Letterhead - OSC

RETIREMENT SERVICES DIVISION MEMORANDUM 2018-06

September 14, 2018

TO ALL HEADS OF STATE AGENCIES

ATTENTION:   All Human Resources and Payroll Officers
SUBJECT:   Alternate Retirement Program (ARP):
Implementation of SEBAC ARP Grievance Award

I.        Introduction

The purpose of this memorandum is to provide additional guidance regarding the implementation of the SEBAC ARP Grievance Award ("SAG Award") and to serve as a supplement to the RSD Memorandum 2018-04.

II.      Background

The SAG Award stems from a labor dispute between higher education system employees participating in the Alternate Retirement Program (ARP) and the State regarding the adequacy of the information and advice and information provided to employees about the available retirement plan choices.  These claims culminated in SEBAC filing grievances on behalf of higher education participants in ARP. 

The grievance progressed to arbitration, and on September 22, 2010, the final negotiated agreement allowed for a one-time irrevocable opportunity to transfer from the ARP to SERS Tier II/Tier IIA for employees meeting certain eligibility requirements and affording such transferees the opportunity to purchase their prior ARP service for retirement credit in SERS at the full actuarial cost of such service. The transfers were initially set to be offered through December 31, 2010 with the new election to be effective January 1, 2011. 

The implementation of the SAG Award has been delayed for an extended period, due to questions regarding the impact of the SAG Award on the tax-qualified status of the affected plans.  In recognition of the uncertainty surrounding the SAG Award, the 2011 SEBAC agreement created a new hybrid retirement plan within SERS ("Hybrid Plan") and established a one-time, irrevocable opportunity for certain ARP members to elect to transfer their membership from the ARP to the new Hybrid Plan.  This opportunity was created as an alternative to and in lieu of participation in the SAG Award.[1] 

In August 2011, the State filed with the Internal Revenue Service (IRS) a request for a private letter ruling ("PLR") regarding the SAG Award.  The IRS declined to resolve these issues through the PLR request.  After extended discussions and negotiations with the IRS, the Retirement Commission's tax counsel and the IRS have established a framework through the IRS’ Closing Agreement Program ("CAP") to permit these transfers consistent with the original arbitrator’s decision. 

This memorandum addresses the major points of the framework discussed with the IRS to allow for a favorable resolution of the issues relating to the implementation of the SAG Award along with an overview of the steps required for eligible ARP Participants to elect to transfer during the one-time only 90-day window period that will run from Friday, September 14, 2018 through December 14, 2018.  It is expected that rare scenarios will occur that are not outlined below.  Agencies should contact the Retirement Services Division ("RSD") for those situations.

The information contained herein applies to: (1) those current or former higher education employees that are eligible to make a one-time irrevocable decision to transfer from ARP to the State Employees Retirement System (SERS) pursuant to the SAG Award ("SAG Transfers") and also to (2) those current higher education employees that are eligible to make a one-time irrevocable decision to transfer from ARP to the Hybrid Plan pursuant to the 2011 SEBAC Agreement ("ARP to Hybrid Transfers"). 

III.    One-Time Opportunities to Transfer from ARP to SERS or from ARP To Hybrid

A.              Eligibility Requirements:

1.          SAG Transfers:  The SAG Award established an opportunity for certain ARP members to transfer from ARP to SERS.  SAG Transfers are available only to those employees that satisfy each of the following conditions:

a.     Actively employed on 9/22/2010 by a constituent unit of the state system of higher education or the central office staff of the Department of Higher Education (“Higher Education Institution”);

b.     Employed in a job title eligible for membership in the SERS; and

c.      Actively participating in the ARP at that time (i.e. paying ARP contributions on September 10, 2010).

2.          ARP to Hybrid Transfers:  The 2011 SEBAC Agreement established a separate opportunity for certain ARP members to transfer from ARP to the Hybrid Plan.  ARP to Hybrid Transfers are available only to those employees that satisfy each of the following conditions: 

a.     Actively employed on a State of Connecticut payroll between January 1, 2009 and July 1, 2012 by a Higher Education Institution;

b.     Currently employed by Higher Ed. Institution;

c.      Employed in a job title eligible for membership in the SERS; and

d.     Actively participating in the ARP (i.e. currently paying ARP contributions).

B.              Deadlines/Key Dates:

1.         Election Period:  (September 14, 2018 to December 14, 2018):  This is the specific 90-day window period within which eligible ARP participants must make a one-time irrevocable election to either remain in ARP or transfer into the SERS or Hybrid plan. 

a.     Expiration of Both Transfer Opportunities:  Any and all ARP to Hybrid and SAG Transfer elections must be submitted within the Election Period as the window for electing either of those transfer opportunities will permanently expire on December 14, 2018.

b.     Default to ARP:  ARP participants that fail to make an affirmative election to complete either an ARP to Hybrid or SAG Transfer prior to the expiration of the Election Period will remain in ARP.

2.         Implementation Date:  (January 18, 2019):  This is the date that the irrevocable choice made by those ARP participants that have elected either an ARP to Hybrid or SAG Transfer (“Transferees”) will take effect.  Specifically, this is the date on which the retirement codes and contribution rates will be switched for those Transferees that timely submitted transfer paperwork during the Election Period.

C.              Transferee Destinations/New Plan Membership:

Eligible ARP participants that elect either an ARP to Hybrid or SAG Transfer will be placed into the and/or subject to the rules of the applicable SERS "Tier" based on the date of hire[2] and the application of the SERS permanent break rules.  The differences between the Tier designations mainly involve the amount and type of employee contribution required and the age and service retirement eligibility requirements.  The benefit calculation formula, however, is the same for all members of Tiers II, IIA and III (with the exception that the average salary calculation for Tier III consists of a member's five highest years of State service).

1.          Tier II (Prior to 7/1/1997):  Eligible ARP Participants hired prior to 7/1/1997 (provided a permanent break has not occurred) that elect a SAG Transfer will be placed in Tier II; those that elect an ARP to Hybrid Transfer will be placed in the Hybrid Plan – applying Tier II rules.

2.          Tier IIA (On or After 7/1/1997 but Before 7/1/2011):  Eligible ARP Participants hired on or after 7/1/1997 but before 7/1/2011 (provided a permanent break has not occurred), that elect a SAG Transfer will be placed in Tier IIA; those that elect an ARP to Hybrid Transfer will be placed in the Hybrid Plan – applying Tier IIA rules.

3.          Tier III:  Eligible ARP Participants hired between 7/1/2011 and 7/1/2012 are limited to an ARP to Hybrid Transfer and, upon completion of the transfer, will be placed in the Hybrid Plan – applying Tier III rules.

4.          Permanent Break Provisions:  Pursuant to SERS provisions, any period of employment prior to a permanent break in service is excluded from an employee’s retirement service credit.  For those employees that have left and later returned to state service, a permanent break occurs if the period of separation equals or exceeds the amount of service credit accrued prior to the break or five years whichever is greater.  

Employees that were vested at the time of separation (meaning the employee satisfied the applicable minimum service credit eligibility requirement) and later return to state service will not be subject to a permanent break.

When evaluating prior ARP service, permanent break provisions will be applied as if the service had been in SERS.

IV.    Purchase of Prior ARP Service

Eligible ARP participants that elect either an ARP to Hybrid or SAG Transfer may also elect to purchase:  all, none, or some of their prior ARP Service.

For both ARP to Hybrid or SAG Transfers, the Transferee is required to pay the full actuarial cost attributable to such service, based on the member’s age and highest one year of compensation.  Transferees may not purchase more years of service under SERS/Hybrid than the number of years he/she has participated in ARP in SERS eligible positions. 

A.              Preliminary Estimates of the Cost to Purchase Prior ARP Service:

In an effort to assist eligible ARP participants with their election decision, the RSD has partnered with the respective Higher Education Institutions and the SERS plan actuaries to provide all those active ARP participants eligible to elect either an ARP to Hybrid or SAG Transfer with preliminary estimates of the cost to purchase prior ARP service before the commencement of the Election Period on September 14, 2018.   The preliminary estimates are based on service credit totals provided by the eligible ARP participants’ employer(s) while a member of the ARP and a highest one year of compensation total generated by the RSD. 

1.        Distribution of Preliminary Estimates:  Copies of the preliminary estimates will be sent to the home address on record for all active ARP participants that have been identified as eligible for either or both transfer opportunities.  The RSD will also provide copies of the preliminary estimates to the respective Higher Education Institutions.

2.        Preliminary Estimates Are Subject to Audit and Correction:  The preliminary estimates are not actual invoices.  While considerable efforts have been made to verify those totals, the RSD is in the process of distributing approximately 5,500 preliminary estimates.  It is important to note, therefore that the information contained in the preliminary estimates is subject to audit, revision and correction.  Final invoices will be generated only for those members that actually elect to transfer from ARP to SERS and elect to purchase prior ARP service.

3.        Preliminary Estimates Will Cover Multiple Scenarios:  Because eligible ARP participants have multiple transfer opportunities and are free to complete either full or partial purchases, the preliminary estimates will include information for the following different scenarios:

a.     Cost of Prior ARP Service Purchase Cost for SAG Transfer:

·       The estimated cost to purchase all prior ARP service in connection with a SAG transfer.

·       The estimated cost to purchase 5 years of prior ARP service in connection with a SAG transfer. (For those members that have completed five or more years of service).

·       The estimated cost to purchase 10 years of prior ARP service in connection with a SAG transfer. (For those members that have completed ten or more years of service).

b.     Cost of Prior ARP Service Purchase Cost for ARP to Hybrid Transfer:

·       Estimated cost to purchase all prior ARP service in connection with an ARP to Hybrid transfer.

·       Estimated cost to purchase 5 years of prior ARP service in connection with an ARP to Hybrid transfer. (For those members    that have completed five or more years of service).

·       Estimated cost to purchase 10 years of prior ARP service in connection with an ARP to Hybrid transfer. (For those members that have completed ten or more years of service).

B.              Final Invoices of the Cost to Purchase Prior ARP Service:

For those eligible ARP participants that actually elect to complete either an ARP to Hybrid or SAG Transfer and also elect to purchase prior ARP service by timely submitting a SEBAC ARP Grievance Award election form (CO-994a) between September 14, 2018 and December 14, 2018, the RSD will update and review the service credit and salary information used to generate the preliminary estimate before working with the Plan actuaries to generate a final invoice.

It is anticipated that for the majority of Transferees, the final invoices will not be distributed until January 2019 and, in some cases, even later.  For Transferees that submit CO-994a’s early in the election period, it is possible that final invoices may be distributed earlier. 

V.      The Election to Transfer from ARP Is Irrevocable

Once an eligible ARP participant submits a CO-994a, electing either an ARP to Hybrid or SAG Transfer, that Transferee’s transfer election cannot be changed.  Likewise, for most Transferees, the decision to purchase prior ARP service also cannot be changed after the submission of the CO-994a.

For those Transferees electing to purchase prior ARP service, if the final invoice for the cost to complete the purchase is 5% or higher than the preliminary estimate, the Transferee will not be required to complete the purchase of prior ARP service.  Instead, the transferring member will have the option to purchase no ARP prior service or to purchase a different amount of ARP prior service based on the amount of funds available. 

Once an eligible ARP participant has submitted a CO-994a, electing either ARP to Hybrid or SAG Transfer, regardless of the magnitude of any difference in the cost to purchase past ARP service, the transfer election as indicated in the CO-994a cannot be changed.  This is a departure from the existing policy, necessitated by the need to complete and finalize all transfer elections by December 14, 2018.

VI.    Earliest Possible Date of Retirement

The Implementation Date for all SAG Transfers is January 18, 2019 and SERS retirements must occur on the first of a month.  Therefore, for any ARP participants electing a SAG Transfer, the earliest date on which any such Transferee will be eligible to retire from SERS is February 1, 2019 - the first of the month following the transfer to SERS assuming they have purchased sufficient service and meet the minimum retirement age to collect benefits.

Any eligible ARP participants that wish to transfer from the ARP and also retire prior to February 1, 2019 are limited to an ARP to Hybrid transfer under the existing ARP to Hybrid process.

VII.                   Special Situations

A.              Hazardous Duty:  The Hybrid Plan does not provide a hazardous duty benefit. Therefore, those eligible ARP participants that have service in a position that would qualify for hazardous duty credit in ARP, or anticipate future employment in a hazardous duty position may only elect a SAG Transfer and possibly qualify for a SERS hazardous duty benefit. 

1.        Higher Actuarial Cost:  Any SAG Transferees that purchase “hazardous duty” ARP service must pay a higher full actuarial cost to receive “hazardous duty” credit in SERS.

2.        Refunds for Transferee that Do Not Qualify for Hazardous Duty Benefits:  In the event any such SAG Transferee leaves state service prior to satisfying the hazardous duty requirement, the SAG Transferee will be entitled to a refund of the difference between the normal cost and the higher hazardous duty actuarial cost.

B.              UConn Adjunct Faculty/Special Payroll Lecturers:  Pursuant to the terms of an agreement between the University of Connecticut (UConn) and the American Association of University Professors, the ARP is the only retirement plan option available to individuals employed by UConn as either Adjunct Faculty or Special Payroll Lecturers.  Because this population is not eligible to participate in SERS during periods of employment on UConn’s Special Payroll, this population is not eligible for either an ARP to Hybrid or SAG Transfer.   

C.              Non-Social Security/Medicare Covered ARP participants:  Eligible ARP participants that are not covered by Social Security/Medicare may elect either an ARP to Hybrid or SAG Transfer the same as any other eligible ARP participant.  However, post-transfer, any such non-social security covered ARP participant will become Social Security/Medicare covered on a prospective basis only.  We advise any individuals that fall within this category to contact the Social Security Administration and/or to contact a financial advisor for additional information regarding the potential impact or risks a transfer from ARP may pose under this set of circumstances.

D.              Current SERS Participants with Prior ARP Participation:  The SAG Award also extends to a small minority of individuals that are currently participating in SERS, but otherwise satisfy the eligibility criteria set forth above in Section III.A.1 ("SAG Eligible-Current SERS Participants").  As the employees that fall into this category are already participating in SERS, there is no need for any such employees to transfer plan membership.  The SAG Award, however, does allow SAG Eligible-Current SERS Participants the opportunity to purchase service credit for prior ARP service.  The window for SAG Eligible-Current SERS Participants to submit a request to purchase any prior ARP service will also permanently expire on December 14, 2018.  Questions regarding any employees that fall within this category should be directed to the RSD.

E.              "Grandfathering" and Other Purchases Opportunities: 

1.        Grandfathering the Normal Retirement Age:  Prior to the SEBAC 2011 Agreement, the Normal Retirement Age was age 60 with 25 years of service or age 62 with 10 years of service for Tier II and Tier IIA non-hazardous duty members.  Pursuant to the SEBAC 2011 Agreement, this will change for all employees not retired by July 1, 2022 who have not already attained their Normal Retirement Age.  For affected employees, the Normal Retirement Age will be age 63 with 25 years of service or age 65 with 10 years of service starting July 1, 2022.   

The SEBAC 2011 included a provision for a one time irrevocable option to enable affected members to grandfather their normal retirement date under current rules as long as they pay the full actuarial cost for this benefit.  That one-time irrevocable option will be extended to Transferees that are otherwise subject to the new Normal Retirement Age after the completion of the plan transfer and any purchase of prior ARP service.

2.        Other Traditional Service Purchase Opportunities:  SERS provisions extend additional purchase opportunities for members with certain other specific categories of service provided the eligibility requirements are met:  These additional service purchase opportunities include: 

a.     Service to another State and were not vested (additional rules apply);

b.     Service while a member of the Connecticut Municipal Employees Retirement System (“CMERS”) and provided the member is not vested in CMERS; and

c.      Prior Military Service.

The window for Grandfathering and/or completing other traditional service purchase opportunities will not open until after the 2019 implementation date and after the transfer is completed.  Additional information regarding these opportunities will be included in a forthcoming memorandum.

VIII.                 Making the Transfer

A.              Required Forms

1.     CO-994a - SEBAC ARP GRIEVANCE AWARD:  Option to Transfer from the Alternate Retirement Program to the State Employees Retirement System TIER II/TIER IIA Plan or Hybrid Plan (CO-994).

a.     All ARP participants that are eligible for either an ARP to Hybrid or SAG Transfer must complete the CO-994a.

b.     This applies even to those that elect to remain in ARP, as all eligible ARP members are required to make one of the following decisions:

·       Transfer To Tier II or Tier IIA Plan (based on the initial date of hire and subject to permanent break rules)
·       Transfer To The Hybrid Plan (based on the initial date of hire and subject to permanent break rules)
·       Prospective Only Into Tier II Or Tier IIA
·       Prospective Only Into The Hybrid Plan
·       Remain In ARP

c.      Eligible ARP participants electing to remain in ARP must complete sections I, II, III, and VI of the CO-994a; the form must be received in the RSD or post-marked on or before by December 14, 2018.

2.       Prudential Forms

a.     ARP Transition Fund:  Prudential has established an ARP Transition Fund dedicated to this process.  Eligible ARP members that elect either an ARP to Hybrid or SAG Transfer during the election period and purchase prior ARP service must move the funds necessary to complete the purchase into this fund prior to submitting the CO-944a.

b.     The Retirement Services Division will provide eligible ARP members with a preliminary estimate of the amount of funds necessary to complete the purchase. 

c.      Prudential requires eligible ARP participants to complete a special form ("ARP Transition Fund Transfer Request Form") to transfer funds into the ARP Transition Fund.

·    Separate ARP Transition Fund Transfer Request Forms must be completed for each plan, ARP, 403(b), and 457.  Please note that eligible ARP participants must first exhaust all unencumbered funds with TIAA and Prudential before 403(b) and 457 funds can be used to complete the purchase of prior ARP service.
·    The respective ARP Transition Fund Transfer Request Forms are available on the OSC website.
·    The ARP Transition Fund Transfer Request Forms must be returned to Prudential directly and may be submitted to Prudential via fax, e-mail or traditional mail.

3.        CO-995 - APPLICATION FOR USE OF ENCUMBERED FUNDS

a.     This form shall be completed by only those Transferees that have exhausted their unencumbered funds with TIAA and Prudential and 403(b) and 457 accounts and, therefore, have no other alternative but to use encumbered funds to complete the purchase of prior service (discount rate applies).

b.     The following is the order in which Transferees must exhaust the limited sources of funds available to complete a purchase of prior ARP service:

·       Unencumbered funds with TIAA and Prudential
·       403(b) and 457 accounts
·       Encumbered funds at TIAA

B.            Transfer Instructions:  Eligible ARP participants that elect either an ARP to Hybrid or SAG Transfer must take the following steps:

1.            Complete a CO-994a form (CO-994).

a.     All Transferees must fill out sections I, II and III (do not complete section VI unless you are waiving your right to transfer from the ARP).

b.     Transferees electing to purchase prior ARP service must also complete section IV. 

Note:  If you are using TIAA Encumbered Funds, you must also complete a CO-995a form. 

2.               Complete the ARP Transition Fund form (ARP Transition Fund Transfer Request Form) and submit to Prudential (fax # 866-439-8602; e-mail CTARPFund@prudential.com) ; keep a copy for your records and for HR.

Note:   Transferees that are also using 403(b) and 457 funds, must also complete and submit the following additional form(s) to Prudential:

·       (State of CT 403(b) Plan Transfer Request Form)

·       (State of CT 457 Plan Transfer Request Form)

IX.    Conclusion

It is important to recognize that our office does not employ financial advisers and will not be able to suggest to eligible ARP participants which plan is best.  Instead, the resources on our website can provide eligible ARP participants and other interested parties with information on the different retirement plans and estimates of potential benefits under each plan.  Please refer to the SAG/Hybrid information available on the Office of the State Comptroller's website:  https://www.osc.ct.gov/rbsd/arptransfer/disclaimer.htm.

Members are encouraged to first contact the Human Resource Department at their respective agency/school with questions regarding the process for completing an ARP to Hybrid or SAG Transfer.  Members with additional questions about the information provided herein that cannot be addressed by their HR Department may submit such questions in writing to the following e-mail address OSC.SAGQuestions@ct.gov.

 

Very truly yours,  

STATE EMPLOYEES RETIREMENT COMMISSION
KEVIN LEMBO, SECRETARY EX OFFICIO

 

BY:

 

John Herrington, Director
Retirement Services Division

[1] The benefits payable under the SERS Hybrid Plan are the same as that payable under the SERS Tier II or Tier IIA retirement plan dependent upon the individual's date of employment.

[2] Special rules may apply for periods of prior state service during which the employee: (1) waived membership or otherwise did not participate in either the ARP or SERS plan, (2) elected membership in a retirement plan other than ARP or SERS or (3) was subject to a permanent break.


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