The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


 

STATE OF MICHIGAN

MIKE COX, ATTORNEY GENERAL

RETIREMENT AND PENSIONS: Payment of pension to retirant upon return to state employment

Assuming a bona fide termination of employment, there is no legal basis for the State Employees' Retirement System to suspend the Tier 1 pension of a retirant who returns to State employment and is entered upon the payroll on or after December 1, 2002, as a "qualified participant" in the Tier 2 plan pursuant to section 13(3)(f) of the State Employees' Retirement Act.

Opinion No. 7167

December 29, 2004

Mr. Mitch Irwin, Director
Department of Management and Budget
Lewis Cass Building
Lansing, Michigan 48909

Mr. Chris DeRose, Director
Office of Retirement Services
Department of Management and Budget
Lewis Cass Building
Lansing, MI 48909

You have asked if, assuming a bona fide termination of employment, there is a legal basis for the State Employees' Retirement System to suspend the Tier 1 pension of a retirant who returns to state employment and is entered upon the payroll on or after December 1, 2002, as a qualified participant pursuant to section 13(3)(f) of the State Employees' Retirement Act (Act), 1943 PA 240, MCL 38.1 et seq, as amended by 2002 PA 743.

Historically, a public employee's pension was not considered a contractual obligation or a vested right. See Brown v Highland Park, 320 Mich 108, 114; 30 NW2d 798 (1948). However, this position was reversed with the adoption of Michigan's Constitution in 1963. Const 1963, art 9, � 24 prohibits the impairment of a state pension:

The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

In Ass'n of Professional & Technical Employees v Detroit, 154 Mich App 440; 398 NW2d 436 (1986), the City of Detroit proposed to increase the minimum age at which a person could retire, thereby delaying receipt of a city pension. The Court held that the framers intended Const 1963, art 9, � 24 "to protect pension benefits related to work already performed by current employees." Id., at 446. As a result, the Court concluded that the city's proposed imposition of a minimum age requirement directly diminished and impaired plaintiffs' accrued financial benefits in violation of art 9, � 24. Thus, a retirant may not be unilaterally denied a retirement allowance for work previously performed unless the denial is based upon some provision in the law in effect when the retirant earned his or her service credit. Id., at 446-447. See also OAG, 1967-1968, No 4365, p 55 (June 26, 1967).

MCL 38.13(1) states in pertinent part: "Except as otherwise provided in this act, membership in the retirement system consists of state employees occupying permanent positions in the state civil service." MCL 38.16(4) states: "If a member becomes a retirant or dies, he or she ceases to be a member." OAG, 1991-1992, No 6693, p 71 (August 16, 1991), relied on OAG, 1945-1946, No O-4106, p 675 (April 23, 1946),1 to conclude that:

[W]here a retiree is receiving an allowance under the Act and returns to state service and, therefore, again becomes a "member" under the Act, the person's allowance is suspended during the period of subsequent state employment.

Prior to the enactment of 1996 PA 487, all "members" were covered by the Act's defined benefit plan.2 The defined benefit plan provides a fixed pension allowance based upon the employee's age, years of service, and final average compensation. MCL 38.20. 1996 PA 487 amended the Act to provide that all employees hired on or after March 31, 1997, are "qualified participants" in a defined contribution plan in which the State contributes an amount equal to 4% of the participant's compensation and will match up to an additional 3% of the participant's contributions.3  MCL 38.63. No fixed retirement allowance is provided by the State under this plan.

MCL 38.13(3), as added by 2002 PA 743, provides in pertinent part:

Membership in the [Tier 1] retirement system does not include any of the following:

* * *

(d) An individual who is first employed and entered upon the payroll on or after March 31, 1997 for employment for which the individual would have been eligible for membership under this section before March 31, 1997. An individual described in this subdivision is eligible to be a qualified participant in Tier 2 subject to sections 50 to 69.

               * * *

(f) A retirant who again becomes employed by the state and is entered upon the payroll on or after December 1, 2002, for employment for which the retirant would have been eligible for membership under this section before December 1, 2002. A retirant described in this subsection shall be a qualified participant in Tier 2 subject to sections 50 to 69.

Thus, a state retirant who returns to state employment on or after December 1, 2002, does not again become a "member" in the retirement system upon reemployment. Rather, the retirant becomes a "qualified participant" in the Act's defined contribution plan. MCL 38.13(3)(f). In other words, at the time the retirant returns to work, he or she becomes a participant in a different retirement plan than the plan from which he or she draws a retirement allowance. MCL 38.16(4) provides no authority for the retirement system to suspend a retirant's Tier 1 pension in that instance.4  The Act does not provide any prohibition against continuing to pay the Tier 1 pension of a retiree who returns to state employment on or after December 1, 2002, as a "qualified participant" in the Tier 2 plan. The conclusions reached in OAG No 6693 and OAG No O-4106 do not, therefore, apply to the instant situation.

Your question assumes a "bona fide termination of employment." In Internal Revenue Service (IRS) Revenue Ruling 56-693, 1956-2 CB 282, the IRS discussed the receipt of retirement benefits absent a bona fide termination of employment, ruling that:

[A] pension plan which permits the participants, prior to any severance of employment (e.g. retirement; disability or death) to withdraw all or a part of the funds accumulated on their behalf is inconsistent with the accepted concept of a pension plan which meets all of the requirements of section 401(a) of the [Internal Revenue] Code.

This conclusion was reaffirmed in IRS Revenue Ruling 74-254, 1974-1 CB 91. More recently, in IRS Information Letter 2000-0245 (September 6, 2000), the IRS concluded that, while there is no definitive rule prohibiting the rehiring of an employee who has received a distribution from the employee's retirement 401(k) plan, the plan may not make such a distribution unless there is a "bona fide termination of employment in which the employer/employee relationship is completely severed." According to the IRS letter, if an employee terminates employment with the intent to be reemployed by the employer on a part-time or contingent basis, there is no severance of employment.

MCL 38.49(1), as added by 1995 PA 176, establishes the Legislature's intention that the State Employees' Retirement System be maintained as a qualified pension plan under the Internal Revenue Code:

This section is enacted pursuant to section 401(a) of the internal revenue code, 26 USC 401, that imposes certain administrative requirements and benefit limitations for qualified governmental plans. This state intends that the retirement system be a qualified pension plan created in trust under section 401 of the internal revenue code, 26 USC 401, and that the trust be an exempt organization under section 501 of the internal revenue code, 26 USC 501. The department shall administer the retirement system to fulfill this intent.

26 USC 401(a) and 26 CFR 1.401-1 define a qualified pension plan as a plan established and maintained by an employer primarily to provide for payments to employees after retirement.

Where there has been a bona fide severance of a retirant's employment, payment of a pension allowance to the retirant during his or her reemployment with the State would be consistent with the intent of MCL 38.49 to maintain the qualified status of the plan under 26 USC 401. If, however, there has been no bona fide termination of employment prior to the rehiring of a retirant, payment of a pension allowance to such an individual could jeopardize the qualified status of the plan and present issues regarding that individual's entitlement to payment of that allowance.5

It is my opinion, therefore, that, assuming a bona fide termination of employment, there is no legal basis for the State Employees' Retirement System to suspend the Tier 1 pension of a retirant who returns to State employment and is entered upon the payroll on or after December 1, 2002, as a "qualified participant" in the Tier 2 plan pursuant to section 13(3)(f) of the State Employees' Retirement Act.

MIKE COX
Attorney General

 1In reaching this conclusion, OAG No 6693 also relied on language in the Act to the same effect as the current language in MCL 38.16(4), as did OAG No O-4106.

2The Act's defined benefit plan is now also known as "Tier 1."  MCL 38.1i(3) defines "Tier 1" to mean:

    [T]he retirement plan available to a member under this act who was first employed and entered upon the
    payroll before March 31, 1997 and who does not elect to become a qualified participant of Tier 2.

3The Act's defined contribution plan is also known as "Tier 2."  MCL 38.1i(4) defines "Tier 2" to mean: 

    [T]he retirement plan established pursuant to section 401(k) of the internal revenue code that is
    available to qualified participants under sections 50 to 69.

4This opinion does not address whether a suspension of retirement benefits can be imposed as a condition of reemployment.

5This conclusion would not apply in the case of a deferred retirement option plan.  For a discussion of deferred retirement plans, see OAG, 2003-2004, No 7122, p ___ (January 14, 2003).  The Act does not currently provide for a deferred retirement option plan.