HOUSE BILL No. 4073

 

January 22, 2009, Introduced by Rep. Hammel and referred to the Committee on Judiciary.

 

     A bill to authorize and create irrevocable trusts for the

 

purpose of holding, investing, and distributing assets to be used

 

for certain postemployment health care benefits; to set forth

 

certain rights that public employees have in retirement health care

 

benefits under certain circumstances; to provide for the

 

establishment and amendment of certain irrevocable trust

 

agreements; and to prescribe certain powers and duties of certain

 

retirement systems, state departments, public officials, and public

 

employees.

 

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

 

     Sec. 1. This act shall be known and may be cited as the

 

"public employee retirement health care funding act".

 

     Sec. 2. As used in this act:

 


     (a) "Department" means the department of management and

 

budget.

 

     (b) "Employer contributions" means the amount transferred by

 

an employer to a funding account.

 

     (c) "Funding account" means an account created pursuant to

 

section 3(6) for the deposit of funds and payment of retirement

 

health care benefits under the applicable retirement act.

 

     (d) "Funding account dependent" means 1 or more of the

 

following:

 

     (i) A dependent as that term is used in section 20d of the

 

state employees retirement act, 1943 PA 240, MCL 38.20d, or a

 

"health benefit dependent" as that term is defined in section 54 of

 

the state employees retirement act, 1943 PA 240, MCL 38.54,

 

whichever is applicable.

 

     (ii) A health insurance dependent as that term is defined in

 

section 91 of the public school employees retirement act of 1979,

 

1980 PA 300, MCL 38.1391.

 

     (iii) A retirement allowance beneficiary as that term is defined

 

in section 109 of the judges retirement act of 1992, 1992 PA 234,

 

MCL 38.2109, or a health benefit dependent as that term is defined

 

in section 705 of the judges retirement act of 1992, 1992 PA 234,

 

MCL 38.2655, whichever is applicable.

 

     (iv) A survivor as that term is defined in section 13a of the

 

Michigan legislative retirement system act, 1957 PA 261, MCL

 

38.1013a, a beneficiary of a deceased retirant as that term is used

 

in section 50b of the Michigan legislative retirement system act,

 

1957 PA 261, MCL 38.1050b, or a health benefit dependent as that

 


term is defined in section 65 of the Michigan legislative

 

retirement system act, 1957 PA 261, MCL 38.1065, whichever is

 

applicable.

 

     (v) A retirement allowance beneficiary as that term is defined

 

in section 4 of the state police retirement act of 1986, 1986 PA

 

182, MCL 38.1604, or a dependent as that term is used in section 42

 

of the state police retirement act of 1986, 1986 PA 182, MCL

 

38.1642.

 

     (e) "Medical expenses" means expenses incurred by a past

 

member or his or her dependents that satisfy all of the following

 

conditions:

 

     (i) The expenses are medical care expenses that would otherwise

 

qualify for a deduction under section 213(d) of the internal

 

revenue code, 26 USC 213(d), without regard to the income threshold

 

in section 213(a) of the internal revenue code, 26 USC 213(a).

 

     (ii) The expenses have not been and will not be reimbursed by

 

any other source.

 

     (iii) The expenses must have been incurred while the individual

 

is a past member or after the death of a past member.

 

     (iv) The individual properly and timely substantiates the

 

expenses in a manner established by the applicable retirement

 

system.

 

     (f) "Member" means a person who is a member, former member,

 

deferred member, qualified participant, or former qualified

 

participant as determined under the applicable retirement act.

 

     (g) "Past member" means a former member who has retired with

 

retirement health care benefits payable by a retirement system or a

 


former member who has terminated employment.

 

     (h) "Retirement act" means 1 or more of the following:

 

     (i) The state employees' retirement act, 1943 PA 240, MCL 38.1

 

to 38.69.

 

     (ii) The public school employees retirement act of 1979, 1980

 

PA 300, MCL 38.1301 to 38.1408.

 

     (iii) The judges retirement act of 1992, 1992 PA 234, MCL

 

38.2101 to 38.2670.

 

     (iv) The state police retirement act of 1986, 1986 PA 182, MCL

 

38.1601 to 38.1648.

 

     (v) The Michigan legislative retirement system act, 1957 PA

 

261, MCL 38.1001 to 38.1080.

 

     (i) "Retirement health care benefits" means expenses for

 

medical, dental, and vision to be paid for past members or their

 

funding account dependents under the applicable retirement act.

 

     (j) "Retirement system" means a retirement system established

 

under a retirement act.

 

     (k) "State" means this state.

 

     (l) "Trust" means an irrevocable trust created under section

 

3(1) of this act.

 

     (m) "Trustee" means a member of a retirement system board.

 

     Sec. 3. (1) One irrevocable trust is authorized and created by

 

this act for each retirement system. An irrevocable trust

 

established under this subsection shall at all times be established

 

and administered in accordance with section 115 of the internal

 

revenue code, 26 USC 115.

 

     (2) The governing board of each retirement system shall be the

 


grantor and shall administer the irrevocable trust created for that

 

retirement system in order to pay retirement health care benefits

 

to its past members and their funding account dependents. The

 

members of the retirement system board shall act as the trustees of

 

the irrevocable trust for that retirement system. The trustees

 

shall adopt a written trust agreement that meets all of the

 

requirements set forth in section 9. The trustees of the

 

irrevocable trust may establish and adopt policies and procedures

 

for administering the irrevocable trust.

 

     (3) Each trust shall be managed and operated separately and

 

independent of the other retirement system trusts. The trustees may

 

contract with public and private entities for the provision of

 

bookkeeping, benefit payments, and other plan functions. The

 

department, the department of treasury, and the department of the

 

attorney general shall provide services to the trust as requested

 

by the trustees.

 

     (4) The assets in the irrevocable trusts shall be invested in

 

accord with the public employee retirement system investment act,

 

1965 PA 314, MCL 38.1132 to 38.1140m. Except as otherwise provided

 

in this subsection, the state treasurer shall be the investment

 

fiduciary of the irrevocable trusts and shall have exclusive

 

authority and responsibility to employ or contract with personnel

 

and for services that the state treasurer determines necessary for

 

the proper investment of the assets in the irrevocable trusts. The

 

governing board of the legislative retirement system may elect, or

 

revoke an election, to be the fiduciary of the funding account

 

assets within its irrevocable trust and retain the exclusive

 


authority to employ or contract with personnel and for services

 

that are necessary for the proper investment of those assets.

 

     (5) Each trust shall receive state appropriations, employer

 

contributions, employee contributions, investment earnings, refunds

 

and reimbursements, and other permitted deposits, and shall make

 

distributions for the payment of retirement health care benefits

 

authorized by the trustees for the administration of such trust.

 

However, an amount in excess of twice the annual obligations of the

 

trust shall not be deposited in or received by the trust unless the

 

state treasurer certifies that the proposed deposit will not

 

materially reduce the amount of federal funds received by the state

 

to support payments made under the social welfare act, 1939 PA 280,

 

MCL 400.1 to 400.119b. The trustees are authorized to establish an

 

administrative and investment fee structure to be charged against

 

the funding account within the trust to defray the costs of

 

administering the trust. An irrevocable trust established under

 

this section shall be kept separate from the pension assets of

 

retirement systems.

 

     (6) A funding account shall be established by the trustees for

 

the funding and prefunding of payments of retirement health care

 

benefit obligations under the applicable retirement act, and the

 

trustees may create accounts that the trustees determine are

 

necessary for the administration of the trust. Past members in the

 

aggregate shall have contractual rights to the assets in the

 

funding account for the payment of retirement health care benefits

 

required under the applicable retirement act.

 

     (7) The governing board of a retirement system may from time

 


to time authorize the deposit into the funding account of any

 

eligible funds on deposit in an account within its retirement

 

system for the purpose of payment of eligible retirement health

 

care benefits. Distributions from the funding account may be made

 

to satisfy the requirements of the retirement system for all

 

retirement health care benefits provided by the retirement system.

 

     (8) The trustees shall cause the annual financial statements

 

of the trust to be prepared in accordance with generally accepted

 

accounting principles and an audit to be conducted of those

 

financial statements by a qualified independent certified

 

accounting firm for each fiscal year in accordance with generally

 

accepted auditing standards.

 

     Sec. 4. (1) Except as otherwise provided in this section,

 

section 8, and section 18, assets contributed to the irrevocable

 

trust are irrevocable and may not be refused, refunded, or returned

 

to the employer or employee making such contribution.

 

     (2) The trustees of each trust may establish separate reserves

 

within the funding account to ensure that the assets of the funding

 

account are utilized for the exclusive benefit of specified groups

 

of members and past members. The separate reserve accounts shall

 

not be diverted for a purpose other than the payment of retirement

 

health benefits and administrative costs for each specified group

 

until such time as the liabilities for each group have been

 

satisfied. Assets received from specific members shall not be used

 

to pay for health benefits for any other member who is not a

 

beneficiary of that member.

 

     Sec. 5. The assets of the irrevocable trust are to be used

 


solely to perform this essential function of state government. The

 

trust shall only provide retirement health care benefits as

 

provided under this act and pay fees and expenses for the

 

administrative costs in carrying out this essential governmental

 

function.

 

     Sec. 6. The assets of the irrevocable trust and the right of a

 

member or past member of a retirement system to retirement health

 

care benefits shall not be subject to execution, garnishment,

 

attachment, the operation of bankruptcy or insolvency laws, or

 

other process of law and shall be unassignable.

 

     Sec. 7. The assets of the irrevocable trust shall be used

 

exclusively for the benefit of past members and their funding

 

account dependents and shall not be diverted for a purpose other

 

than the payment of retirement health care benefits and the

 

administrative costs of providing such benefits.

 

     Sec. 8. (1) Any assets remaining in the funding account after

 

all payments for eligible retirement health care benefits have been

 

paid and all other liabilities of the trust have been satisfied

 

shall be distributed to this state or other employers within the

 

applicable retirement system so long as the employers are

 

organizations the income of which is excluded under section 115(1)

 

of the internal revenue code, 26 USC 115.

 

     (2) Upon dissolution of the irrevocable trust, any assets

 

remaining after the payment of debts and the satisfaction of

 

liabilities are to be distributed to 1 or more states, political

 

subdivisions of states, the District of Columbia, or other

 

organizations the income of which is excluded under section 115(1)

 


of the internal revenue code, 26 USC 115.

 

     Sec. 9. The written trust agreement for each retirement system

 

shall contain all of the following provisions consistent with this

 

act:

 

     (a) Recitals describing the creation and purpose of the trust.

 

     (b) Language reflecting the requirements of sections 4 through

 

7.

 

     (c) Sections outlining the management and operation of the

 

trust.

 

     (d) A description of the various accounts that carry out the

 

functions of the trust.

 

     (e) Provisions setting forth the powers and duties of the

 

trustees.

 

     Sec. 10. (1) This state, an employer within a retirement

 

system, a member, or any other person may contribute amounts to a

 

funding account within an applicable trust for the prefunding of

 

retirement health care benefits.

 

     (2) If a funding account contribution is made to the

 

applicable trust, the contribution shall promptly be credited to

 

the funding account within the applicable trust.

 

     (3) Trustees shall credit the applicable account with the

 

appropriate investment earnings on those assets.

 

     Sec. 11. (1) The trustees shall establish a separately written

 

plan document which shall govern the terms and conditions of

 

reimbursement of expenses for medical, dental, and vision care with

 

the terms being consistent with the funding and payment of the

 

expenses under the applicable retirement act.

 


     (2) If the governing board of a retirement system has made a

 

deposit described in section 3(7), the trust shall use the funds in

 

the funding account to satisfy the requirements of the retirement

 

system for all retirement health care benefits provided by the

 

retirement system consistent with this act and the plan document

 

established under this section.

 

     (3) Any funds in the funding account may be counted toward and

 

used in the calculation of the annual required contribution for

 

purposes of the annual financial statements prepared pursuant to

 

section 3(8).

 

     (4) Notwithstanding anything to the contrary in this act,

 

claims incurred before the past member became entitled to receive

 

reimbursements under the applicable retirement act or this act are

 

not eligible medical expenses.

 

     Sec. 12. (1) If the department receives notification from the

 

United States internal revenue service that this act or any portion

 

of this act will cause any retirement system to be disqualified for

 

tax purposes under the internal revenue code, or prevent any

 

irrevocable trust from meeting the requirements of section 115 of

 

the internal revenue code, 26 USC 115, then the portion that will

 

cause the disqualification does not apply.

 

     (2) The provisions of this act are severable. If any part of

 

this act is declared invalid or unconstitutional, that declaration

 

shall not affect the remaining part of this act.

 

     Sec. 13. The trusts created by this act shall not be deemed to

 

be invalid by reason of any indefiniteness or uncertainty of the

 

persons designated as beneficiaries in this act and agreements

 


creating the trusts, nor shall the trusts be deemed to be invalid

 

as violating any existing law against perpetuities or against

 

suspension of the power of alienation of title to property or

 

against trusts for the purpose of the accumulation of income, but

 

each trust may continue for the amount of time that may be

 

necessary to accomplish the purpose for which it was created.

 

     Sec. 14. All assets and income of the trusts shall be exempt

 

from taxation by the state or any political subdivision of this

 

state. Distribution from the trusts will not be treated as taxable

 

income to the past members or their dependents by this state or any

 

political subdivision of this state.

 

     Sec. 15. (1) A trustee shall not be any of the following:

 

     (a) Personally liable for any liability, loss, or expense

 

suffered by the trust, unless the liability, loss, or expense

 

arises out of or results from the willful misconduct or intentional

 

wrongdoing of the trustee.

 

     (b) Responsible for the adequacy of the trust to meet and

 

discharge any obligation under the applicable retirement act and

 

this act.

 

     (c) Required to take action to enforce the payment of any

 

contribution or appropriation to the trust.

 

     (2) The trustees may be indemnified by the trusts and from the

 

fund of the trusts against costs, liabilities, losses, damages, and

 

expenses, including their attorney fees, as more fully provided in

 

the respective trust agreements, unless such costs, liabilities,

 

losses, damages, or expenses arise out of or result from the

 

willful misconduct or intentional wrongdoing of a trustee.

 


     Sec. 17. (1) The benefit obligations referenced in section

 

3(6) shall be construed to define or otherwise grant a contractual

 

right or privilege to a health care benefit or other postemployment

 

benefit to any member or beneficiary of a member if a benefit,

 

right, or privilege is established in the applicable retirement

 

act.

 

     (2) Members and past members shall have a contractual right to

 

a health care benefit if a health care benefit right is provided

 

pursuant to the applicable retirement act at the time the member or

 

past member separates from employment.

 

     Sec. 18. If a change or error in any records of the trust

 

results in a member, past member, or his or her dependent paying

 

into or receiving from the trust more or less than the member, past

 

member, or his or her dependent should have paid or would have been

 

entitled to receive had the records been correct, the trustees

 

shall correct the error and, as far as practicable, shall

 

incrementally adjust future payments to correct for the change or

 

error.