FAQ: Miscellaneous Tier 2 to Tier 3 Conversion

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Audience: County Employees Contributing to SCERS as Miscellaneous Tier 2 Members
Topic: Conversion from Miscellaneous Tier 2 to Miscellaneous Tier 3

1. Who is eligible to convert membership to Miscellaneous Tier 3?

Active employees of the County of Sacramento who contribute to the Sacramento County Employees’ Retirement System (“SCERS”) as Miscellaneous Tier 2 members are eligible to convert membership to Miscellaneous Tier 3. [Active employees who do not currently contribute as Miscellaneous Tier 2 members, deferred members and retired members are not eligible to convert membership to Miscellaneous Tier 3.]

2. What is required to convert membership to Miscellaneous Tier 3?

Miscellaneous Tier 2 members who wish to convert to Miscellaneous Tier 3 must complete a special “Notice and Election Form” and return it to the SCERS office within a 60-day enrollment period, which will begin October 19th, 2007 and conclude December 18th, 2007.

3. Where is the Notice and Election Form?

Personalized versions of the Notice and Election Form will be distributed in a direct mailing to eligible Miscellaneous Tier 2 members. Generic versions of the Notice and Election Form will be available from the SCERS Web site, www.scers.org, but will not be accepted from persons who are ineligible for membership conversion.

4. What happens to Miscellaneous Tier 2 members who fail to return the Notice and Election Form?

Miscellaneous Tier 2 members who fail to return their Notice and Election Form or do not respond within the 60-day period set by SCERS will remain in Miscellaneous Tier 2. [The County has no plans at present to offer another opportunity for Miscellaneous Tier 2 members to convert to Miscellaneous Tier 3.]

5. What are the benefits of converting Miscellaneous Tier 2 membership to Miscellaneous Tier 3?

Members who convert will begin earning future service with SCERS under Miscellaneous Tier 3. The benefit of converting from Miscellaneous Tier 2 to Miscellaneous Tier 3 is the possibility of a higher monthly allowance after retirement. This is because Miscellaneous Tier 3 offers an annual cost-of living adjustment (“COLA”) of up to 2.00%, while Miscellaneous Tier 2 does not. To illustrate the impact of this difference after just a few years, please compare the allowance payable to a member who retires with full service in Miscellaneous Tier 2 to the allowance payable to a member who retires with full service in Miscellaneous Tier 3. Download Election Form and FAQs to view examples.

6. What does it cost to earn future service under Miscellaneous Tier 3?

Miscellaneous Tier 2 members pay a lower contribution rate than Miscellaneous Tier 3 members because Miscellaneous Tier 2 members do not have a COLA. Accordingly, the immediate cost of conversion is a higher member contribution. As indicated by the examples below, the difference between the contribution rate required from Miscellaneous Tier 2 members and the rate required from Miscellaneous Tier 3 members is currently about 1% of retirement eligible wages. Download Election Form and FAQs to view examples.

7. When can past service be upgraded to Miscellaneous Tier 3?

Members who elect to convert future service to Miscellaneous Tier 3 will have the opportunity to upgrade prior Miscellaneous Tier 2 service after the conclusion of the 60-day election period. At that time, members will have the ability to upgrade some or all of their prior Miscellaneous Tier 2 service by paying the full actuarial cost of the benefit increase. Because members will be required to pay the full cost of the upgrade, cost information will be prepared by SCERS’ actuary and distributed to all members who elect to convert future service to Miscellaneous Tier 3. Mailing of this information will not occur until after the election period closes on December 18th, 2007.

8. How much Miscellaneous Tier 2 service can be upgraded?

Members may choose to upgrade all or a portion of their prior Miscellaneous Tier 2 service, but must upgrade the credit in minimum increments of 6 months. For example, a member who has earned 20 years of Miscellaneous Tier 2 service and elected to convert future service to Miscellaneous Tier 3 may effect a service purchase to upgrade as little as 6 months of service or as many as 20 years of service.

9. How will retirement benefits be calculated for members who convert to Miscellaneous Tier 3, but decide not to upgrade any or all of their Miscellaneous Tier 2 service?

Members who do not upgrade Miscellaneous Tier 2 service will not see any change in the value of these benefits. Rather, they will receive a single allowance at retirement, which considers the combined benefit of all service. Download Election Form and FAQs to view examples.

10. Are there scenarios where converting to Miscellaneous Tier 3 might not be beneficial to members?

Yes. Under certain scenarios, a decision to convert to Miscellaneous Tier 3 may not provide a significant increase in post-retirement benefits. For example, members who believe that the U.S. economy may experience an extended period of zero or negative inflation during their retirement may conclude that the added expense of Miscellaneous Tier 3 contributions or the actuarial cost of a service upgrade is unwarranted. In addition, members who expect to receive a relatively small allowance from SCERS may conclude that an annual increase of 0.00% to 2.00% may not be worth the expense of higher contributions or service upgrades.

11. What payment options are available for upgrading Miscellaneous Tier 2 service?

Members have three payment options for upgrading Miscellaneous Tier 2 time: (1) make a lump sum payment, (2) effect an irrevocable payroll deduction agreement, or (3) agree to pay a portion of the cost by lump sum and the remainder through an irrevocable payroll deduction agreement.

12. What payment sources are acceptable for upgrading Miscellaneous Tier 2 service?

Members have three payment sources for upgrading Miscellaneous Tier 2 time: (1) post-tax dollars held in personal savings or investment accounts, (2) pre-tax dollars transferred or rolled over from 403(b) plans or governmental 457 plans, and (3) pre-tax dollars deducted directly from wages paid by the County.

13. Can members who are purchasing other service credit from SCERS also upgrade Miscellaneous Tier 2 service through payroll deduction?

Yes. Members who are already purchasing other service credit under an irrevocable payroll deduction agreement may enter into another irrevocable payroll deduction agreement to upgrade Miscellaneous Tier 2 service. However, members may not effect payroll deduction agreements for more than one upgrade of Miscellaneous Tier 2 service at any time.

14. What is the maximum payment period of upgrading Miscellaneous Tier 2 service?

Members who upgrade Miscellaneous Tier 2 service through irrevocable payroll deduction agreements can request payment periods as long as the lesser of (a) the upgrade period or (b) 10 years. For example, a member who wishes to upgrade 5 years of Miscellaneous Tier 2 service may take up to 5 years to complete the purchase, while a member who wishes to upgrade 20 years of Miscellaneous Tier 2 service may take up to 10 years to complete the purchase. Please note that a member who requests payroll deduction to purchase a service upgrade cannot request payroll deduction to purchase another service upgrade until the original agreement is completed.

15. What happens if members retire or separate from service prior to completing an upgrade of Miscellaneous Tier 2 service?

Members who are in the process of upgrading Miscellaneous Tier 2 service must pay-off outstanding payroll deduction agreements as soon as they retire or separate from service for any other reason. Otherwise, members who do not pay-off their agreements will receive credit for the portion of the upgrade already purchased.