§88-81.5  Federal tax limits on annualcompensation.  (a)  [2007 amendment retroactive to July 1, 2006.  L2007, c 215, §31.]  Effective July 1, 1996, compensation used to determine"average final compensation" under section 88-81 and employeecontributions picked up by the employer under section 88-46 or 88-326, shall besubject to the annual limit set forth in section 401(a)(17) of the InternalRevenue Code of 1986, as amended.

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

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

(2)  The tax-qualified pension benefit that would bepayable 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 ofservice as of June 30, 2004, and the member's average final compensation aslimited by section 401(a)(17) as of the earliest age the member could retirewith an unreduced benefit, or, upon the member's termination of service, ifearlier.

(c)  The nontax-qualified benefit undersubsection (b) shall be determined and paid in a single lump sum within thetime required to meet federal tax withholding and reporting obligations for thefirst year the benefit is taxable.  The lump sum shall be the actuarialequivalent of a single-life annuity payable at the earliest age the membercould retire with an unreduced benefit, assuming that the compensation limit ineffect under section 401(a)(17) at the time the benefit is taxable willincrease two per cent annually.  The actuarial equivalent of the single-lifeannuity 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 Actuaries1995, vol. 47 (table 18), using a blended mortality table that is a fifty percent-fifty per cent blend of the 1994 Group Annuity Mortality table for malesset back two years and the 1994 Group Annuity Mortality table for females setback one year; and

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

(d)  At the earliest age the member couldretire 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 actualcompensation limit then in effect under section 401(a)(17) is less than thelimit that was assumed to be in effect under subsection (c) as of the date thatwas assumed to be the member's unreduced retirement age.  Such additionalpayment, if any, shall be the difference between:

(1)  The benefit that would have been paid undersubsection (c) if the member's unreduced retirement age and the actual section401(a)(17) limit in effect at the earlier of the member's unreduced retirementage 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 beadjusted for interest at eight per cent from the date of payment undersubsection (c) to the date of payment under this subsection.

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

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

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

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