Retirement division says late payroll backlog is being caught up; will use DOL calculator to compute interest owed

At a meeting of the Senate Finance Subcommittee on the Department of Administration budget, Division of Retirement and Benefits Director Kathy Lee told senators the division is working to catch up after a November server incident that delayed employer payroll reporting and will use the U.S. Department of Labor interest calculator to make affected employees whole.

The matter matters because the delayed reports left employee retirement contributions unposted for several months and the division must calculate and post interest so members’ defined contribution accounts reflect the investment gains or losses they would have experienced if contributions had been posted on time. Lee said the division is preparing an appropriation request to cover the cost and expects to submit that request to the Office of Management and Budget soon.

Lee told senators the division has 131 positions and a current vacancy rate of about 5 percent and that staffing has improved after a reorganization and hiring and retention incentives, including a $4,000 hiring incentive with staged payments. She said the division restored routine processing times, returning to a four- to six‑week timeframe for completed retirement applications.

Lee described the November incident as an intrusion attempt that was stopped by the Office of Information Technology; she said there was no data breach but two servers had to be rebuilt and the division moved systems to the state cloud. One reporting tool used by political subdivisions and school districts required extensive reprogramming because it was written in an old Java version; that tool returned to service in mid‑February and employers were onboarded by March 7. Payroll supervisor Tracy Walter told the subcommittee the division has 57 employers on that reporting system, eight are fully caught up and roughly 40 remain to be fully current. Walter said employers report on different pay cycles, so catch‑up speed varies by employer.

On interest calculations, Lee said the division worked with law firm Ice Miller and recordkeeper Empower to choose a method permitted by IRS rules for tax‑qualified governmental plans. "Our decision was to go with the DOL calculator because we would be able to get the interest calculated more quickly and into the participants' accounts for investment more quickly," Lee said. She explained the IRS accepts two methods: individual participant calculations of actual gains/losses, which is time‑consuming, or the Department of Labor (DOL) formula that applies a standard rate; the division selected the DOL method to speed payments. Lee also said the state statutes governing interest do not provide the division authority to unilaterally pay interest under state law and the division had to wait the federal 90‑day window before determining whether to make interest payments under federal guidance.

Lee said she expects to have a final cost estimate in May after all employers finish submitting back payrolls and that a formal appropriation request was being prepared with OMB. She asked the subcommittee to allow the division to publish a status spreadsheet on its website so members can see which employers are caught up and to encourage members to verify deposits in their Empower accounts.

The division also reported on major operational projects. Lee said the Benefits and Retirement System (BEARS) replacement is in user acceptance testing; testers have found defects requiring retesting and the division is tracking fixes with the vendor. Lee said the goal remains a fall 2025 go‑live but timing depends on how quickly tested defects are resolved. She told the subcommittee a vendor proposal for hosting, licensing and ongoing enhancements had been received at about $3,000,000 per year but negotiations were not complete.

On retiree and employee health plan administration, Chief Health Administrator Steve Ramos described recent program changes the AlaskaCare plan has implemented, including a virtual physical‑therapy program (Hinge Health), a surgical provider-of-excellence program (Lantern) with enhanced travel benefits, expanded first‑dollar coverage for breast imaging in retiree plans, and limited acupuncture coverage for specified diagnoses. Ramos said a pharmacy market check produced roughly $10.7 million in favorable pricing for the plans and that a future pharmacy RFP could yield 5–10 percent better pricing annually. He also reported network changes that increased Alaska‑based provider participation to more than 5,600 providers in the AlaskaCare network.

Lee and staff said communications to affected members were initially slow while the division awaited clarity about interest payment authority. The division plans non‑personalized letters routed to employers and an online status spreadsheet; it noted it lacks direct email addresses for many political‑subdivision employees and would rely on employers for distribution unless the division chooses to mail personalized notices at additional cost. The division also plans social‑media and website postings directing members to empower account checks.

The hearing record shows senators pressed for status updates and progress reports; Lee offered to provide the subcommittee with a follow‑up progress report on the employer payroll backlog. No formal motions or votes were taken on the item at the meeting.