INFORMATION: POLICY REVISION KCTCS BOARD OF REGENTS POLICY Agenda Item H KCTCS RETIREMENT PLAN POLICIES December 5, 2008

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1 INFORMATION: POLICY REVISION KCTCS BOARD OF REGENTS POLICY Agenda Item H KCTCS RETIREMENT PLAN POLICIES December 5, 2008 Background When KCTCS was established by the Kentucky Postsecondary Education Improvement Act of 1997, former community college employees transferred to KCTCS with the same 403(b) retirement plan and retiree health benefits afforded to University of Kentucky (UK) employees as outlined in Kentucky Revised Statute (KRS) (3)(d): All employees hired as of the effective date of the transfer shall be provided the same benefit package available for other University of Kentucky employees as it may be modified by the University of Kentucky for all employees. Procedural arrangements were made with the University of Kentucky s retirement vendors to transfer the applicable employees contracts. Former technical college employees transferred under 18A and 151B provisions and retirement benefits were guaranteed in KRS (1)(d)4: Employees shall be provided retirement plans in the same system where they are currently enrolled: the Kentucky Teachers Retirement System under KRS or the Kentucky Employees Retirement System under KRS The referenced statutes then allowed KCTCS new employees to participate in either of the state retirement systems in accordance with their prevailing statutes and provisions. Retirement-Related Events ( ) The following carriers were added: Effective January 14, 1998, American Century was contracted to offer an interim 403(b) defined contribution plan based upon the University of Kentucky contribution schedule and plan. Prior to that date newly hired employees were required to participate in one of the other defined benefit plans. Effective September 1998, following a request for proposal process, TIAA-CREF, American Century, and AETNA (now ING) were contracted as retirement plan carriers for the defined contribution 403(b) plan. In 2001, the issue arose that although active KCTCS employees were covered for health insurance under the Commonwealth Group Health Insurance Plan, KCTCS 403(b) plan participants were not covered as retirees. This issue was resolved by amendment House Floor Amendment (1) to House Bill 370, signed by the Governor on March 18, 2003, which revised KRS 18A.225 effective July 1, 2003, by defining these retirees as covered under the Commonwealth Group Health Insurance plan. In July 2003 as a further incentive for University of Kentucky personnel system employees to exercise the one time irrevocable option to opt-over to KCTCS personnel policies, Fidelity Investments (a UK retirement carrier) was added to the KCTCS benefit package. Since retirees age 65 or over are not eligible to participate in the Commonwealth Group Health Insurance Plan, it was necessary to secure a carrier for this group of retirees to complete a postretirement health package. KCTCS contracted with Anthem for a Medicare eligible plan by joining the Kentucky Employees Retirement Systems contract with Anthem, effective January 1,

2 Specific KCTCS Board of Regents Actions Related to Retirement ( ) In 1998, the KCTCS Board of Regents adopted retirement plan policies as they related to the establishment of employer and employee contribution rates for the 403(b) plan and eligibility criteria necessary to continue the employer contribution toward the cost of the employee health insurance during retirement. The policies were modeled after the UK defined contribution 403(b) plan. The KCTCS Board of Regents provided post-retirement health insurance for employees in the KCTCS personnel system in 403(b) retirement plans, effective July 1, The KCTCS Board of Regents revised KCTCS Board of Regents Policy 3.7 KCTCS Retirement Plan Policies August 15, 2003, for employees who participate in a KCTCS 403(b) matching plan to access their retirement plan by using their account as collateral for a loan from their 403(b) carrier before separating from service from KCTCS. Federal Changes, KCTCS Studies, and KCTCS Board of Regents Government Accounting Standards Board Statement Number 45 (GASB 45) o In June 2004, Governmental Accounting Standards Board (GASB) issued Statement 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, which established new accounting standards for post-retirement benefits other than pensions (OPEB). The requirements applied to any state or local government employer that provides OPEB, or for KCTCS, post-retirement health insurance. The accounting methodology changed from a pay-as-you-go basis to accrual-based accounting in the same manner as applied to pension plans. This accounting methodology was effective in fiscal year The liability for this benefit significantly increased with the recording of the Annual Required Contribution. o Mercer (a Human Resources consulting firm) was contracted to perform an initial actuarial report on the financial impact of GASB 45 in 2005 and for subsequent updated reports in 2006, 2007, and o In December 2006, an update on the economic impact of GASB 45 on KCTCS of a total obligation of approximately $153 million was reported to the Board as a result of the initial Mercer report. o Mercer prepared an updated GASB 45 Post-Retirement Benefit Valuation Report in March 2007 showing an $18.3 million Annual Required Contribution. The impact of this liability was discussed in detail during the March 2008 Board meeting in development of the budget. At that time, the current KCTCS budget included approximately $2.0 million (for funding the pay-as-you-go method), leaving a need for an additional $16.3 million annually to fund this obligation. o Mercer provided an updated report for the Benefits Study, Fall 2008 showing the impact of ending post-retirement health benefits for new employees hired with an effective date on or after July 1, The 10-year accumulated cash savings is projected at $57,260,

3 Mercer Benefits Valuation Report, July 2006 o The employee benefits review and benefits comparison study was reported to the KCTCS Board of Regents in the President s Report in March o This Mercer report generated a common dollar value for benefit plans with varying plan designs and provisions. Statistical comparisons could then be made to create an objective comparison to those in selected peer groups. o The plans that were valued and compared included: Retirement/Savings (including post-retirement medical, stock purchase). Health/Group (medical, dental, life, and flexible spending accounts). Time Loss (vacation, holiday, personal leave, sick days, and disability). o The peer groups chosen for comparison included: Eleven educational organizations (Austin Peay University, Eastern Kentucky University, Indiana University, Marshall University, Morehead State University, Ohio University, University of Illinois, University of Missouri, the University of Tennessee, University of Virginia, and Western Kentucky University). Mercer s standard peer group (162 organizations). Regional 30 educational organizations in states bordering Kentucky. Kentucky educational organizations (Centre College, Eastern Kentucky University, Georgetown College, Kentucky Christian College, Morehead State University, Pikeville College, Transylvania University, University of Kentucky, University of Louisville, and Western Kentucky University). Eighteen Kentucky private organizations. The Commonwealth of Kentucky. o Summary Data for Retirement/Savings Plans indicate that KCTCS exceeds the median by: Peers 29 percent. Standard 47 percent. Regional 56 percent. Kentucky 53 percent. Kentucky Organizations 94 percent. o The median is defined as the 50 th percentile; value equals 50 percent of the observed values that fall below this level. o Median exceeded for Retirement/Savings due to the choice factor at KCTCS between Defined Benefit and Defined Contribution Plans. 101

4 Benefits Study, Fall 2008 o At the request of the Finance, Technology, and Human Resources Committee during the June 2008 meeting, a benefits study was conducted to further investigate potential cost savings and benefit changes within the KCTCS benefits package. o Presented and discussed at the September 26, 2008, Board of Regents meeting, the Benefits Study, Fall 2008 included: Guiding Principles Reflecting the Board of Regents commitment to current faculty and staff, the initial focus for any employee benefit changes would be for NEW hires. For an effective allocation of resources in providing a competitive benefits program, consideration would be given to those benefits that would help attract, motivate, and retain quality employees. Summary of the Mercer Benefits Valuation Report, July 2006 Summary of the four evaluated categories and KCTCS relation to median standing (see Mercer Benefits Valuation Report, July 2006 above). Retirement Program Trends Mercer database information for 206 higher education entities who offer a defined contribution plan. 56 percent offer both a defined benefit and a defined contribution plan. 44 percent offer a defined contribution plan only. 0 percent offer a defined benefit plan only. Detailed Comparison of Kentucky Educational Institutions Benefit Programs, including Executive Summary For Retirement plans: KCTCS offers both defined contribution and defined benefit plans as do all other institutions except UK and the University of Louisville (U of L). These two do not offer defined benefit plans. KCTCS, UK, and U of L offer phased retirement for faculty. UK offers phased retirement for staff. Only KCTCS, UK, and U of L offer retiree health for defined contribution programs. UK eliminated employer-provided retiree health insurance for employees hired after July 1, KCTCS monthly retiree cost for single coverage is $0 to $15.30, while UK cost ranges from $58 to $588. U of L limits employer contribution at $ for those in a defined contribution plan. 102

5 KCTCS Benefits Comparison by Personnel System Outlines each benefit and the legal considerations on retention, change, or elimination of any benefit. Compliance ensured with statutory mandates: Federal: The Employee Retirement Security Act of 1974 (ERISA), Internal Revenue Service statutes, The Omnibus Budget Reconciliation Act of 1993 (OBRA). State: Kentucky Revised Statutes (KRS): KRS Chapter regarding Kentucky Retirement System (KERS). KRS Chapter regarding Kentucky Teachers Retirement System (KTRS). KRS 18A.225 Health Coverage - Rule Governing the Kentucky Employee Health Plan (KEHP). KRS Governance and Management of Community Colleges - Transfer of Funds - Rules Governing Employees - Personnel System. KRS Transfer of Assets, Liabilities and Staff Positions of Kentucky Tech System - Employee Benefits and Salaries of Transferred Employees - Rules Governing Transferred Employees. House Bill (HB) 1 of the 1997 Extraordinary Session of the Kentucky General Assembly - Kentucky Postsecondary Education Improvement Act of KCTCS Benefits Program Participation as of August 2008 Illustrates health and retirement system enrollment. Defined contribution 403(b) plan constitutes 70 percent of enrollment. Options for Consideration For employee benefits in which KCTCS does have authority, consideration could be given to the following changes for NEW hires: Post-Retirement Health Insurance: Eliminate for employees hired with an effective date on or after July 1, Projected savings over a 10-year period: $57,260,000. Consideration of decreasing employer retirement contribution in 403(b) from 10 percent to 5 percent. Projected 10-year savings: $4,957,926. Recommendations Requested At the September 2008 Board meeting, the Finance, Technology, and Human Resources Committee requested that recommendations regarding employee benefits (for new hires only) be presented for the Board s consideration at the December 4-5, 2008, KCTCS Board of Regents meetings. 103

6 Analysis of Retirement Plans, November 2008 o Prepared by KCTCS staff, an analysis of retirement plans was reviewed by the KCTCS President s Cabinet and the KCTCS President s Leadership Team. The analysis included the following possible options for defined contribution 403(b) plan participants with hire effective dates on or after July 1, 2009: Eliminate post-retirement health savings: $1,380,000. Recurring annual savings in 10 years: $13,050,000. Accumulated cash savings over 10 years: $57,260,000. Implement a five-year (continuous service) vesting schedule. Using 10 percent employer contribution and no salary increase projections savings: $72,780. Recurring annual savings in 10 years: $382,095. Accumulated cash savings over 10 years: $3,020,370. Reduce employer retirement contributions from 10 percent to either 5 percent, 6 percent, 7 percent, 8 percent, or 9 percent. Using no salary increase savings projections are: savings: Range of $206,236 (5 percent) to $479,964 (9 percent). Recurring annual savings in 10 years: Range of $2,062,360 (5 percent) to $4,799,640 (9 percent). Accumulated cash savings over 10 years: Range of $11,342,980 (5 percent) to $26,398,020 (9 percent). Retirement 403(b) contribution summary: Kentucky public universities. Employer contributions range from 7.5 percent to 10 percent. State retirement system contribution summary. Employer contributions range from percent to percent. Proposed Policy Revision The following revisions are being proposed in the KCTCS Board of Regents Policy 3.7 Kentucky Community and Technical College System Retirement Plan Policies: For new hires on and after July 1, 2009, a five-year vesting period (60 months) of continuous service is established to be eligible to receive the employee s accrued benefits derived from employer contributions. For new hires on and after July 1, 2009, retiree health benefits will not be available to 403 (b) plan retirees. Updates are shown in the paragraphs related to the Omnibus Budget Reconciliation Act of 1993 (OBRA) to keep them current. 104

7 Considerations/Rationale Based on thorough discussion, research, and analysis, the proposed revision in policy is made with consideration of the following: Maintaining the existing retirement package for current employees and only implementing changes for NEW employees appointed with an effective date on or after July 1, Consistency with the University of Kentucky decision to cease post-retirement health benefits for new employees hired on or after January 1, Kentucky Public Pension Reform, which changed pension benefits eligibility, contribution levels, and benefit calculation for new employees hired on or after July 1, 2008, for the Kentucky Teachers Retirement System and September 1, 2008, for the Kentucky Retirement System. Kentucky Public Pension Reform, which changed post-retirement health eligibility and employer contributions for new employees hired on or after July 1, 2008, for the Kentucky Teachers Retirement System and September 1, 2008, for the Kentucky Retirement System. Public and private sector trends for post-retirement benefits. Ability to attract and retain employees. Rationale relative to these proposed revisions include: The impact of GASB 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions, which established new accounting standards for reporting post-retirement benefits. o The Mercer Post-Retirement Benefit Valuation Report (2007) reported a resulting annual required contribution of $18.3 million, a $16.3 million annual increase over previous liabilities beginning with fiscal year An updated Mercer report included in the Benefits Study, Fall 2008, which showed the GASB 45 impact if newly hired employees effective on or after July 1, 2009, were excluded. o The report showed a $57, 260,000 savings over a 10-year period. An analysis of current benefits expenses and census by personnel system for the Benefits Study, Fall o Illustrated that the defined contribution 403(b) plan contains : 70 percent of all KCTCS employee participate in a 403(b) plan. 2,733 KCTCS personnel system employees in the 403(b) plan. 412 UK personnel system employees in the 403(b) plan. Both KCTCS and UK 403(b) retirees are considered in GASB 45 calculations. 105

8 Analysis of the 10-year impact of a five-year vesting period of continuous service for newly hired employees effective on or after July 1, 2009, based upon the past five years of employment activity - numbers hired and terminated in five years or less. o A vesting period allows that if an employee terminates with less than five years of participation in the 403(b) plan, they would only be eligible to access employee funds after termination. All employer contributions would be returned to KCTCS. o A five-year vesting period is comparable with the state retirement system. o Projected accumulated cash savings over 10 years is $3,020,370. Review of legacy personnel system recent policy changes in regard to retirement issues. o The University of Kentucky studied post-retirement health issues during due to the onset of GASB 45 accounting standards. The employer contribution for post-retirement health benefits was eliminated for employees hired on or after January 1, However, retirees were permitted to access the post-retirement health plans at their own expense. UK maintains a self-funded health care plan. Previously all experience for active employees and retirees were combined for premium and contribution rating purposes. Due to the new policies, the higher retiree experience was then separated out and the rate structure was calculated accordingly for this older, higher experience group, creating increased premiums and employee cost for retirees. Example: Active employee has single UK HMO plan. As an active employee they pay $26 monthly. As an early retiree (under age 65), they pay $58 monthly for the same coverage. Two contribution schedules were established based upon eligibility to retire by July 1, 2007, and an Age/Service schedule was implemented for those not eligible by that date with a much higher rate schedule for those not eligible. Example: Active employee has single UK HMO plan. As an active employee they pay $26 monthly. As an early retiree (under age 65) who meets the rule of 75 and just meets the 15 years of service criteria and is under age 60, they will now pay $482 monthly. A Medicare Advantage plan with a calendar year benefit period (changed from fiscal year period) and an equitable, lower employee contribution rate was implemented for retirees age 65 and older. All retirees over age 65 and Medicare eligible pay the same employee contribution ($25 monthly) regardless of when they were eligible to retire. 106

9 o Pension reform for state retirement systems. Monitored Governor s Blue Ribbon Committee meetings in 2007 to address serious funding shortfalls in system and impact on KCTCS employees. Monitored 2008 legislative session and HB 600, which carried forth legislative committee recommendations on changes for new employees contributions, benefit factors, retirement health eligibility, cost of living adjustments, as well as an introduction of a combination of defined benefit and defined contribution plans, and service purchase rules among other issues. The bill did not pass. Monitored Governors Special Session (2008 Extraordinary Session of the Kentucky General Assembly) on Pension Reform, which resulted in the passage of that session s HB 1: Pension Reform that was signed by the Governor on June 27, The majority of the changes were for new participants after July 1, 2008, (Kentucky Teachers Retirement System) and September 1, 2008, (Kentucky Retirement Systems). Predicated by funding issues, benefit reductions were instituted for new employees and where possible for current employees. Attachment A outlines all of the resultant provisions from the HB 1: Pension Reform. The recommended policy revisions outlined preserve the current benefit package for current personnel and honors their understanding of the compensation package offered at their hiring. Additionally, it significantly reduces future liabilities in an uncertain economic environment, enabling KCTCS to utilize its resources more effectively by making changes in line with other agencies and institutions in the public sector. Attachment B illustrates recommended changes to the KCTCS Board of Regents Policy 3.7 KCTCS Retirement Plan Policies. 107

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15 PROPOSED POLICY REVISION Attachment B KCTCS BOARD OF REGENTS POLICIES STRIKETHROUGH VERSION 3.7 Kentucky Community and Technical College System Retirement Plan Policies Retirement Plans KCTCS provides employees with the option to join a Defined Benefit Plan or a Defined Contribution 403 (b) Plan. The Defined Benefit Plan includes either the Kentucky Teachers Retirement System (KTRS) or the Kentucky Employees Retirement System (KERS). The election to join a retirement plan must be made within 30 days of regular full-time employment. Participation in a KCTCS retirement plan is mandatory for regular full-time employees and a condition of employment Defined Benefit Plans KTRS is a defined benefit plan for employees employed in selected education-related organizations working in a position that requires certification or a degree from a four-year college or university. KERS is a defined benefit plan for non-instructional employees working in a position with a state university that does not require a degree or certification. The rates for contributions and multipliers for retirement annuities are defined by state statute. An irrevocable, one-time election is made to enter either plan. The employee must remain in that retirement system as long as they are in a position that is covered under that retirement system Defined Contribution 403 (b) Plan Employees that enroll in a defined contribution plan make an irrevocable, one-time salary reduction (pre-tax) agreement when entering the plan. The employee may not withdraw from the KCTCS Defined Contribution 403 (b) Plan as long as that employee remains eligible for plan participation Contributions as a Percent of Annual Salary By the Participant By the Institution Total 5% 10% 15% KCTCS, or its designate, will withhold the contribution of the participant from regular salary payments, add its contribution, and remit the combined sum to the retirement plan carrier selected by the participant for the purchase of retirement benefits. Retirement contributions are made on the participant s salary. Retirement benefits purchased with the combined participant and KCTCS contributions shall become the property of individual participants immediately upon 113

16 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES purchase. There is no vesting period. All benefits are for the sole purpose of providing retirement benefits, or death benefits, or both. Participants cannot access their retirement accounts until they separate from service with KCTCS except to use their retirement account as collateral on a 403(b) loan, if allowed, from their 403(b) carrier. An employee hired with an effective date on or after July 1, 2009 shall be subject to a vesting schedule for employer contributions. An employee must work a total of five years (60 months) of continuous service to be able to complete the vesting period and be eligible to receive the employee s accrued benefits derived from employer contributions. In addition to other applicable limitations stated in the plan, and notwithstanding any other provisions of the KCTCS retirement policies to the contrary, the annual compensation of each employee taken into account under the plan shall not exceed the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) annual maximum includable compensation limit. The OBRA 93 annual limit is $150,000 (currently $160,000), as adjusted by the Commissioner of the Internal Revenue Service for increases in the cost of living in accordance with section 401 (a) (17) (B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, beginning in such the calendar year over which compensation is determined. This is the determination period. The determination period may not exceed 12 months. If a determination period consists of fewer than 12 months, the OBRA 93 annual limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator, which is 12. Any reference in this plan to the limitation under section 401 (a) (17) of the Code shall mean the OBRA 93 annual maximum includable compensation limit stated in this provision. The KCTCS Retirement Plan Year is deemed to begin July 1 of a calendar year and end June 30 of the next calendar year. If compensation for any prior determination period is taken into account in determining an employee s benefits accruing in the current plan year, the compensation for that prior determination period is subject to the OBRA 93 annual limit in effect for that prior determination period. For this purpose, the OBRA 93 annual compensation limit is $160,000 (indexed from $150,000) for the first day of the first plan year beginning on or after January 1, If by applying the above-stated percentages there would be a violation of federal or state laws, as a result of the employee or employer contributions or both, these percentages shall not be applied to the extent of violating applicable laws. In these cases, the amount of the employer contribution that cannot be forwarded to a retirement plan carrier shall be paid to the employee as a temporary salary increase for the balance of the calendar year. 114

17 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES Investments The participant must advise the retirement plan carrier which investment options have been chosen. If two or more options are selected with a retirement carrier, the part of the retirement contribution that is to be allocated to each option shall be specified. A participant may change the investment options by contacting the retirement carrier Termination of Contributions Contributions on behalf of a participant in the Retirement Plan shall terminate upon cessation of regular full-time employment or retirement Retirement Date Retirement is authorized when the combination of the employee s age and years of regular fulltime service (with a minimum of 15 years of continuous service at the time of retirement) equals or exceeds the number 75. Regular part-time service will be counted on a pro rate basis. Employees that are retiring must provide written notification through normal administrative channels to their appropriate Chancellor or Vice President at least three months in advance of the desired retirement date Sick Leave Conversion Former UKCCS employees that were employed by the University of Kentucky prior to July 1, 1995, will receive a payment for unused sick leave if the accrued balance is at least 66 days. The first 22 days will be at full pay and the remaining days will be paid at the rate of the KCTCS retirement contribution rate which is currently 10% Retirement Benefits Each participant is entitled at retirement to activate any retirement benefits that have been accrued under the KCTCS retirement plan in accordance with the rules established by the retirement plan carriers. In addition to lump sum or partial lump sum provisions, there will be both annuitized and non-annuitized methods of withdrawal. There may be variances in the retirement withdrawal options among the carriers. All retirement plan carriers do not offer the same withdrawal options Periods of Service As used in the defined contribution retirement plan, "period of service" means the number of years of full-time employment, plus credit allowed for part-time employment, plus periods in an approved leave of absence status. Employees can earn only one year of service per calendar year, regardless of any extra part-time employment above the normal 37.5-hour work week within KCTCS. 115

18 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES Contributions During a Leave Contributions shall be made only on the actual salary the employee is paid through the KCTCS payroll. Contributions will not be increased for partial salaries. This includes sabbatical leave Purchase of Service Credit The Defined Contribution 403 (b) Plan does not have a feature that allows the purchase of service from prior service in military, public employment, or higher education positions. This feature is common in defined benefit plans, but is not used in a defined contribution plan Conversion of Health Insurance Upon Retirement Defined Contribution Plan 403 (b) Plan Retirees Employees that meet the retirement criteria will continue to receive a contribution toward the cost of their health insurance plan. Employees under age 65 will remain on a regular health insurance plan until age 65, while employees that retire and are eligible for Medicare will be placed on a Medicare Supplement eligible health insurance plan. An employee hired with an effective date on or after July 1, 2009, who retires under the provisions of KCTCS Board of Regents Policy 3.7 is not eligible for participation in a KCTCS sponsored retiree health plan. Employees that retire from the Community Colleges under UK benefits at the time of retirement will receive their health insurance credit per UK policy and participate in the UK health plans. Any Community College employee that has retired under the UK benefits will be ineligible for the health insurance credit available through employment under the KCTCS personnel system. 116

19 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES KTRS/KERS Requirements for health insurance coverage in retirement are established by state statute. Employees should contact the appropriate retirement system office for details Date Approved by Date of Last Review Date of Last Revision KCTCS Board of Regents (Include all dates in chronological order) (SIGNED) (SIGNED) Chair, Board of Regents Date President, KCTCS Date 117

20 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES AS IT WILL APPEAR VERSION 3.7 Kentucky Community and Technical College System Retirement Plan Policies Retirement Plans KCTCS provides employees with the option to join a Defined Benefit Plan or a Defined Contribution 403 (b) Plan. The Defined Benefit Plan includes either the Kentucky Teachers Retirement System (KTRS) or the Kentucky Employees Retirement System (KERS). The election to join a retirement plan must be made within 30 days of regular full-time employment. Participation in a KCTCS retirement plan is mandatory for regular full-time employees and a condition of employment Defined Benefit Plans KTRS is a defined benefit plan for employees employed in selected education-related organizations working in a position that requires certification or a degree from a four-year college or university. KERS is a defined benefit plan for non-instructional employees working in a position with a state university that does not require a degree or certification. The rates for contributions and multipliers for retirement annuities are defined by state statute. An irrevocable, one-time election is made to enter either plan. The employee must remain in that retirement system as long as they are in a position that is covered under that retirement system Defined Contribution 403 (b) Plan Employees that enroll in a defined contribution plan make an irrevocable, one-time salary reduction (pre-tax) agreement when entering the plan. The employee may not withdraw from the KCTCS Defined Contribution 403 (b) Plan as long as that employee remains eligible for plan participation Contributions as a Percent of Annual Salary By the Participant By the Institution Total 5% 10% 15% KCTCS, or its designate, will withhold the contribution of the participant from regular salary payments, add its contribution, and remit the combined sum to the retirement plan carrier selected by the participant for the purchase of retirement benefits. Retirement contributions are made on the participant s salary. Retirement benefits purchased with the combined participant 118

21 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES and KCTCS contributions shall become the property of individual participants immediately upon purchase. There is no vesting period. All benefits are for the sole purpose of providing retirement benefits, or death benefits, or both. Participants cannot access their retirement accounts until they separate from service with KCTCS except to use their retirement account as collateral on a 403(b) loan, if allowed, from their 403(b) carrier. An employee hired with an effective date on or after July 1, 2009 shall be subject to a vesting schedule for employer contributions. An employee must work a total of five years (60 months) of continuous service to be able to complete the vesting period and be eligible to receive the employee s accrued benefits derived from employer contributions. In addition to other applicable limitations stated in the plan, and notwithstanding any other provisions of the KCTCS retirement policies to the contrary, the annual compensation of each employee taken into account under the plan shall not exceed the Omnibus Budget Reconciliation Act of 1993 (OBRA 93) annual maximum includable compensation limit. The OBRA 93 annual limit is adjusted by the Commissioner of the Internal Revenue Service for increases in the cost of living in accordance with section 401 (a) (17) (B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, beginning in such calendar year over which compensation is determined. This is the determination period. The determination period may not exceed 12 months. If a determination period consists of fewer than 12 months, the OBRA 93 annual limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator, which is 12. Any reference in this plan to the limitation under section 401 (a) (17) of the Code shall mean the OBRA 93 annual maximum includable compensation limit stated in this provision. The KCTCS Retirement Plan Year is deemed to begin July 1 of a calendar year and end June 30 of the next calendar year. If compensation for any prior determination period is taken into account in determining an employee s benefits accruing in the current plan year, the compensation for that prior determination period is subject to the OBRA 93 annual limit in effect for that prior determination period. If by applying the above-stated percentages there would be a violation of federal or state laws, as a result of the employee or employer contributions or both, these percentages shall not be applied to the extent of violating applicable laws. In these cases, the amount of the employer contribution that cannot be forwarded to a retirement plan carrier shall be paid to the employee as a temporary salary increase for the balance of the calendar year. 119

22 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES Investments The participant must advise the retirement plan carrier which investment options have been chosen. If two or more options are selected with a retirement carrier, the part of the retirement contribution that is to be allocated to each option shall be specified. A participant may change the investment options by contacting the retirement carrier Termination of Contributions Contributions on behalf of a participant in the Retirement Plan shall terminate upon cessation of regular full-time employment or retirement Retirement Date Retirement is authorized when the combination of the employee s age and years of regular fulltime service (with a minimum of 15 years of continuous service at the time of retirement) equals or exceeds the number 75. Regular part-time service will be counted on a pro rate basis. Employees that are retiring must provide written notification through normal administrative channels to their appropriate Chancellor or Vice President at least three months in advance of the desired retirement date Sick Leave Conversion Former UKCCS employees that were employed by the University of Kentucky prior to July 1, 1995, will receive a payment for unused sick leave if the accrued balance is at least 66 days. The first 22 days will be at full pay and the remaining days will be paid at the rate of the KCTCS retirement contribution rate which is currently 10% Retirement Benefits Each participant is entitled at retirement to activate any retirement benefits that have been accrued under the KCTCS retirement plan in accordance with the rules established by the retirement plan carriers. In addition to lump sum or partial lump sum provisions, there will be both annuitized and non-annuitized methods of withdrawal. There may be variances in the retirement withdrawal options among the carriers. All retirement plan carriers do not offer the same withdrawal options Periods of Service As used in the defined contribution retirement plan, "period of service" means the number of years of full-time employment, plus credit allowed for part-time employment, plus periods in an approved leave of absence status. Employees can earn only one year of service per calendar year, regardless of any extra part-time employment above the normal 37.5-hour work week within KCTCS. 120

23 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES Contributions During a Leave Contributions shall be made only on the actual salary the employee is paid through the KCTCS payroll. Contributions will not be increased for partial salaries. This includes sabbatical leave Purchase of Service Credit The Defined Contribution 403 (b) Plan does not have a feature that allows the purchase of service from prior service in military, public employment, or higher education positions. This feature is common in defined benefit plans, but is not used in a defined contribution plan Conversion of Health Insurance Upon Retirement Defined Contribution Plan 403 (b) Plan Retirees Employees that meet the retirement criteria will continue to receive a contribution toward the cost of their health insurance plan. Employees under age 65 will remain on a regular health insurance plan until age 65, while employees that retire and are eligible for Medicare will be placed on a Medicare eligible health insurance plan. An employee hired with an effective date on or after July 1, 2009, who retires under the provisions of KCTCS Board of Regents Policy 3.7 is not eligible for participation in a KCTCS sponsored retiree health plan. Employees that retire from the Community Colleges under UK benefits at the time of retirement will receive their health insurance credit per UK policy and participate in the UK health plans. Any Community College employee that has retired under the UK benefits will be ineligible for the health insurance credit available through employment under the KCTCS personnel system. 121

24 PROPOSED POLICY REVISION KCTCS BOARD OF REGENTS POLICIES KTRS/KERS Requirements for health insurance coverage in retirement are established by state statute. Employees should contact the appropriate retirement system office for details Date Approved by Date of Last Review Date of Last Revision KCTCS Board of Regents (Include all dates in chronological order) Chair, Board of Regents Date President, KCTCS Date 122