Senate Bill 200 DC Option and Supplemental Explained

BOTTOM LINE: Senate Bill 200’s DC Option with DC Supplemental will cost employers an additional 6% – 9% for each employee choosing it.

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A defined contribution plan or DC plan is like a 401(k), employees put their contributions and their employers in an account. Those contributions are invested as the employee decides and the amount in their account at the end of the day will be affected by investment returns and fees. To learn more about defined contribution plans vs. defined benefit plans, visit this page on our website.

Currently, State of Colorado employees who started their employment after 1/1/2006 and community college employees who started after 1/1/2008 get to choose between PERA’s DB plan or PERA’s DC plan. As of the end of 2016 there were 5,761 participants in the DC plan or approx. 10% of those eligible.

To understand the DC plan, you first need to know a little more about how the DB plan is funded.

For this example, we will be using the State Division, including Troopers.

PERA State Division employers pay 20.22% of pay to PERA. 10% of that pay is the AED & SAED which go straight to pay the unfunded liability. The statutory amount of 10.22% (10.15% is the State Division rate combined with the Troopers rate of 12.85%) gets divided up four ways –

  • 1.02% to the Health Care Trust Fund
  • .49% to the Annual Increase Reserve Fund
    • The Annual Increase Reserve Fund provides for COLAs for those employees hired after 1/1/2007
  • 2.82% to the cost of the member’s pension
    • This is called the Normal Cost; the cost of the pension equals the employee contribution (8%) plus a part of the employer contribution (2.82%)
  • 5.89% to the unfunded liability

For the State Division DC Plan Option that is in place today, things look a little different, the employer still contributes 20.22% of pay to PERA but it is divided up as follows:

  • 10% AED & SAED still go to the unfunded liability
  • 22% statutory contribution goes straight to the employee’s DC account
    • The employee also receives their 8% contribution into that account

The problem is for every employee who has chosen the DC option, the employers’ contribution of 5.89% to the unfunded liability isn’t made. This has meant a reduction in the pay down of the unfunded liability.

 

 

Senate Bill 200 seeks to expand the DC Option to any employee starting on 1/1/2020. But, in order to not short change the unfunded liability payments, the bill requires the employer to pay an additional 6% – 9% called the DC Supplemental (exact amount depends on the division and the employee choosing the DC plan)

Here is an example for the School Division if Senate Bill 200 passed as introduced and no auto adjust occurred in 2020 or 2021:

Year 2022 (SB 200 doesn’t have the DC Supplemental start until 1/1/2022):

  • The employer still pays the 10% AED and SAED to the unfunded liability
  • The statutory amount of 12.15% (increased 2% in SB200) gets divided between:
    • 15% to the employee’s DC account
      • The employees 11% (increased 3% in SB200) also goes into this account
    • 2% to the unfunded liability

The DC Supplemental in Senate Bill 200 then requires the employer to pick up the additional amount that would have gone to the unfunded liability if the employee had chosen the DB plan.

For the school division in 2022 we estimate that increased contribution required from the employer would be approx. 8.63%.

 

 

How did we come up with 8.63% for the DC Supplemental?

We have to go back to the way the DB plan would be funded in 2022:

The statutory amount would be 12.15%, but none of the statutory amount would go to pay for the current employee’s pension (no Normal Cost contribution) so the distribution to the member DC account would be 10.15% under Senate Bill 200 and then 2% would be able to go to the unfunded liability. But, for the DC plan 10.63% would have gone to the unfunded liability (12.15% minus 1.02% health care minus .5% annual increase fund equals 10.63%) The difference between 10.63% and the 2% would be the DC Supplement – in this case 8.63% as an additional employer contribution.

 

Bottom line is the Senate Bill 200 DC Option with DC Supplemental will cost employers an additional 6% – 9% for each employee choosing it.

DC plans are more expensive for a lesser benefit.