility for issuing interpretive guidance on PEPRA, many California agencies are left to interpret PEPRA on their own – or with the assistance of their legal advisors. In some many cases, legal positions taken by CalPERS and CalSTRS with respect to their own systems may not be applicable to standalone plans maintained by public employers. Documenting the basis for your interpretations of PEPRA may become important because you may be forced to defend the positions you have taken. Although you shouldn’t rely solely on something you read in a blog, here are a few items that we have come to understand about PEPRA:

  1. PEPRA does not apply to plans that consist solely of employee pre-tax elective deferrals, such as a deferral only Code section 457(b) plan. If your 457(b) plan provides for any employer contributions, it would be subject to PEPRA.
  2. PEPRA definitely applies to collectively-bargained employees hired on or after January 1, 2013, even though the impact of PEPRA is not set forth in the current MOU and may not have been the subject of bargaining. For example, if you maintain a defined benefit pension plan (whether it is through CalPERS or not), your new union employees likely will become subject to newer, less generous benefits formulas – effective immediately – even though you have not yet had an opportunity to discuss this with your union representatives.
  3. To the extent that any of your retirement plans cross-reference the “normal retirement age” in another of your plans (including CalPERS or CalSTRS), a common practice in many 457(b) plans, you should evaluate how this might affect the administration of the plan containing the cross-reference. This is because PEPRA new mandatory benefit formulas seem to establish a range of possible normal retirement ages, rather than a single normal retirement age.
  4. CalPERS has taken the position that its plans, which are set forth in the California Government Code, are “automatically” amended for PEPRA and that participating employer contracts with CalPERS need not be amended immediately to comply with PEPRA. This is not the case for the thousands of standalone section 401(a) that public agencies maintain in addition to, or instead of, participation in CalPERS. We believe that standalone plans must be separately amended to comply with PEPRA. Otherwise, they run the risk of compromising their tax qualified status because their compliance with PEPRA will not be consistent with what is in their plan documents.

We continue to monitor updates and clarifications relating to PEPRA. Let us know if you are running into specific PEPRA issues that you need help with.

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