§88-81.5  Federal tax limits on annual
compensation.  (a)  [2007 amendment retroactive to July 1, 2006.  L
2007, c 215, §31.]  Effective July 1, 1996, compensation used to determine
"average final compensation" under section 88-81 and employee
contributions picked up by the employer under section 88-46 or 88-326, shall be
subject to the annual limit set forth in section 401(a)(17) of the Internal
Revenue Code of 1986, as amended.



(b)  Notwithstanding subsection (a), any member
who accrued a benefit prior to July 1, 2004, based on annual compensation in
excess of the limit set forth in section 401(a)(17) of the Internal Revenue
Code of 1986, as amended, shall receive a nontax-qualified benefit equal to the
difference between:



(1)  The pension benefit that would be payable at the
earliest age the member could retire with an unreduced benefit, based on the
member's years of credited service, the member's class of service, and the
member's average final compensation as of June 30, 2004, without regard to the
limit under section 401(a)(17); and



(2)  The tax-qualified pension benefit that would be
payable at the earliest age the member could retire with an unreduced benefit,
based on the member's years of credited service and the member's class of
service as of June 30, 2004, and the member's average final compensation as
limited by section 401(a)(17) as of the earliest age the member could retire
with an unreduced benefit, or, upon the member's termination of service, if
earlier.



(c)  The nontax-qualified benefit under
subsection (b) shall be determined and paid in a single lump sum within the
time required to meet federal tax withholding and reporting obligations for the
first year the benefit is taxable.  The lump sum shall be the actuarial
equivalent of a single-life annuity payable at the earliest age the member
could retire with an unreduced benefit, assuming that the compensation limit in
effect under section 401(a)(17) at the time the benefit is taxable will
increase two per cent annually.  The actuarial equivalent of the single-life
annuity shall be calculated on the following assumptions:



(1)  An eight per cent discount rate;



(2)  The 1994 Group Annuity Mortality Static Table
(Males and Females), published in the Transactions of the Society of Actuaries
1995, vol. 47 (table 18), using a blended mortality table that is a fifty per
cent-fifty per cent blend of the 1994 Group Annuity Mortality table for males
set back two years and the 1994 Group Annuity Mortality table for females set
back one year; and



(3)  A two and one-half per cent simple interest cost
of living adjustment to the original annuity.



(d)  At the earliest age the member could
retire with an unreduced benefit, or, upon the member's termination of service,
if earlier, the member shall be entitled to an additional payment if the actual
compensation limit then in effect under section 401(a)(17) is less than the
limit that was assumed to be in effect under subsection (c) as of the date that
was assumed to be the member's unreduced retirement age.  Such additional
payment, if any, shall be the difference between:



(1)  The benefit that would have been paid under
subsection (c) if the member's unreduced retirement age and the actual section
401(a)(17) limit in effect at the earlier of the member's unreduced retirement
age or termination of service had been known and used; and



(2)  The benefit that was paid under subsection (c).



The amount of any additional payment shall be
adjusted for interest at eight per cent from the date of payment under
subsection (c) to the date of payment under this subsection.



(e)  The nontax-qualified benefit shall be
administered by the board of trustees; provided that:



(1)  State members shall be paid with funds
appropriated from the State's general revenues; provided that the University of
Hawaii and the departments and agencies subject to section 88-125 shall
reimburse the State for the respective amounts payable on account of the
employees of the University of Hawaii or in such departments and agencies; and



(2)  County members shall be paid by the respective
counties pursuant to assessments made and received by the system.



(f)  Section 88-91 shall apply to the
nontax-qualified benefit. [L 2004, c 183, §2; am L 2006, c 169, §12; am L 2007,
c 215, §12]