Saturday, May 28, 2022
Hawai'i Free Press

Current Articles | Archives

Sunday, August 7, 2016
Aftermath of the Maui Hospital Benefits Veto Override
By Tom Yamachika @ 5:01 AM :: 6048 Views :: Maui County, Health Care, Labor

Aftermath of the Maui Hospital Benefits Veto Override

by Tom Yamachika, President Tax Foundation Hawaii

The adventure of state-run hospitals in Maui County continues. The State is attempting to privatize them, the government employees’ union sued to block the transition, and efforts were made at the Legislature to give those employees a special severance package. We have written about this before. The Governor vetoed the bill providing the severance benefits, SB 2077, and the Legislature overrode the veto, making the bill law immediately.

Much of the last-minute bluster surrounding the bill concerned the effect that the bill might have on the tax-exempt status of the Employees’ Retirement System (ERS). Today we focus on what in the new law may be causing the problem, and the effect that it might have.

The law offers a choice of either enhanced benefits from the ERS or a severance payment of up to half the annual salary of any worker whose position is privatized. This choice would be given to workers whether or not they ultimately keep their position once privatization takes place.

This feature, where an employee is allowed to choose between cash now and plan benefits later, is called a “cash or deferred arrangement.” Requirements for such an arrangement are found in Internal Revenue Code section 401(k), which is why the employee benefit plans in the private sector that offer such a choice are called “401(k) plans.”

According to ERS counsel’s opinion that accompanied the veto message, there are two problems. First, according to Treasury Regulations, only certain types of benefit plans can have 401(k) features, and defined benefit plans, such as ERS, are not among them. Second, according to the Internal Revenue Code itself, a governmental defined benefit plan can’t have a 401(k) feature. (A government can offer a separate section 457 plan, which allows participants a similar choice.)

So what happens if a benefit plan does get disqualified? According to the IRS’ website, there are potentially severe consequences to the employer, the employees, and the plan itself.

For the employer, contributions to the plan aren’t deductible until the employee recognizes the payment as income. That isn’t a big deal to a state government that doesn’t pay federal income tax anyway.

For the employees, contributions made by the employer to the plan are immediately taxable to employees to the extent each employee is vested in the contributions being made. Those contributions, as they vest, would be considered salaries subject to payroll taxes, including unemployment and Social Security taxes. All employees that are vested in ERS will be impacted, and will probably owe more tax at the end of the year than they are planning for.

For the plan, loss of tax-exempt status means that the plan will need to pay federal and state income tax on its net investment income such as interest, dividends, and capital gains on its invested assets. In fiscal year 2014, ERS’ comprehensive annual financial report stated that its net investment income was slightly less than $2.2 billion. Just the federal tax on that amount would be $870 million, which is one and a half times the amount reportedly needed to buy the whole island of Lanai. Having to pay that amount would not be good for a retirement plan that is already underfunded by $8 billion.

We need to clean up this mess.

Links

TEXT "follow HawaiiFreePress" to 40404

Register to Vote

2aHawaii

808 Silent Majority

ACA Signups Hawaii

Alliance Defending Freedom

Aloha Pregnancy Care Center

American Council of Trustees and Alumni

AntiPlanner

Antonio Gramsci Reading List

A Place for Women in Waipio

Astronomy Hawaii

Back da Blue Hawaii

Ballotpedia Hawaii

Better Hawaii

Broken Trust

Build More Hawaiian Homes Working Group

ChinaTownWatch.com

Christian Homeschoolers of Hawaii

Cliff Slater's Second Opinion

DVids Hawaii

FIRE

Fix Oahu!

Frontline: The Fixers

Genetic Literacy Project

Grassroot Institute

Habele.org

Hawaii Aquarium Fish Report

Hawaii Aviation Preservation Society

Hawaii Catholic TV

Hawaii Christian Coalition

Hawaii Cigar Association

Hawaii Coalition Against Legalized Gambling

Hawaii ConCon Info

Hawaii Credit Union Watch

Hawaii Crop Improvement Association

Hawaii Debt Clock

Hawaii Defense Foundation

Hawaii Family Advocates

Hawaii Family Forum

Hawaii Farmers and Ranchers United

Hawaii Farmer's Daughter

Hawaii Federalist Society

Hawaii Federation of Republican Women

Hawaii Future Project

Hawaii Gathering of Eagles

Hawaii History Blog

Hawaii Homeschool Association

Hawaii Jihadi Trial

Hawaii Legal News

Hawaii Life Alliance

Hawaii March for Life

Hawaii's Partnership for Appropriate & Compassionate Care

Hawaii Public Charter School Network

Hawaii Rifle Association

Hawaii Shippers Council

Hawaii Smokers Alliance

Hawaii State Data Lab

Hawaii Together

HIEC.Coop

HiFiCo

Hiram Fong Papers

Homeschool Legal Defense Hawaii

Honolulu Navy League

Honolulu Traffic

House Minority Blog

Imua TMT

Inouye-Kwock, NYT 1992

Inside the Nature Conservancy

Inverse Condemnation

Investigative Project on Terrorism

July 4 in Hawaii

Kakaako Cares

Keep Hawaii's Heroes

Land and Power in Hawaii

Legislative Committee Analysis Tool

Lessons in Firearm Education

Lingle Years

Malulani Foundation

Managed Care Matters -- Hawaii

Malama Pregnancy Center of Maui

Mauna Kea Recreational Users Group

MentalIllnessPolicy.org

Military Home Educators' Network Oahu

Missile Defense Advocacy

MIS Veterans Hawaii

NAMI Hawaii

Natatorium.org

National Christian Foundation Hawaii

National Parents Org Hawaii

NFIB Hawaii News

No GMO Means No Aloha

Not Dead Yet, Hawaii

NRA-ILA Hawaii

Oahu Alternative Transport

Obookiah

OHA Lies

Opt Out Today

OurFutureHawaii.com

Patients Rights Council Hawaii

PEACE Hawaii

People vs Machine

Pritchett Cartoons

Pro-GMO Hawaii

P.U.E.O.

RailRipoff.com

Rental by Owner Awareness Assn

ReRoute the Rail

Research Institute for Hawaii USA

Rick Hamada Show

RJ Rummel

Robotics Organizing Committee

Save Dillingham Airfield

School Choice in Hawaii

SenatorFong.com

Sink the Jones Act

Statehood for Guam

Talking Tax

Tax Foundation of Hawaii

The Real Hanabusa

Time Out Honolulu

Trustee Akina KWO Columns

UCC Truths

US Tax Foundation Hawaii Info

VAREP Honolulu

Waagey.org

West Maui Taxpayers Association

What Natalie Thinks

Whole Life Hawaii

Yes2TMT