Part 4. EMPLOYEES RETIREMENT SYSTEM OF TEXAS

Chapter 85. FLEXIBLE BENEFITS

34 TAC §85.7, §85.17

The Employees Retirement System of Texas (ERS) proposes amendments to 34 Texas Administrative Code §85.7 (Enrollment) and §85.17 (Grievance Procedure). Amended rule §85.7 concerns the automatic re-enrollment in the flexible benefits plan (the plan) under the Group Benefits Program (GBP). The amended rule is needed to provide for the establishment of this service and to clarify how automatic re-enrollment is administered for those employees with reimbursement account arrangements under the plan. Amended rule §85.17 is proposed in order to make this rule consistent with recent amendments made to Chapter 67 concerning the appeals process.

Section 85.7(a) is amended to add new paragraph (6) that provides for automatic re-enrollment in a reimbursement account(s) with the same elections during the annual enrollment period, and specifies the timeframe and method to change or decline benefits during this period. Section 85.7(b)(1) is amended to add new subparagraph (A) and (B) to clarify that employees who are automatically re-enrolled in a reimbursement account(s) and fail to change or decline benefits within the annual enrollment period shall be deemed an express election and informed consent to continue with the same elections for the new plan year.

Amended §85.17 is changed to conform the rule to recent changes made in the appeal process under Chapter 67, delegating responsibility for final decision making from the Board of Trustees to the executive director. Section 85.17(a) and (c) are amended to make clear that appeals are made under Chapter 67 to the executive director. Section 85.17(d) is deleted because the Board of Trustees has delegated appeals to the executive director.

Paula A. Jones, General Counsel, has determined that for the first five-year period the amended rules are in effect, there will be no fiscal implication for state or local governments as a result of enforcing or administering the rules; and small businesses will not be affected. The proposed amendment to §85.7 will affect a participant in the plan during the annual enrollment period by establishing an automatic re-enrollment with the same elections and is consistent with the automatic re-enrollment in other GBP programs administered by ERS.

Ms. Jones also determined that for each year of the first five years the proposed rules are in effect the public benefit anticipated as a result of enforcing the rules will be clarification of the rules as it applies to automatic re-enrollment in a reimbursement account(s) under the plan and the grievance procedure. There are no known anticipated economic costs to persons who are required to comply with these rules as proposed other than the monthly contributions to the health or dependent care plans.

Comments on the proposed rules may be submitted to Paula A. Jones, General Counsel, Employees Retirement System of Texas, P.O. Box 13207, Austin, Texas 78711-3207, or e-mail Ms. Jones at paula.jones@ers.state.tx.us. The deadline for receiving comments is 10:00 a.m. on May 21, 2007.

The amendments to §85.5 are proposed under §§1551.051, 1551.052, 1551.055, and 1551.206, Texas Insurance Code, which authorizes the board of trustees to adopt rules and provide for the administration of the GBP. The amendments to §85.17 are proposed under Texas Government Code §815.511(d) and Insurance Code §1551.360 which provide the Board with authority to delegate its authority to decide contested case matters, and Insurance Code §1551.357(c) which authorizes the Board to adopt rules pertaining to the sanctions and adjudication process.

No other statutes are affected by these proposed rules.

§85.7.Enrollment.

(a) Election of benefits.

(1) An eligible employee may elect to participate in the health care and/or dependent care reimbursement accounts within the flexible benefits plan by making an election and executing an election form or enrolling electronically.

(2) An employee who becomes eligible after the beginning of a plan year has 30 days from the date of eligibility to elect or decline benefits by executing an election form.

(3) By enrolling in the plan, the employee agrees to a reduction in compensation or agrees to after-tax payments equal to the participant's share of the cost and any fees for each reimbursement account selected.

(4) An election to participate in a reimbursement plan must be for a specified dollar amount plus any administrative fee.

(5) An annual enrollment period will be designated by the Employees Retirement System of Texas and shall be prior to the beginning of a new plan year. The annual enrollment period shall provide an opportunity to change and to elect or decline benefit options.

(6) An active employee who is enrolled in reimbursement accounts immediately prior to the annual enrollment period will be automatically re-enrolled with the same elections and contribution amounts for the new plan year unless the active employee takes action during the annual enrollment period to change contribution amounts or to decline participation.

(b) Effects of failure to elect.

(1) If the Employees Retirement System of Texas does not receive an election form from an eligible employee to participate in the reimbursement accounts by the due date, it shall be deemed an express election and informed consent by the eligible employee to: [ receive cash compensation as a benefit by reason of failure to purchase optional benefits in lieu of cash compensation.]

(A) receive cash compensation as a benefit by reason of failure to purchase optional benefits in lieu of cash compensation; or

(B) in the case of automatic re-enrollment during the annual enrollment period, to continue participation in the reimbursement accounts with the same contributions for the new plan year.

(2) To the extent an eligible employee does not elect the maximum permissible participation amounts hereunder, he shall be deemed to have elected cash compensation.

(c) Benefit election irrevocable except for qualifying life event.

(1) An election to participate shall be irrevocable for the plan year unless a qualifying life event occurs, and the change in election is consistent with the qualifying life event. The plan administrator may require documentation in support of the qualifying life event.

(2) A qualifying life event occurs when an employee experiences one of the following changes:

(A) change in marital status;

(B) change in dependent status;

(C) change in employment status;

(D) change of address that results in loss of benefits eligibility;

(E) change in Medicare or Medicaid status;

(F) significant cost of benefit or coverage change imposed by a third party provider other than a provider through the Texas Employees Group Benefits Program; or

(G) change in coverage ordered by a court.

(3) An election form requesting a change in election must be submitted on, or within 30 days after, the date of the qualifying life event.

(4) A change in election as provided in this subsection becomes effective on the first day of the month following the date of the qualifying life event.

(d) Payment of flexible benefit dollars.

(1) Flexible benefit dollars from an active duty employee shall be recovered through payroll withholding at least monthly during the plan year and remitted to the Employees Retirement System of Texas for the purpose of purchasing benefits. For the health care reimbursement account only, and except as otherwise provided in §85.3(b)(3)(D) of this title (relating to Eligibility and Participation), flexible benefit dollars from employees on leave without pay status or who have insufficient funds for any month shall be recovered through direct after-tax payment from the employee or upon the return of the employee to active duty status from payroll withholding, for the total amount due.

(2) An employee's flexible benefit dollars with respect to any month during the plan year shall be equal to the authorization on the employee's election form plus any administrative fees.

(3) Flexible benefit dollars received by the Employees Retirement System of Texas shall be credited to the participant's dependent care reimbursement account and/or health care reimbursement account, as appropriate.

(e) Forfeiture of account balances.

(1) The amount credited to a participant's reimbursement account for each benefit election for any plan year will be used to reimburse or pay qualified expenses incurred during the eligible employee's period of coverage in such plan year and the grace period, if the claim is electronically adjudicated or if the participant files a correctly completed claim for reimbursement on or before December 31 following the close of the plan year.

(2) Any balances remaining after payment of all timely and correctly filed claims postmarked no later than December 31 following the close of the plan year and the grace period, shall be forfeited by the participant and be available to pay administrative expenses of the flexible benefits program.

(f) Reimbursement report to participant. The plan administrator or its designee shall provide to the participant periodic reports on each reimbursement account, showing the account transactions (disbursements and balances) during the plan year and the grace period. These reports may be provided periodically through electronic means.

§85.17.Grievance Procedure.

(a) Any person participating in the flexible benefits program, who is denied reimbursement of eligible expenses, may request the plan administrator or its designee to reconsider the claim. Any additional documentation in support of the claim may be submitted with the request for reconsideration. If the claim is again denied, the claim, accompanied by all related documents and copies of correspondence with the plan administrator or its designee, may be appealed [submitted] by the person to the executive director of the Employees Retirement System of Texas [ for review]. An appeal [ A request for review ] must be filed by the person in writing within 90 days from the date the plan administrator or its designee formally denies the claim and mails notice of this denial and right of appeal to the person.

(b) Any person with a grievance regarding eligibility or other matters involving the program may submit a written request to the executive director to make a determination on the matter in dispute.

(c) When the executive director reviews any matter arising under this section, all parties involved will be notified in writing of the executive director's determination [ decision ].

[(d) Any person that does not accept the executive director's decision may appeal the decision to the board. A notice of appeal must be filed in writing 30 days from the date the executive director's decision is mailed by certified mail.]

(d) [ (e) ] Appeals to the executive director [ board ] will be processed under the provisions of Chapter 67 of this title (relating to Hearings and Disputed Claims) and the Administrative Procedure Act, Chapter 2001, Government Code.

(e) [ (f) ] As used in this section, the term "person" includes any duly authorized representative of such person.

(f) [ (g) ] In computing time under this section, the day after any mailing by the plan administrator or its designee or the executive director shall be counted as the first day of the time period. A document is considered to be filed with the executive director when it is received by the executive director or when it is postmarked, whichever is earlier.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 9, 2007.

TRD-200701311

Paula A. Jones

General Counsel

Employees Retirement System of Texas

Earliest possible date of adoption: May 20, 2007

For further information, please call: (512) 867-7421

34 TAC §§87.1, 87.3, 87.5, 87.7, 87.13, 87.17, 87.33

The Employees Retirement System of Texas (ERS) proposes amendments to 34 Texas Administrative Code §§87.1, 87.3, 87.5, 87.7, 87.13, 87.17, and 87.33, concerning the Deferred Compensation 457 Plan found in Chapter 609, Subchapter C of the Texas Government Code.

These proposed amendments are needed in order to update the Plan rules due to the Pension Protection Act of 2006 (PPA), to clarify Plan requirements, and to comport with federal law, regulations, and administrative requirements.

Section 87.1, containing the Plan's Definitions, is amended to add certain definitions (qualified military service and public safety employee) due to changes in law and regulations.

Sections 87.3, 87.5 and 87.33, concerning Administrative and Miscellaneous Provisions, Participation by Employees, and The Economic Growth and Tax Relief and Reconciliation Act, are amended to adjust the annual deferral limit to $15,500 for 2007, per federal law.

Section 87.7 and §87.13, concerning Prior Plan Vendor Participation and Disclosure, modify certain requirements for prior plan vendors.

Section 87.17, concerning Distributions, includes changes due to PPA requirements on unforeseeable emergency provisions (payback option) for qualified military; rollovers by non-spouse beneficiaries to an inherited IRA; and, other emergency withdrawals by beneficiaries.

Paula A. Jones, General Counsel, Employees Retirement System of Texas, has determined that for the first five year period the amendments are in effect, there will be no fiscal implications for state or local government as a result of enforcing or administering the amended rules, and, to her knowledge, small businesses should not be affected.

Ms. Jones also determined that for each year of the first five years the amendments are in effect the public benefit anticipated as a result of enforcing the amended rules would be added flexibility for and protection of Texa$aver Deferred Compensation Plan participants. There are no known anticipated economic costs to persons who are required to comply with the amendments as proposed.

Comments on the proposed rule amendments may be submitted to Paula A. Jones, General Counsel, Employees Retirement System of Texas, P.O. Box 13207, Austin, Texas 78711-3207, or you may e-mail Ms. Jones at paula.jones@ers.state.tx.us. The deadline for receiving comments is 10:00 a.m. on May 21, 2007.

These amendments are proposed under Government Code, §609.508, which provides authorization for the ERS Board of Trustees to adopt rules necessary to administer the deferred compensation plan.

No other statutes are affected by these proposed amendments.

§87.1.Definitions.

The following words and terms, when used in this chapter, shall have the following meanings, unless the context clearly indicates otherwise.

(1) - (17) (No change.)

(18) Emergency withdrawal application--A form completed by a participant requesting the full or partial distribution of the participant's deferrals and investment income because of an [ a ] unforeseeable emergency.

(19) - (29) (No change.)

(30) Qualified military service--a uniformed service while on active or inactive duty, including training periods. Uniformed services include the Army, Navy, Marine Corps, Air Force, Coast Guard, and Public Health Service Commission Corps, the reserve components of those services as well as training or service in the National Guard or Air National Guard and any other category of persons designated by the President in a time of war or emergency.

(31) [ (30) ] NCUA--National Credit Union Administration, a United States Government Agency, which regulates charters and insures deposits of the nation's federal credit unions. Shares and deposits in credit unions are insured by the NCUSIF as detailed in this section.

(32) [ (31) ] NCUSIF--National Credit Union Share Insurance Fund, is administered by the NCUA as detailed in this section and insures members' share and deposit accounts at federally insured credit unions.

(33) [ (32) ] Non-filer--A prior plan vendor which does not ensure that the plan administrator receives a quarterly report by the due date specified in §87.19(d)(1) of this title (relating to reporting and recordkeeping by prior plan vendors).

(34) [ (33) ] Non-spousal beneficiary--Any beneficiary other than a spouse or ex-spouse.

(35) [ (34) ] Normal retirement age--A range of ages beginning with the earliest age at which a person is eligible to retire under the participant's basic pension plan as referenced in §87.5(g) of this title (relating to participation by employees).

(36) [ (35) ] One-time election form--A form completed by a participant requesting the full distribution of deferred compensation funds with a total balance that does not exceed the dollar limit under the Code §457(e)(9), EGTRRA, or the dollar limit under §411(a)(11) of the Code, if greater, as of the date that payments commence. Also known as the de minimis distribution election.

(37) [ (36) ] Participant--A current, retired, or former employee who either has elected to defer a portion of the employee's current compensation, previously deferred compensation or has a balance in the plan.

(38) [ (37) ] Participation agreement--A contract signed by an employee agreeing to defer the receipt of part of the employee's compensation in accordance with the plan and containing certain information regarding prior plan vendors, investment products, and other matters.

(39) [ (38) ] Plan--The deferred compensation program of the state of Texas that is governed by the Code §457 and authorized by Chapter 609, Government Code. This plan is a continuation of the plan previously administered by the Comptroller of Public Accounts.

(40) [ (39) ] Plan administrator--The Board of Trustees of the Employees Retirement System of Texas or its designee.

(41) [ (40) ] Prior plan--Refers to the State of Texas 457 Deferred Compensation Plan, the vendors and products approved by the Board of Trustees of the Employees Retirement System of Texas prior to September 1, 2000.

(42) [ (41) ] Prior plan vendor--A vendor in the prior plan with whom the plan administrator has signed a vendor contract. The term includes a prior plan vendor's officers and employees. The prior plan vendor may be an insurance company, bank, savings and loan, credit union, or mutual fund. The term applies only to vendors approved and implemented by the Board of Trustees before January 1, 2000.

(43) [ (42) ] Product approval notice--A written notice from the plan administrator to a prior plan vendor informing the vendor that a particular investment product has been approved for participation in the plan.

(44) [ (43) ] Product contract--A contract between an investment provider and the plan administrator concerning the participation of one of the vendor's investment products in the plan.

(45) [ (44) ] Product type--A categorization of an investment product according to its relevant characteristics. Examples of product types are life insurance products, mutual funds, certificates of deposit, savings accounts, share accounts, stable value account, self-directed brokerage account, and annuities.

(46) Public safety employee--Any employee of a state or political subdivision who provides police protection, firefighting services, or emergency medical services for any area within the jurisdiction of such state or political subdivision. It may also include a chaplain or a member of an ambulance or rescue crew. This does not include judges, Texas Department of Criminal Justice guards, probation, parole, juvenile delinquency or similar officers.

(47) [ (45) ] Qualified investment product--An investment product concerning which the plan administrator and the sponsoring prior plan or revised plan vendor have signed a product contract.

(48) [ (46) ] Revised plan--Refers to the State of Texas 457 Deferred Compensation Plan and the vendors and products approved by the Board of Trustees of the Employees Retirement System of Texas after August 31, 2000 for the Texa$aver program. The term "Texa$aver program" is used as it is defined in Texas Government Code Section 609.502.

(49) [ (47) ] Revised plan vendor--An insurance company, brokerage firm, or mutual fund distributor that sells investment products in the revised plan. The term includes a vendor's officers and/or employees. This applies only to vendors approved and implemented by the Board of Trustees subsequent to December 31, 1999.

(50) [ (48) ] Separation from service--A termination of the employment relationship between a participant and the participant's employing state agency, as determined in accordance with the agency's established practice. The term excludes a paid or unpaid leave of absence.

(51) [ (49) ] Spousal beneficiary--The current or ex-spouse of a participant who is designated to receive a participant's account balance.

(52) [ (50) ] State agency--A board, commission, office, department, or agency in the executive, judicial, or legislative branch of state government. The term includes an institution of higher education as defined by the Education Code, §61.003.

(53) [ (51) ] Third Party Administrator (TPA)--An entity under the direction of the plan administrator that operates independently of both the employer and investment providers to perform agreed upon administrative services to a tax-deferred defined contribution plan. These tasks may include recordkeeping, preparation of participant statements, monitoring deferral limits, and other specified services.

(54) [ (52) ] Transfer--The redemption of deferrals and investment income from a qualified investment product for investment in another qualified investment product.

(55) [ (53) ] Trust--The deferred compensation trust fund established to hold and invest deferrals and investment income under the plan for the exclusive benefit of participants and their beneficiaries.

(56) [ (54) ] Trustee--The Board of Trustees of the Employees Retirement System of Texas.

(57) [ (55) ] Unforeseeable emergency distribution--A severe financial hardship of the participant resulting from: an illness or accident, loss of property due to casualty, funeral expenses or other extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the participant.

(58) [ (56) ] Valuation date--A point in time in which an asset is assigned a dollar value. It may be the designated time of closing (daily, last day of the calendar month, the last day of the calendar quarter, each December 31) for determination of account balances in a defined contribution plan.

(59) [ (57) ] Vendor contract--A contract between the plan administrator and an investment provider concerning the vendor's participation in the plan.

(60) [ (58) ] Vendor representative--An agent, independent agent, independent contractor, or other representative of a prior plan who is not an employee or officer of the vendor.

(61) [ (59) ] 401(a)(9), §401(a)(9) and Section 401(a)(9)--These terms refer to Internal Revenue Code §401(a)(9).

(62) [ (60) ] 457, §457 and Section 457--These terms refer to Internal Revenue Code §457.

§87.3.Administrative and Miscellaneous Provisions.

(a) (No change.)

(b) Participation by state agencies in the plan.

(1) - (2) (No change.)

(3) Agency coordinators. An agency coordinator's responsibilities may include:

(A) - (D) (No change.)

(E) monitoring the annual deferral limits for each plan participant to ensure the maximum annual deferral limit of the lesser of $15,500 [ $15,000 ] (as adjusted) or 100% of the participant's gross income is not exceeded;

(F) - (P) (No change.)

(c) (No change.)

§87.5.Participation by Employees.

(a) - (f) (No change.)

(g) Normal maximum amount of deferrals.

(1) (No change.)

(2) The normal maximum amount of deferrals is equal to the lesser of $15,500 [ $15,000 ] (as periodically adjusted for cost-of-living in accordance with Code §457(e)(15)), §415(d), [ and ] the Job Creation and Worker Assistance Act of 2002 and the Pension Protection Act of 2006 , or 100% of a participant's includible compensation.

(3) The participant's employing agency will monitor the annual deferral limits for each plan participant to ensure the maximum annual deferral limit of the lesser of $15,500 [ $15,000 ] (as adjusted) or 100% of a participant's gross income is not exceeded. Each participant enrolling in the plan must provide the employing state agency any information necessary to ensure compliance with plan requirements, including, without limitation, whether the employee is a participant in any other eligible plan. If a participant makes deferrals in excess of the normal maximum annual deferral limit and is not participating under the catch-up provision, the following actions will be taken:

(A) Upon notification by the participant's agency, the prior plan vendor or TPA will return to the participant's agency the amount of deferrals in excess of the normal plan limits, that is, the lesser of $15,500 [$15,000] (as adjusted) or 100% of the participant's gross income without any reduction for fees or other charges.

(B) (No change.)

(4) - (5) (No change.)

(h) Three-year catch-up exception to the normal maximum amount of deferrals.

(1) - (7) (No change.)

(8) If a participant makes deferrals in excess of the normal plan limits under the three-year catch-up provision during or after the calendar year in which the participant reaches normal retirement age, the following actions will be taken.

(A) Upon notification by the participant's state agency, the prior plan vendor or TPA will return to the participant's state agency, the amount of deferrals in excess of the normal plan limits, that is, the lesser of $15,500 [ $15,000 ] (as adjusted in accordance with Code §457(e)(15) or 100% of a participant's includible compensation) without any reduction for fees or other charges.

(B) (No change.)

(9) (No change.)

(10) Special post severance compensation under Code §415 effective January 1, 2007. A participant may elect to defer compensation paid within 2 1/2 months following separation from service in accordance with Code §415. Types of compensation include:

(A) - (C) (No change.)

(D) compensation relating to qualified military or other service (Reg. 1.457-4(d)(1) , Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA), Code section 414(u) and the Pension Protection Act of 2006.

(i) - (l) (No change.)

(m) Unpaid leave of absence. If a participant separates from service or takes a leave of absence from the state because of service in the military and does not receive a distribution of his or her account balances, the Plans will allow suspension of loan repayments until after the conclusion of the period of military service. [ Participants on a leave of absence due to qualified military service under Code §414(u) may elect to make additional annual deferrals upon resumption of employment with the state equal to the maximum annual deferrals that the participant could have elected during that period if employment had continued (at the same level of compensation) without the interruption or leave, reduced by the annual deferrals, if any. This right applies for five years following the resumption of employment (or if sooner, for a period equal to three times the period of the interruption or leave). ]

(n) Military service. Participants on a leave of absence due to qualified military service under Code §414(u) may elect to make additional annual deferrals upon resumption of employment with the state equal to the maximum annual deferrals that the participant could have elected during that period if employment had continued (at the same level of compensation) without the interruption or leave, reduced by the annual deferrals, if any. This right applies for five years following the resumption of employment (or if sooner, for a period equal to three times the period of the interruption or leave). To qualify for USERRA, final USERRA regulations (January 18, 2006) benefits and the Pension Protection Act of 2006, the employee must return to employment with the original employer within certain specified timelines based on the length of his or her service. If less than 31 days, the employee must report to work no later than the beginning of the first full work period on the first full calendar day following discharge, allowing reasonable time required to return home safely and an eight (8) hour rest period. If more than 30 days but less than 181 days, the employee must return to employment no later than 14 days following discharge. If more than 180 days, the employee must return to employment no later than 90 days following discharge. A serviceman called up for action between September 11, 2001 and December 31, 2007 for more than 179 days may take the later of two years after the end of active service to make up annual contributions, distributions or payback loans. A tax refund or credit may be allowed if filed before the close of such period.

(o) [ (n) ] Disability. A disabled participant may elect to defer compensation during any portion of the period of his or her disability to the extent that he or she has actual compensation (not imputed compensation and not disability benefits) from which to make contributions to the plan and has not had a separation from employment.

(p) [ (o) ] Termination and resumption of deferrals.

(1) An employee may voluntarily terminate additional deferrals to the prior plan by completing a participation agreement or by contacting his or her agency coordinator.

(2) An employee who returns to active service after a separation from service must enroll in the revised plan before deferrals may resume.

(q) [ (p) ] Ownership of deferrals and investment income.

(1) Until December 31, 1998, a participant's deferrals and investment income are the property of the state of Texas until the deferrals and investment income are actually distributed to the employee.

(2) Effective January 1, 1999, in accordance with Chapter 609, Texas Government Code and Code §457(g), all amounts currently and hereafter held under the plan, including deferrals and investment income, shall be held in trust by the Board of Trustees for the exclusive benefit of participants and their beneficiaries and may not be used for or diverted to any other purpose, except to defray the reasonable expenses of administering the plan. In its sole discretion, the Board of Trustees may cause plan assets to be held in one or more custodial accounts or annuity contracts that meet the requirements of Code §457(g), and §401(f). In addition, effective January 1, 1999, the Board of Trustees does hereby irrevocably renounce, on behalf of the state of Texas and participating state agencies, any claim or right which it may have retained to use amounts held under the plan for its own benefit or for the benefit of its creditors and does hereby irrevocably transfer and assign all plan assets under its control to the Board of Trustees in its capacity as the trustee of the trust created hereunder. It shall be impossible, prior to the satisfaction of all liabilities with respect to participants and their beneficiaries, for any part of the assets and income of the trust fund to be used for, or diverted to, purposes other than for the exclusive benefit of participants and their beneficiaries. Adoption of this rule shall constitute notice to prior plan vendors holding assets under the plan to change their records effective January 1, 1999, to reflect that assets are held in trust by the Board of Trustees for the exclusive benefit of the participants and beneficiaries. Failure of a vendor to change its records on a timely basis may result in the expulsion of the vendor from the plan.

(r) [ (q) ] Market risk and related matters.

(1) The plan administrator, the trustee, an employing state agency, or an employee of the preceding are not liable to a participant if all or part of the participant's deferrals and investment income are diminished in value or lost because of:

(A) market conditions;

(B) the failure, insolvency, or bankruptcy of an investment provider; or

(C) the plan administrator's initiation of a transfer or investment of deferrals in accordance with the sections in this chapter.

(2) A participant is solely responsible for monitoring his or her own investments and being knowledgeable about:

(A) the financial status and stability of the investment provider in which the participant's deferrals and investment income are invested;

(B) market conditions;

(C) the resulting cost of making a transfer or distribution from a qualified investment product;

(D) the amount of the participant's deferrals and investment income that are invested in an investment provider's qualified investment products;

(E) the riskiness of a qualified investment product; and

(F) the federal tax advantages and consequences of participating in the plan and receiving distributions of deferrals and investment income.

(s) [ (r) ] Alienation of deferrals and investment income. A participant's deferrals and investment income may not be:

(1) assigned or conveyed;

(2) pledged as collateral or other security for a loan;

(3) attached, garnished, or subjected to execution; or

(4) conveyed by operation of law in the event of the participant's bankruptcy, or insolvency.

§87.7.Prior Plan Vendor Participation.

(a) (No change.)

(b) Eligibility requirements of a prior plan vendor.

(1) - (2) (No change.)

(3) Insurance companies.

(A) - (B) (No change.)

[(C) An insurance company shall report its A.M. Best, Standard & Poors, Moody's, and Duff & Phelps rating information to the plan administrator annually by January 1st and shall immediately report any change in its rating in the interim to the plan administrator.]

[(D) The plan administrator shall disapprove an insurance company's application to become a prior plan vendor if the company uses the sex of the person insured or of the recipient to calculate premiums, payments, or benefits for any of its investment products.]

(4) - (5) (No change.)

(c) - (m) (No change.)

§87.13.Disclosure.

(a) Approval of a disclosure form in prior plan.

(1) A prior plan vendor may [ shall ] complete an annual disclosure form for each investment product in which a plan participant has an account balance. If a variable annuity product has several investment choices, the plan administrator may require [ must receive ] all disclosures related to those investment choices. A prior plan vendor may be required by plan administrator to [ shall ] complete a disclosure on each investment product that has plan participant funds.

(2) - (3) (No change.)

(b) - (d) (No change.)

§87.17.Distributions.

(a) In general. Upon request, the plan administrator or TPA shall authorize the distribution of a participant's deferrals and investment income in accordance with the applicable distribution agreement so long as:

(1) - (5) (No change.)

(6) the participant elects a transfer to be made if the transfer is either for the purchase of permissible service credit (as defined in §415(n)(3)[ (A) ] of the Code and as amended by the Pension Protection Act of 2006 ) under the receiving governmental defined benefit plan, or if the transfer is for a repayment to which §415 of the Code does not apply by reason of §415(k)(3) of the Code.

(b) - (d) (No change.)

(e) Filing of distribution agreements by participants.

(1) - (5) (No change.)

(6) A participant may request a trustee-to-trustee transfer of assets from the prior plan or the revised plan to a governmental defined benefit plan in the same state or another state for the purchase of permissible service credit (as defined in the Code §414(d) and (p) and Code §415(n)(3)(A) , as amended by the Pension Protection Act of 2006 ) under such plan or a repayment to which Code §415 does not apply by reason of subsection (k)(3) thereof. The participant may elect to have any portion of the account balance transferred to a governmental defined benefit plan.

(7) (No change.)

(8) At a participant's [ or ] surviving spouse's request, the plan administrator may process a trustee-to-trustee transfer of an eligible rollover distribution upon receipt of appropriate instructions from the receiving plan. If a beneficiary is a non-spouse, the non-spouse may request a rollover to an inherited IRA.

(f) - (i) (No change.)

(j) Unforeseeable emergency distribution.

(1) - (3) (No change.)

(4) The term "unforeseeable emergency" means a severe financial hardship to a participant or participant's beneficiary caused by:

(A) (No change.)

(B) the loss of the property of a participant or participant's beneficiary because of a casualty (including the need to rebuild a home following damage to a home not otherwise covered by homeowner's insurance, as a result of a natural disaster); or

(C) (No change.)

(5) - (8) (No change.)

(9) The plan administrator may [ not ] approve an emergency withdrawal request from a primary or secondary beneficiary.

(10) (No change.)

(k) - (s) (No change.)

(t) Federal withholding and reporting requirements.

(1) - (3) (No change.)

(4) Federal tax withholding is mandatory for certain distributions to participants or beneficiaries. Distributions with a periodic payout of less than 10 years and lump sum distributions, other than required minimum distributions, are "eligible rollover distributions" subject to a mandatory 20 percent federal income tax withholding unless distributed in a direct rollover to an eligible retirement plan. Vendors who maintain participant account balances in the prior plan shall provide the required IRC §402(f) safe harbor notice to all 457 plan participants or their beneficiaries prior to the payment of an eligible rollover distribution. Tax notices may be provided electronically or in writing to the participant. For all distributions other than eligible rollover distributions, a prior plan vendor or TPA shall accurately determine any amounts to be withheld for federal taxes based on a Form W-4P submitted by the participant at the time of a distribution. If no Form W-4P is provided, the participant shall be taxed as "single with no dependents." The Tax Equity and Fiscal Responsibility Act does not apply to a deferred compensation plan governed by the Code §457.

(5) - (6) (No change.)

(u) (No change.)

§87.33.The Economic Growth and Tax Relief and Reconciliation Act.

(a) - (f) (No change.)

(g) Distributions.

(1) (No change.)

(2) Purchase of Service

(A) A participant may request a trustee-to-trustee transfer of assets from the prior plan or the revised plan to a governmental defined benefit plan in the same state or another state for the purchase of permissible service credit (as defined in Code §414(d), §414(p), and §415(n)(3)(A) as amended by the Pension Protection Act of 2006 ) under such plan or a repayment to which Code §415 does not apply by reason of subsection (k)(3) thereof.

(B) Notwithstanding any other provision contained in this plan, the TPA, at the direction of the plan administrator, or as requested by a participant or beneficiaries, shall transfer part or all of the account of any non-terminated participant to the trust forming the Employees Retirement System of Texas, the Teacher Retirement System of Texas, the Judicial Retirement System of Texas Plan I or Plan II or any other eligible retirement plan for the purpose of purchasing service credit, provided that the recipient trust meets or purports to meet the requirements (as defined in Code §414(d), §414(p), [and] §415(n)(3)(A) and as amended by the Pension Protection Act of 2006) and expressly permits such transfers to be accepted. In no event may the transfer exceed the amount necessary to purchase the service credit.

(3) (No change.)

(h) - (i) (No change.)

(j) The normal maximum amount of deferrals is increased to the lesser of $15,500 [$15,000 ] (as periodically adjusted in accordance with Code §457(e)(15)) or 100% of a participant's includible compensation.

(k) At a participant's or beneficiary's [ surviving spouse's ] request, the plan administrator shall process a trustee-to-trustee transfer of an eligible rollover distribution upon receipt of appropriate instructions from the receiving plan.

This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.

Filed with the Office of the Secretary of State on April 9, 2007.

TRD-200701313

Paula A. Jones

General Counsel

Employees Retirement System of Texas

Earliest possible date of adoption: May 20, 2007

For further information, please call: (512) 867-7421