Federal Law: Employee Retirement Income Security Act (ERISA); the Internal Revenue Code (IRC) [IRC pension provisions also known as Title II of ERISA]; and relevant case law.

IRC Pension Qualification Rules: 3 key benefits --
1) contributions that the employer makes to finance the pension plan are deductible as a business expense within certain limits; 2) the income on the assets in the pension trust fund is tax exempt until distributed to the employee; and 3) the contributions and income on the assets are not taxable to the employee or subject to income tax withholding or employment taxes until the employee retires and begins to draw a benefit.

State and Local Law: ERISA generally supersedes state laws relating to employee benefit plans. ERISA Sec. 514.

Federal Law: IRC and relevant case law.

IRC Pension Qualification Rules: State and local government plans are not taxable entities, so they do not benefit from the first 2 key tax benefits. The third benefit does apply because it allows the employee to defer tax on the employer contributions and income on the assets until the employee retires and begins to draw a benefit. Moreover, if a plan is inadvertently disqualified without the knowledge of the employer, the employer can be held liable for the amount of tax withholding it should have done, even though the error may be discovered too late to allow for the money to be taken from the employee’s check.

State and Local Law: State constitutions statutes and local ordinances relating to pensions; relevant case law; and common law of trusts, including Restatement of Trusts.

Federal Law. Generally inapplicable per Taxpayer Relief Act of 1997.

State and Local Law. Participation and coverage laws are sometimes based on occupations as a consequence of particular occupations’ characteristics and requirements (e.g., physical demands of police and fire employees). Plans generally cover all full-time employees within an occupational classification.

Federal Law. Inapplicable.

State and Local Law. Generally board of trustees made up of individuals with different backgrounds establish overall policy for administering plan. An executive director is responsible for daily administration of plan. Board members may include employee representatives, retiree representatives, employer representatives, governmental officials, representatives of members of public, and individuals with special skills, such as investment expertise. Among state plans that include teachers, 45 have retiree and/or active members who are elected or appointed to serve on boards of trustees.

Moore & NCTR, Public Pension Plans: The State Regulatory Framework, (1998).

Federal Law. Funding requirements not applicable, except that state and local plans must comply with requirements of IRC Sec. 401(a)(7) in effect before ERISA. IRC Sec. 412(h) (under pre-ERISA IRC Sec. 401(a)(7), if a plan was terminated or contributions discontinued, the rights of all employees to benefits accrued to the date of termination or discontinuance are nonforfeitable).

State and Local Law. Typically, funding is required to cover the normal cost and the amount necessary to amortize the unfunded liability of the plan. Employer Contributions. Average actual employer contribution varies by size of plan, ranging from 18.31% of payroll for plans with less than 1,000 members to 8.73% of payroll for plans with 100,000 members or more. Survey of State and Local Government Employee Retirement Systems, Public Pension Coordinating Council (1995) ("PPCC Survey"). Employee Contributions. Unlike most private plans, the majority of state and local plans require an employee contribution. Comparative Study of Major Public Employee Retirement Systems, Wisconsin Retirement Research Committee (1994) ("Wisc. Survey"). The average employee contribution is 5.41%. PPCC Survey.

Federal Law. IRC Sec. 401(a)(2) ("exclusive benefit rule") and IRC Sec. 503 (special prohibited transaction rules for state and local plans).

State and Local Law. As of 1995, 23 retirement systems that include teachers use a standard nearly identical to ERISA’s, 14 use the prudent person standard, and 13 use some variation. Twenty-six retirement systems that include teachers have legal lists, as of 1995. These lists set limits in the statute on the types of investments in which system fiduciaries may invest (e.g., no more than 50% of plan assets in stock).

Moore & NCTR, Protecting Retirees’ Money, (1995).

Federal Law. Some state courts have held that the Contract Clause of the U.S. Constitution (Article I, Section 10) would grant contractual rights under state and local government law. (Bailey v. State, 500 S.E. 2d 54 (N.C. 1998)).

State and Local Law. Pension benefits and other rights are fixed upon hiring (e.g., N.Y. Const. Art. V, Sec. 7); upon vesting (e.g., Alaska Const. Art. XII, Sec. 7); or upon retirement (e.g., Ohio Rev. Code Ann. Sec. 3307.711).

Moore & NCTR, Public Pension Plans: The State Regulatory Framework (1998).

Federal Law. Not applicable, except that state and local plans must comply with vesting requirements of IRC Sec. 401(a)(7) in effect before ERISA. IRC Sec. 411(e)(2). See section on funding.

State and Local Law. 53% of plans surveyed require 5 or fewer years of service to vest. Nearly 40% require 10 or more years. A slow trend in vesting is toward 5 years or shorter. Wisc. Survey.

Federal Law. To the extent that a pension is divided under a Domestic Relations Order (DRO) (not a QDRO), the federal tax law treats the DRO as though it were a QDRO.

State and Local Law. As of 1994, 39 states had laws requiring retirement systems to recognize QDROs. AARP’s survey of spousal rights under state pension plans (1994).

Federal Law. Inapplicable.

State and Local Law. As of 1994, 23 states had laws or rules requiring retirement systems to obtain spouse’s consent or acknowledgment for waiver of survivor benefits, 3 states provided for automatic survivor benefits for spouse, and 24 states did not have spousal consent or acknowledgment laws or rules. AARP’s survey of spousal rights under state pension plans (1994).

Federal Law. IRC Sec. 401(a)(31) rollover rules.

State and Local Law. Extensive opportunities to purchase service credit as a means to increase pension benefits exist. Employee may purchase credit for years of work that would be otherwise lost because employee was ineligible to receive a benefit for the work (e.g., had not vested). As of 1998, 47 out of 50 statewide retirement systems that include teachers allow some or all participants to purchase out-of-state teaching service.

Moore & NCTR, Portability of Teacher Retirement Benefits (1998). States also frequently allow "reciprocity," in which employee’s service credit is transferred from one retirement system in state to another in same state. National Conference of State Legislatures, Public Pensions: A Legislator’s Guide (1995).

For example, employee worked 10 years in teachers’ plan and 10 years in general employees plan. He/she may be allowed to consolidate service in one plan. Reciprocity between plans within same state is fairly common, but rare on an interstate basis.