Q & A: Can state governments just legislate pension changes?

Question

How are these state governments able to legislate changes to vesting schedules and formula calculations without someone challenging in a federal tax court hearing on defined benefit plan qualifications? Some of these proposals are radical plan modifications and would require a private corporation to solicit at least a private letter ruling from the IRS before they would risk their favorable tax qualification staus by adopting these changes to their DB plans.

Answer

The rules for state sponsored pension funds vary from state to state, except to the extent that each state adheres to the pronouncements of the Government Accounting Standards Board (GASB).  GASB, in effect, suggests best practices, but has no power to require that their directives be followed.

Most states have recognized that any changes they make cannot apply to incumbent employees.  So most of the proposals you may hear about would be mandatory only for new hires.  It is possible that some governors could challenge this presumption.

But the direct answer to your question is that the qualification rules that you cite apply to private sector pension plans, under the governing Federal law - ERISA.  Participants or their representatives could challenge any changes made in a given state, but the law would be determined state by state.

Thanks for your question.

-Bob Patrician