Gen. 35] 35
COMPTROLLER

R E TI REMENT S YSTEMS

) C OLLEGES AND U NIVERSITIES

) A DMINISTRATI ON OF O PTIONA L R ETIREMEN T P ROGRAM
May 26, 1995

Mr. Edw in G. Greenberg Director , Central Payroll Bure au You have requ ested o ur op inion o n sev eral qu estions related to the Optional Ret irementProg ram (“O RP ”). Yo ur spe cific questi ons are as follows:
“1. Who is the legal ly resp onsibl e sponsor of the opti onal reti rement program , both employ er and employee deductions? What is the prec ise dut

y of the s ponsor in monit oring t he program on an ongoin g basis (particularly co mp liance with IR S requirem ents)?
“2. Must the C om ptr olle r implement t he expansion of

[the] Optional Retirem ent Progra m at a sp ecific time if there is no agency c urren tly responsible fo r the expan ded pro gram under IR S 403 (b ) monitoring requirements?
“3. Is Cen tral Pay roll entit led under a st atute , regul ation or executive o rder to reimb ursem ent of expe nses incurred for suppo rt of t he op t i on alre t i re men t pr og ram?
“4. To what extent

are Centr al Payrol l, t he Retir ement Agency or the em plo ying coll eges authorized t o relea se employee infor mation to op tional re tirem ent ve ndo rs such as soc ial secu rity num ber, home address and phone, and the amount of ot her 403(b) voluntary deductions?
“5. Which employees of t he coll ege and univ ersity system a re eligible for elec tion of v olun tary de ductio ns to the n ew optional reti rement ve nd or s? Doe s an e l i gi bl e e mp loy ee ha ve to fo rma lly elect to p articipate in op tional re tirem ent?36 [80 O p. Att’y
“6. If the answers to t

he above quest ions cannot be com pletely defini tive, what State legis lat ion is re quired t o insure that the IRS regulations for 403(b) pl ans are meti culousl y f ollow ed, monitored, and enforce d?” For the reasons stated below, we conclude as follows:
1. The answer to your first questi on begins wit h an identi fication of the l imited r ole of t he CentralPayrollBureau: Central Pay roll is notinanyse nse th e “s pon sor” of th e ORP or the deducti ons und er it. Indeed, given CentralPayroll ’s limited rol e, we do not t hink it nece ssary f or pu rpose s of this o pinion to try to identify any singl e “spons or” o n which ultimate compliance respo nsibility reposes; in fact , responsi bility for administ rati on of the ORP is divided among State entities and the designated vendors. For Central Payroll ’s purpos es, however, it may look t o the employing inst itution as t he “sponsor” of deducti ons from employees at that ins tit

ution. Thus, if

Central Payrollhas a conce rn about an individu al’s deductions

)for example, that t he amount of th e ded uctions appears t o be so high as to exceed l imits imposed under the Inter

nal Reve nue C ode (“I.R.C .”)

)Cen tral Pay roll sho uld inquire of the employi ng i n sti tuti on. The ins tit ution, in tur

n, may pass along the inquir

y to an ORP vendor that recei ves deducti ons from the empl oye e. If need be, the Stat e Retir ement Agency may take nece ssary a ction to requ ire a ve ndo r to carry out its contrac tual obligation t o p roperl y soli cit and process f unds under the program and to monitor com pliance with I.R.C. requir ements. 2. Because responsibili ties for admini ster ing a la wful program are sufficiently laid out in statute, there is no b asis for any delay i n the implementati on of the expanded ORP called for under Title 30 of the St ate Per sonnel and Pens ions (“ SPP”) Articl e, Maryland Code.
3. The Cen tral Pay roll Bu reau is entitled to reimbursement of its co sts, as pro vided in the S tate bu dget.
4. W ith the co nsen t of any em ploy ee, C entral Pay roll , the Retire ment Agency, or the employing ins tit ution may rel e ase the emp loyee’s socialsecuri ty numbe r, hom e address and phone num ber, and the am ount of othe r voluntary deductio ns unde r I .R. C. §403(b ). For e xam ple, a p articip at ing em ploy ee ne cessa rily cons ents to the di sclosu re of t his i nformati on to the de signat ed vendor (or v end ors) sele cted by t he e m plo yee . W ithout employeeGen. 35] 37

1 A “defined benefit” plan promises a specifi c annuity be nefit calculated

by a formula. Adefined

contribu tion plan or progra

m genera lly links benefits to the investment performance of periodic c ontributions by anindividual to one or

more investment options. The employer bears the risk of in vestm ent gain or loss in a defined benefit plan; the employee bears the risk in a

defined contribu tion progr am. co nsen t, however, the agencies may release only the business add ress of a n em plo yee
. 5. An emp loyee is eligible to elec t to m ake v olun ta r y deducti ons to th e new ORP vendors i f the employee meets the eligibility criteria in S PP § 30-3 01 an d has elected to partic ipate in the State c ontribution por tionof the progr am. An eligi ble employee mu st formall y elect

to participate in t

he ORP by filling out the req uire d en rollm ent f

orm s. 6. No gap in curr ent Stat e law prevent s the admini stration of an OR P that com plies with all of the requ ire me nts of th e I.R.C. If a more detail ed description of monitori ng res ponsibilities were thoughtdesir able, the Board of Tr ustees of t he Reti re men t Sy st ems m ay a dop t add ition al req uire m ents by r egu latio n.

I Background The OR P is an elective retirementprogr am esta bli shed bySPP Title 30. T he pr ogra m a llo ws eligible emp loyees of the S tate’s pub lic colleges to w aive participation in the re gular reti rement or pensionsystem, whic h are defined benefi t plans , in e xchange for parti cipat ion in t

he ORP, whi ch i s ade fine d c on t ribu t i on pr og ram. 1
Under SPP §30-20 5, the State con tributes 7.25% of the salary of a parti cipat ing employee t o an annu ity contrac t or shares i n a regulat ed invest

ment company (mutual f und), as determined bythe employee. See SPP §§30-101(b) and 3 0-2 05(c). Both types of invest ment qualif

y for t ax benefi ts i f the pr ogram or arrangement sati sfie s the con di ti ons of I. R.C. §40 3(b). T he O RP unq uestion ably is intend ed to be a §403(b) program, commonly refer red to as a “taxshe ltere d” o r “tax -de ferre d” a nnu ity. See SP P § 30- 205 (d).38 [80 O p. Att’y

2 Until Chapter 4 28 opene d up the ORP to competition, annuities wereav ailable from only a si ngle vend or, the Teachers ’ Insura

nce Annu ity A ssociation/College Retirement Equities Fund, TIAA-CREF. SeeJ oint Committee on Pensions, Report of t he 1992 I nterim 11 (December 1992). II “Sponsors hip” The ORP w as enactedin Chapter 556 of the Laws of Maryland 1975. The origina l OR P ga ve all a dminist rati ve authori ty to t he applic able g over ning boar ds of th e eligib le institution s:

A governing boar d adopting a n optiona l reti rement program may pr o vide for the adm in istrati on of the s ystem and may authori ze the perf

ormance of whatever functi ons as may be ne cessary for these purposes. Former Articl e 77, §217(h) of th e C ode

. See generall y Opinion No. 92-024 (August 13, 1992) (unpubli shed) (insti tuti ons have autho rity to select investm ent options for p rogram ). The struc ture of

the progr am was changed by Chapter 428 of the Laws of

M arylan d 19 93. C hapte r 428 gave over all autho rity to the Board of Trustees o f t he R eti rement Syste ms, to be car ried out by the Stat e Retir ement Agency. Under SPP §30-201(e)( 1), “[ t]he Board of Trust ees shal l adminis ter t he program to t

he extent providedin thi s ti tle. ” In addition, t he Board of Trust ees has br oad aut hority to ado pt “reg ulation s that are nece ssary to carry o ut th i s title.” S PP §30 -20 3.
Mo re spec ifically, the Bo ard o f Tru stees is given the au thority to select a ddition al offero rs of an nuity c ontrac ts and to approve the “form and content s” of annui ty contr acts wit h both the ol d and new vendors. SPP §30-202. 2 One of the sel ecti on crit eria to be appli ed by the Board was “the ability of t he company to provide for suita ble rights and b enefits u nder the an nuity contract s.” SPP §30-20 2(c)(4). The statute sp ecifically limits th e adm inistrative respo nsibility of the Board of

Trust ees, however. Under SPP §30-20 4, the Boa rd of Trust ees “is not res ponsibl e for”:Gen. 35] 39

3 The “emp loying insti

tutions” a re the f ollowing: (1) The Unive

rsity of Ma

ryland System; (2) Morgan State University; (3) St. Mary’s College; and (4) The Maryland

H igher Education Commission with resp ect to eligibleemployees of the Co mmission or any community college or regionalcommunity college established under Title 16 of the Education Article. SPP §30-101(e).

(1) retire m ent c oun sellin g ...; (2) prepari ng or diss eminating inf or mation wit h re spe ct to a n an nui ty co ntra ct ...; (3) enroll ing, term inatin g , or r etiring a parti cipat ing employee. The last of these it ems )“enroll ing, t erminati ng, orreti ring a parti cipat ing employee”

)is t he r e sponsibi lit

y of the employi ng inst itution: “W ith respect to a particular employee who is employed by an employing ins tit ution or an ins tit

ution over

which the employing institution has a dm inistrative autho rity, the em plo yin g inst itution shalladminist er the particip ating e mp loyee ’s enro llme nt, termination, or ret irement. ” SPP §30-210. 3 Thus, wh en an eligible employee enro lls in the ORP by com pleting the requir ed forms, the employing in stitution is re spon sible fo r instruc ting C entral P ayro ll on the proper

tax rep ortin g of

the it em in q ues tion

. See SPP §§30- 303(b) and 30- 304 (b). T he employing ins tit ution gi ves Central Pay roll instructions abou t the deduc tion as part of the institution’s administrati on of “enrol lment.” In that limit ed sense, the employing inst itution is the “spons or” of t he deducti on. As a con sequ ence , Cen tral Pay roll is entitled to deal with the ORP deducti on just

as it does with ot

her deduct ion s that C entral Pay roll ma kes b ecau se it w as so in structed by th e emp loyer. If Central Payrollbecomes aware of any probl ems associat ed with the deducti on, be the y disp utes am ong “des ig n ated c om panie s” as to whe re the money should go or uncerta inty as to the amoun t of any deducti on, Cen tral Pay roll sho uld se ek cla rific ation f rom the institu tion

.40 [80 O p. Att’y

4 “Employee contributions” are recognized by the sta tute, seeSPP §30-205( b)(1), b ut not othe

rwise dis cussed in

it.

5 This opinion does not a ttempt to assess the

tax consi d eration s affectingthe ORP. We do note, h oweve r, that OR P contribu

tions must comply with I.R.C. §§403(b)(2) (maximum exclusion allowance for §403(b) contracts); 415 (limitations on contributions to certain retirement plans); and 402(g) (overall dollar limit onannual elective deferrals under §403(b) and §401(k) arrangements). We need not ad dress in this op inion th e ex tent to which the employing ins tit

utions have a duty, in your phr ase, “to monitor the program on an ongoing basis. ” The stat ute cl early c ontemplate s that much of the ac tivi ty assoc iate d with the OR P will occur through direct inter acti on between the vendor and the employee s elect ing that designat ed c ompany. This int eract ion willoccur both f or the State contributionan d for additional, voluntary contributi ons. 4 Indeed, under SPP §30-211(b) , “[ e] ach d esign ated c om pany shall provide and pay for al l adminis trative, infor mational, and counsell ing servic es w ith respect to the annuity c ontract s offer ed by the desi gnated company.” This section also co ntem plate s that t he employing ins tit

ution may need to ca ll upon the v endor t o resolv e pro blem s, beca use it imposes on each desi gnated company a duty to “ cooperat e with the employing institution in conn ection with any c once rns tha t relate to enro llme nt, term inati on, o r retire m ent o f a p artic ipati ng e m plo yee .” SPP §30-211(c). The stat ute thus direct s the employi ng inst itution and the vendor to work together to resolve particular problems.
For example, t

he designat ed companies willbe perfor ming a variety of tax c alcula tions w ith respect to the tax-defer

red st atus of employer or

emp l oy ee co ntribu t i on s t o the pr og ram. 5 Indeed, these responsibili ties are part of eac h com pany ’s con tractua l obliga tion to the Retire ment Agency. In car rying out its authori ty to pr escribe the “form and contents” of the cont ract, the Board of Tr

ustees requir es each contrac torto “[a] gree to a dministe r the t ax shelt ered annui ties in a manner consis tent wit h the appl icab le requirements of the Inter nal Rev enue Serv ice to th e end that the Op tio nal Retire mentGen. 35] 41

6 Another provision of

the contract, §10.1(b), providesas follow s: (Contractor) agrees to perform themaximum exclusionallowance calculation for eac h parti cip ant

each year in accordanc e with the provis ions of the In

ternal Re venue Cod

e and in the manner i

tspecifie d in

the Technical Proposal it submit t ed in response to the RFP. The Contractor

agrees to make a g o od faith e ffort to ensure that all c ontributi o ns are reported to it for p urposes of the maximum exclusion allowanc e calculation

by notifying participants about the nece ssity for making the calculation. Further, i t a grees to indemnify a participant to the extent of anypenalty a

nd/or inte rest ass essed with respect to past du e taxes which may be related to the Contractor’s failu

re to correctly compute the participant’s Maximum Exclusion All o wance (provided however, it shall not be liabl e fo r indemnifi cati onas to any errors in the comp utationof the allowance which result from in correct information supplied to the Contract o r from a participant). We understand that the Retirement Agency’s contract

with TIAA/CREF has not ye t be en executed, although that formality is expected shortly. The TIAA

/CREF contr

act will c ontain the

same provisions. Program constitutes a ta x qualified plan .” Contract § 11.1(i). 6 Sho uld a vendor’s failure to carry out its contrac tual unde rtaki ng result in a cl aim against the Stat e, the ven dor is o bliged to “ho ld harmless and indemnify t he State , the Board of Trust ees, employing instit utions, and the off

icers , agent s, and employees of the St ate, the Board of Trust ees, and e mploying institutions .

... ” SPP §30-212.
As both a prac tica l and le gal matte r, t hen, the inst itutions need not check every t ax calcul ationfor acc uracy or pa rticipate in every meeting between a company’s sal es repr esentative andprospect ive particip ant. The institu tions are ent itl ed to rea sonable as surances from the desi gnatedcompanies that the w ork is b eing p erform ed in a profess ional m ann er, as req uire d by the c ont racts

. If an y p ro bl ems cannotbe res olved inform ally, the in stitution s hou ld bring t he matter to the attenti on of the R etir ement Ag ency , wh ich ca n con sider its rem edie s un der the c ont ract.42 [80 O p. Att’y
III The Role of the Central Payrol l Bureau A. Duty t

o Implement
Your questi on about the C om ptroller’s duty to “implement the expansionof OptionalRetire me nt Pro gram at a specif ic time” in the face of percei ved “sponsors hip” uncertainties has been address ed by our answer to t

he fir st question. The r es ponsibi lities al locat ed by statute and contra ct ref

lect a legal ly suff

icie nt regi me for compliance wit h th e I.R .C. Under this sch eme, Ce ntral Pa yroll B ureau acts in its custom ary role as the pa ymaster of St ate wages and t ax report ing requirements. See SPP §6-4 01. It is d irected to m ake th e pay me nts to the de signa ted co mp anies. S PP § 30-2 05(e ). If Cen tral P ayrol l has doubts about

the accur acy of the tax st atus r eporti ng associ ated with a deducti on, it

should re quest verifi cati on from the employi ng inst itution, which in tur

n would seek the necessar y infor mation fr om the appropri ate vendor . If verif icat ion is not forthcoming, Cent ral Pay roll can report

any contributions as taxabl e, rat her than pr e-tax, i nc ome on the em ployee’s an nual W -2 fo rm. If ne ed be, Centr al Pay roll may place disput ed or quest ioneda mounts in escrow pending adequate i nstruc tions . We see no reason, theref ore, t hat Ce ntra l Pa yro ll can not im plem ent it s role in th is pro gra m
. B. Reimbursement SPP §30 -209 esta blis he s an e xpen se fun d to co ver the State costs of th e O RP

. Th e fund is under the c ontrolof the Board of Trustees of th e Retir ement Systems. The Board of Trustees esti mates the annual“administ rative and operat ional e xpenses of t he pr og ram” and collects those costs fro m the designated com panies. SPP §30-20 9(b). Ap propriation of m oney o ut of t he ex pense fund will occur in the annua l budget bill. SPP §30-20 9(a).Gen. 35] 43

7 Thus, for example, if an employing institution bears added administrative costs attr

ibutable to the ORP, t

hese costs mi ght also be reimbursed.

8 For example, SG §10- 616(g)(2)-(5)allows ins pection o f retir

emen t records by selected parties other thanORP vendors. SG §10-616(g)(6) allows disclosure of limited retirement information regarding elected and appointe d officia

ls. The secti on establ ishi ng and regulating the expense fund does not restrict ex pend itures o ut of the fund t o those i ncurred by t he Retire ment Agency. Rather, a number of diff erent e ntities can incur costs f or this program; all can be rei mbursed, so long as th e necessary appropri ations are inc lude d in t he S tate bu dget. 7 Under this mec ha ni sm, Cen tral Pay roll is entitled to reim burse me nt for its expens es i ncurr ed for

suppor t of the ORP.

IV Release of Employee Informati on Under the Maryland Pub lic Informati on Act, the retirement and personnelrecords of an i nd ividualgeneral ly are c onfidential and theref ore may not be r elea sed by t he c usto dian of th e rec ord

. §10- 616(g)(1) and (i) of

the Stat e Government (“SG”) Arti cle, Maryland Code. Similar ly, a s a generalrule, the home ad dress and tel ephone nu mbe r of a publi c employee may not be dis closed. SG §10- 617(e)(1). These ge ner al proh ibitions a re sub ject to ce rtain exceptions; 8 however, none of t he excepti ons al lo ws discl osure of the co nfidential informati on to the de signat ed vendors by t he Retirement Agency , Central Payroll, or the employing institut ions. Nor does any provi si on in SPP Titl e 30 creat e an addit ional exc eptio n to thes e pr ohi bitio ns. Of cou rse, if an e ligible employee cons ents t o the rel ease of infor mation, the Agency, Ce ntralPayroll , or t he employing inst itution may release i t to a d esi gnate d ven dor. W hen e ligible employees we re able to selec t only o ne ve ndo r, prior to implementati on of Chapter 428 of the Laws of Maryland 1993, t he em ployi ng institution s releas ed em ploy ee info rma tion to th e sole vendor on recei pt of the employee ’s ap pli cati on to e nrol l i n the ORP.44 [80 O p. Att’y

9 Joint Committee on Pensions, Report of the 1993 Interim 3 (December 1993).

10 In addition, nothing would preclude the Age ncy or Ce ntral Pay roll fromdirectly mailing inform ational ma terials t o the home s of eligib le employees at

the vendors’ expense. Moreover, in the past, the Boar d of Trustees has provided mail solicitation as sistance to the Unit ed Charit y campaign and the Comptroller’s office. Give n that the employing institutions have b een solely charged with the administration of enrollme nt, however, such an

action f alls clea rly outside the scope of the Agency’s or Central Payroll’s statutory duty. An employee w hose deducti ons go to m ore tha n on e ven dor w ould necessarily consent to di sclosure to those vendors.
W ith th e addition of n ew v endors to the OR P, the statutory object ive “t o enhance com petition by ad ding additio nal ve ndo rs to the Opt i on alReti re men t Pr og ram” 9 woul d be furthered if t hese vendo rs had an eff

ect ive w ay of

reach ing elig ible em ploy ees w ith infor mation abou t the pro ducts on o ffer prio r to the e mployees’ enroll ment in the ORP. Nevert heless , thi s objective canbe pursued only within the confines of the Public Informati on Act. Perhaps co nsentto d isclo sure of c ertai n in form ation cou ld b e so licited , o r employing inst itutions coul d provide of fic e address es for t

he employees. 10

V

Em ployee E ligibility The crit eria f

or an “el igibl e employee” are s et out in SPP §30- 301 : An individ ual is elig ible to p articipate in

the program if t

he indivi dual is eligible for me mb ership in a retirement s ystem or pensi on system and is: (1) a member of the facul ty of an employing ins tit

ution;Gen. 35] 45 (2) a p rofess ional e mployee at any com mu nity c ollege or reg ional c om mu nity colle ge establ ished under Titl e 16 of the Education Art icle ; (3) an employee of the Universi ty of Maryland System who is not i n a posit ion designat ed to be tr eatedin the s ame manner as a class ifi ed servi ce employee under §12- 11 1 of the Education Arti cle; (4) an emp loyee of M org a n Sta te Un iversity who is not subj ect t o the provi sions of the State Perso nnel A rticle that govern classified service; or (5) an employee of St. Mary’s College of Maryland who is in a posit ion dete rmined by the Board of Trust ees of t he College t o be a profess ional or

facult y posit ion. These eligibili ty cri teri a rep resenta clar ifi cati on of the previous law, cont ainedin former Arti cle 73B, §110(b)(2), updated to reflect c hang es in the nam es an d org aniza tion of v arious State higher educ ation in stitutions , as w ell a s the dem ise of th e State Board of Comm unity Coll eges. Ther e is no i ndicat ion that the 1993 revis ions were inte nded either to expand or reduce t he p ool of employees who could elec t to pa rti cipat e in the ORP. That eligibility rem ains p rincipa lly w ith the fa culty, ad min istrati v e and prof essiona l ( i.e

. , non-cl assif ied) per sonnel of

the Univers ity o f Maryland System, Morgan State U nivers ity, St. Mary’s College of Maryland, and the var ious community col leges and r egional com m uni ty co llege s. Since these employment class ifi cati ons are es tabli shed for all positi ons , as num erous em ploym ent regulations an d bene fits are dependentup on cl as si fi ca t i on , t he emp loying in sti tuti ons autom atically offer

parti cipat ion in t

he ORP to any new employee who falls w ithin the de signa ted cla ssification s. Eligib le employees then m ay ele ct to pa rticipate in the ORP; in t he absence of

such an elect ion, the employees participate in t he employee’s Pen sio n System or the Tea chers ’ Pen sion S ystem . Con verse ly, one wh o is46 [80 O p. Att’y

11 We are not here discussing an employee’s oppor tunity unde r oth er lawto partic ipate in a

separa te annuit yprogram. For

an example of such analterna tiv e program , see letter of advice to Senator Laurenc e Levitan fromAssistant Attorney General Kathryn M. Rowe (March 29, 1994). Nothing in SPP Title 30 or in this opinion ch an ges the way in which an authorized, non-ORP annuity p ro gram operates. Nor can this opinion appropr iately address any policy issues that might ar ise from the current operati on of ann

uity progr

ams outside

the ORP. not eligible for

membership in a pensi on system is not eli gible f or part icipati on in t

he ORP. 11
An election to partic ip ate in the ORP waives ri ghts and bene fits under the Ret irementor Pension Sys tem and substitutes the right to a S tate con tributi on to t he des ignated v endor . Under SPP §30-10 1(f), i t i s t

hi s e l ec t i on t ha t ma kes an eli gible e mployee a part icipantin t

he ORP. Under SPP §30 -205 (b), on ly partic ip a nts i n the ORP make additio nal, volu ntary s alary c ontribu tions. A s we interpre t this provisi on, once an eli gible e mployee elects to particip ate in the S tate contr ibutory porti on of the ORP (in l ieu of Ret irement or Pen sio n System participation), th e em ployee m ay then m ake add itional salary reducti on contributions . If , however, an employee has not m ade th is elect ion, the employee is not authorized by the ORP statute to make such volu ntary s alary re ductio n con tribution s to the designat ed ven dor s.

VI Conclusion The ORP is a diff

icul t progr am to implement. I t has a l ong history during which ce rtai n practi ces devel oped, and yet it now faces a dr am atic tr ans form ation

. This change, wrenching to some, takes place againsta background of t ax com plexity with few rivals even among the arcana of the Int ernal Revenue Code.Gen. 35] 47
Ye t, as we have explai ned, a suf fici ent fr amework now exists forthe expan ded O RP to g et underw ay. If the exper ience implementing the new ORP suggests the ne ed f or mo re administrati ve detai l, t

hat need can be met through t he rul emaking auth ority of th e B oar d of Tru stee s.
J. Joseph C urran, Jr.

AttorneyGeneral Jack Schwartz* Chief Counsel Opinions & Advice

*Assist ant Attorneys General John K. Barr y, Harri et B. Granet , and Elena Langri ll cont

ribut ed to the preparation of t his opi nion.