Legal and actuarial experts tell committee merger poses less IRS risk than reversion; recommendation to seek IRS determination and PLR

Committee staff summarized new memos and legal analyses on two bills under study that would change how closed Plan‑1 systems (commonly called "Plan 1" systems) are handled.

"Private letter rulings are only binding on the exact entity that requests them," Aaron Gutierrez, committee staff, told the members, stressing the importance of seeking IRS approvals tailored to the state’s enacted language before any transfers or implementation.

Rob Goss, partner at Ice Miller (special counsel for federal tax matters), told the committee Ice Miller recommends filing both a favorable determination letter (to confirm the resulting plan is a qualified governmental plan) and a private letter ruling (PLR) to confirm there are no adverse tax consequences for members. "Each is a different transaction," Goss said, and both can take a year or more to obtain; he urged a delay between enactment and implementation to allow IRS review before any asset movement.

Ice Miller explained the legal distinction between a merger (5085) and a termination with asset reversion (2034). The firm said the merger structure—where assets and liabilities of the three plans are combined into a single legacy plan—presents less tax risk because no assets are removed from the trust fund. Ice Miller characterized a cited private letter ruling submitted by an outside group as not analogous to 5085 because the PLR involved a different sequence of transfers while 5085 contemplates a full merger of assets and liabilities.

The Attorney General's Office summarized members’ contractual protections and state case law: plan members generally have a contractual right to promised monthly benefits and to systematic funding, and absent clear evidence of injury the AG's office does not view the two bills as reducing members’ benefits. The AG memo also flagged that state law and federal law guide disposition of surplus assets; under state precedent plan members are not automatically entitled to surplus.

The Office of the State Actuary told members OSA could reprice the bills once recent events are reflected in the actuarial model (including passage of ESSB 5357 and changes from the pension funding council's adopted long‑term economic assumptions). OSA noted the restatement/termination bill (2034) was expected to have impacts similar to prior pricing; it also warned that previously identified savings in the merger bill would be reduced by overlap with ESSB 5357.

SIB explained that removing LEHI 1 assets from the Common Trust Fund would require careful execution and transaction fees but that the proportional impact on the CTF is small because LEHI 1 is a relatively small share of total CTF assets. David Chiamark (SIB) said a slow, planned withdrawal lowers transaction costs, while a rapid withdrawal could force temporary cash holdings and lower near‑term returns.

Actuarial and legal presenters cautioned about the exclusive benefit rule—federal tax law allows governmental plans only to use trust assets for member benefits and reasonable administrative expenses. Ice Miller and the AG advised that for a termination/reversion scenario (2034) the state should ensure the restated plan is funded above 100% to reduce the risk the IRS would treat the remainder as an impermissible reversion. Ice Miller reiterated a merger (5085) generally presents lower tax risk because the assets remain in the single, qualified trust that pays benefit obligations for the merged membership.

Committee members asked detailed questions about the IRS process, timing, and the level of funding that would be appropriate to mitigate risk. Ice Miller and OSA advised that a favorable determination letter and PLR are the conservative path; filings should be made after enactment but with an effective date delayed enough to allow the IRS to act. Presenters said PLR/determination responses can easily take a year or more under current IRS staffing, and IRS filing fees for such requests are material.

Staff reminded members no formal action was required that day; staff plan to finalize the committee’s report for November and said the committee could decide whether to make policy recommendations at that time.