# The Attorney General of Texas

December 31, 1982
MARK WHITE Attorney General

Supreme Court Building P. 0. Box 12546 Austin, TX. 76711. 2548 512,475.2501 Telex 9101674-1367 Telecopier 5121475.0266

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An Equal Opportunity/ Affirmative Action Employer Mr. E. D. Walker Chancellor The Universityof Texas System 601 Colorado Street Austin, Texas 78701 OpinionNo.m-548

Re: Recent legislationaffecting OptionalRetirementProgram and Tax Sheltered Annuity Programs of state colleges and universities

Dear Mr. Walker:

You have asked several questions regarding the effect of recent legislation on the Optional Retirement Programs (hereinafterO.R.P.) and Tax Sheltered Annuity Programs (hereinafter T.S.A.P.) of state colleges and universities. You first ask whether the conditions for benefit availability imposed by section 36.105 of Title llOB, Public Retirement Systems, V.T.C.S., control the availability of all O.R.P. benefits toparticipantsin sucha program.

Because of recent statutoryamendments,chapter 36 of Title 1lOB
now permits the governing board of a state-supported college or university to provide for contributions to or purchase of two different types of investments on behalf of the O.R.P. participants. The board may provide for contributions to any type of investment authorized in section 403(b) of the Internal Revenue Code, such as mutual funds ormoney market funds.or itmay provide for the purchase of fixed orvariable retirementannuities. Prior to 1981,a governing board administeringan O.R.P. could provide only for the purchase of annuities, not for contributions to all investments authorized by section 403(b) of the Internal Revenue Code. HOWl2Vel-, chapter 36 of Title 1lOB now allows a choice of investments, according to the followingsectionsof the statute:

Section 36.002. OptionalRetirementProgram
(a) The optional retirement program established as provided by this subtitle shall provide for contributions to any type of investment authorized in Section 403(b) of the federal Internal Revenue Code of 1954, 42 [sic] U.S. Code, as it existed on January 1, 1981, and for the purchase of fixed or variable retirement annuities that meet the requirements of that

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Mr. E. D. Walker - Page 2 (W-548)

sectionand Section401(g) of the federal Internal Revenue Code of 1954, 42 [sic] U.S. Code, as amended.

. . . . Section 36.004. Administration
(a) A governing board may provide for contributionsto any type of investmentauthorized in Section 403(b) of the federal InternalRevenue Code of 1954,42 [sic]U.S. Code, as it existed on January 1, 1981, and may arrange the purchase of annuity contracts from any insurance or annuity company that is qualified to do business in this state.

As a result of the expanded investmentauthority of a governing board, an O.R.P. participant may collect either annuity benefits or other investmentbenefits. Your question involvesthe availabilityof the differentbenefits to a participantin an O.R.P.
Section 36.105 of Title 1lOB governs availability of benefits under an O.R.P. That section defines terminationof participation in
an O.R.P. and stipulates thatbenefits are available to a participant only upon termination of participation. The pertinent parts of the statuteare as follows:

(a) A person terminates participation in the optional retirement program, without losing any accruedbenefits,by:
(1) death; (2) retirement;or (3) termination of employment in all institutionsof higher education.

(c) The benefits of an annuitypurchasedunder the optional retirementprogramare availableonly if theparticipant terminatesparticipationin the program as provided by Subsection (a) of this section. (Emphasisadded).
Although subsection (c) restricts the availability of annuity benefits, it fails to restrict similarly the availability of other investmentbenefits. Your question, then, is whether subsection (c) should be interpreted as controlling the availability of all investmentbenefits, or whether the benefit availability restrictions

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of Internal Revenue Code section 403(b) are controlling for benefits from investmentsother than annuities.

We are of the opinion that I.R.C. section 403(b) is not controllingand that section 36.105(c),Title llOB, Public Retirement systems, V.T.C.S., is controlling on the availability of all - investmentor annuitybenefits.

Section 403(b) of the Internal Revenue Code requires that a custodial account to which qualified employersmake contributions on behalf of their employees restrict the availability of benefits in order to have the contributed amounts obtain the desired federal tax treatment. The relevantpart of section 403(b) is as follows:

(7) Custodial accounts for regulated investment company stock.
(a) Amounts paid treated as contributions.-- For purposes of this title, amounts paid by an employer described in paragraph (l)(A) to a custodialaccountwhich satisfies the requirements of section 401(f)(2) shall be treated as amounts contributedby him for an annuity contract forhis employee if -- (i) the amounts are to be invested in regulated investment company stock to be held in that custodialaccount,and
(ii) under the custodial account no such amounts may be paid or made available to any distributee before the employee dies, attains age 59%. separates from service, becomes disabled (within the meaning of section 72(m)(7)).or encountersfinancialhardship.

It is apparent that section 403(b) permits the conditions for distribution of benefits from the custodial account to be less stringent than the conditions for availability of benefits from the O.R.P. itself. If the code section403(b) conditionswere to apply to other investmentbenefits and the section 36.105 conditionswere to apply to annuitybenefits, therewould be two different availability standards for the benefits. There is nothing in chapter 36 of Title LlOB to indicate that the legislature intended to have the different benefitsavailableaccording to differentconditions. The legislature did not expresslyadopt the 403(b) standardsforavailabilityof other investmentbenefits, just as it did not expressly expand the scope of the availability restrictions in section 36.105 to include other investment benefits. Thus, we are presented with the question of which set of conditions, if any, can we infer that the legislature

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intended to be controlling for the availability of other investment benefits, since neither set of conditions was expressly made applicable to thosebenefits.

The legislaturecertainlyintended that some sort of availability restrictions apply to any type of benefits that may be distributed under an O.R.P. The purpose of the O.R.P. legislation,as stated in section 36.001 of Title llOB, is to establish a complete retirement program for facultymembers employed in state-supportedcolleges and universities as an incentive to attract high quality faculties and improve the level of education at the institutions. As evidenced by section 36.105, the legislatureconsiderscontrolson the availability of benefits to be a necessary part of a complete retirementprogram. Our office has also considered such controls to be an importantpart of an O.R.P. and a part necessary to achieving the program's basic goals. Attorney General Opinion H-1060 (1977) stated that benefits accumulatedunder an O.R.P. should not be available to a participant prior to termination; to make contract benefits available to participantsbefore retirementwould be inconsistentwith the purpose underlying retirement systems, which is to provide security upon retirement. See Attorney General Opinion H-532 (1975). Thus, in order topreserve the financialintegrityof the O.R.P.'sand to carry out the express purpose of the statute, the legislature certainly intended that the O.R.P. place some type of restrictions on the availabilityof thenewly permitted investmentbenefits and that those restrictions limit the availability of benefits to the time of terminationof employment.

Given that some restrictionsshould apply to the availability of the other investment benefits and that the legislature did not expressly make applicable the restrictions of either I.R.C. section 403(b) or of section 36.105 of Title 1lOB.we consider itmore likely that the legislatureintended to have the section 36.105 availability conditions apply to the other investment benefits than to have the section403(b) conditionsapply.
According to Calvert v. British-AmericanOil Producing Company, 397 S.W.2d839 (Tex. 1965), the intentionof the legislatureshouldbe ascertained from the entire statute, not isolated portions thereof. Under section 36.105, the definition of termination of participation is not restrictedto employees investingin annuities; it covers those contributingto the other typesof investmentsalso. The onlypart of section 36.105 that is restricted to annuity benefits is subsection (4, which provides that those benefits are available only upon terminationas defined by section 36.105(a). Almost every provision of chapter 36 applies with equal force to annuities and other investments purchased under an O.R.P. The administration, participation,and contributionprovisions indicate that an O.R.P. is to be operatedunder one set of guidelines, regardlessof the type of benefits that are forthcomingto its participants. In the absence of

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some inherent reason to impose two different benefit availability standards and in the absence of an expression of intent by the legislature to do so, we conclude that the legislature intended to maintain a single system of regulation for the O.R.P.'s, including a single regulation forbenefit availability.

The more stringent standards for benefit availability under an O.R.P. are not incompatiblewith the standards under I.R.C. section 403(b). The terms of section 403(b) indicate that the restrictions should be imposed by the custodial account itself as minimum availability standards. Once those minimum standards have been established,a program such as the O.R.P., throughwhich an employer makes contributions to the custodial account, may itself establish availability criteria at least as stringent or more stringent than those establishedby section 403(b) and still be compatiblewith the InternalRevenueCode.

On the other hand, the less stringent provisions of Internal Revenue Code section 403(b). if considered to be binding maximum restrictionson O.R.P. benefits,would appear to be incompatiblewith the general goal of the O.R.P. of creating a complete retirement system that restrictsbenefit availabilityto the time of termination. For example,under the financialhardshipprovisionof section403(b),
an employee might be able to obtain investment benefits for the purpose of purchasing a residence or providing higher education for his or her children. See H.R. Conf. Rep. No. 95-1800, reprinted in [1978]U.S Code Gong. andd. News 7198, 7218. Such a situationwould frustrate the O.R.P.'s goal of providing a retirement program and would render meaningless the idea of retirement benefits as pay withheld to induce continued faithful service. Teacher Retirement System V. Duckworth, 260 S.W.2d 632 (Tex. Civ. App. - Fort Worth 1953). aff'd, 264 S.W.2d 98 (Tex. 1954). The purpose of a teacher retirement system, for which the O.R.P. provides an alternative type of investment,is toprovide support for teachersafter their teaching days are over. Duckworth,supra. The legislativeintent in creating such a system was to provide security for teachers and to encourage qualifiedpersons tobecome and remain teachersin thepublic schools. Woodsv. Reilly, 218 S.W.2d 437 (Tex. 1949).

In light of such intent and purposes, statutes regulating retirementnroerams or svstems shouldbe construed liberallv in order

. - to carry out the whole purpose of the plan. Woods, supra. - - In State
v. StandardOil Company, 107 S.W.2d 550 (Tex. 1937), the court stated that when the purpose of a statute is ascertained, the meaning of words used may be restricted or enlarged or words may be disregarded to give the statute the meaning that effectuates its purpose. Thus,
we read section 36.105 of Title 1lOB tomean that benefits under the optional retirement program are available only upon termination of participation;the word "benefits" refers to those from an annuity or from otheravailable investments.

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The bill analysis to the legislation which first enacted the language now codified as section 36.105 supports our conclusion. House Bill No. 1719 of the Sixty-seventhLegislature amended section 51.358 of the Education Code, now codified as section 36.105. Acts 1981, 67th Leg., ch. 441, at 1864. The portion of the bill analysis entitledPurpose/Synopsisstatesas follows:

The optional retirement program for faculty members at public institutionsof higher learning. in which both employer and employee contribute into the individual's retirement account, at set rates is, under this bill, freed from being used only for the purchase of retirementannuities and may be used tomake any type of general investment authorized in section 403(b) of the IRS Code of 1954.

There may be not only different investment plans set up for each institution, but for each componentof sn institution.

An individualmay collect the full benefits of these plans only if he or she dies, retires or terminates employment due to disability. Otherwise, the employee may withdraw only his or her accumulatedcontributions. (Emphasisadded).

This item of legislative history indicates that the legislature intended the benefits of all plans under the O.R.P. to be available only upon death, retirement,or terminationof employment.

Your secondquestionaskswhether theboard of regentsmay define the term "financial hardship" that is used in the Internal Revenue Code, if the availabilityof O.R.P. investmentbenefits is governedby I.R.C. guidelines. Our answer to your first question renders unnecessaryan answer to this question.

You next ask whether the companies offering expanded investment opportunitiesunder an O.R.P. or T.S.A.P. are required by law to be "qualified and admitted to do business" in the State of Texas. Neither article 6228a-5,V.T.C.S.,which authorizesthe operationof a T.S.A.P.,nor chapter 36 of Title llOB,V.T.C.S.,which authorizes the operation of an O.R.P.. specificallyrequires that a company offering 403(b) investments be qualified and admitted to do business in the state, although chapter 36 does require that an insurance or annuity company selling the annuity contracts must be "qualified" to do business here. We are of the opinion that the legislature did not intend that a company offering the 403(b) investmentsmeet the same "qualifications" to do business in the state as an insurance or annuity company.

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An insurance company that is offering annuities to participants in an O.R.P. or T.S.A.P. must be authorized to do business in this stateand becomes authorized to do soby meeting certain financialand administrative requirements and then obtaining the approval of the State Board of Insurance to begin operations. We do not believe that the companies offering the other kinds of investments under 403(b) "ill, simply by virtue of offering such investments, be acting as insurance companies. Thus, there is no authorization for the State Board of Insurance to require those companies to "qualify" under the InsuranceCode to do businessas insurersin this state. We therefore cannot assume that the legislature, through either chapter 36 or article 6220a-5, intended to impose the same requirement of being qualified to do business in Texas on the companies offering the expanded investment opportunities as are imposed on insurance and annuity companies,because the qualifications, as they relate to an insurance company, would be inherently inapplicable to a company presumablynot involved in an insurancebusiness. Of course, if the company were to be engaged in an insurance business, as well as engaged in the sale of the 403(b) investments, the provisions of the InsuranceCodewould be applicableof their own accord,without resort to either chapter 36 or article 6228a-5.

Your question under review at this point is phrased in terms of whether companies are required "by law" to be qualified and admitted to do business in the state. You do not request us to address any particular law or laws. Although we are of the opinion that the O.R.P. and T.S.A.P. lawsdo not specificallyrequire such companies to be qualified and admitted to do business in the state, the laws regulating foreign corporations, as well as the laws regulating the sale of securities,would be applicable to such companies. The Texas SecuritiesAct, article 581-1 et seq.,V.T.C.S., and the regulations promulgated thereunder,in particularregulationunder 7 T.A.C. 0123.1 (19W, the administrative guidelines for registration of open-end investmentcompanies,requiresregistrationof securitiessold in this state. Article 8.01 of the Texas Business CorporationAct requires a foreign corporationto obtain a certificateof authoritybefore being allowed to transact business in the state. These statutes to the extent applicable to a particular company, require a company offering the expanded investmentopportunitiestobe "qualified"to do business in the state of Texas. Furthermore, theremay be other statutes, the applicationof which depends upon the activities of the company, that may affect the operation of these companies. Without particular facts, we cannot state that no laws other than those specifically mentionedwill affect these companies.

In light of the wide-ranging regulationafforded by the laws of this state, a company offering the 403(b) investments does subject itself to statutes requiring some sort of "qualification" for the company to do business in this state, even though neither article 6228a-5, V.T.C.S., nor chapter 36 of Title llOB, V.T.C.S.,

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specificallyrequire such qualification. In your fourth questionyou have askedwhether theboard of regentsmay require suchqualification to dobusiness or the posting of some sort of bond if the law does not require such qualification. Because we are of the opinion that various statutes do require the investment companies to be qualified to do business in this state, we do not consider it necessary to answeryour fourthquestion.

SUMMARY

The availabilityofbenefitsunder an O.R.P. is regulated by section 36.105 of Title llOB, V.T.C.S..regardlessofwhether thosebenefits are annuity benefits or other investment benefits. Neither chapter 36 of Title 1lOB. V.T.C.S., nor article 6228a-5,V.T.C.S., specifically require a company offering the expanded investment opportunitiesto be "qualified" to do business in the state;however, those companiesremain subject to the laws generally regulating corporations transacting business in this state and the laws regulating the sale of securitiesin this state.
Very trulyyours,

MARK WHITE AttorneyGeneral of Texas

JOHNW. FAINTER,JR. FirstAssistantAttorneyGeneral

RICHARD E. GRAY III ExecutiveAssistantAttorney General
Preparedby CharmaineRhodes AssistantAttorney General

APPROVED: OPINION COMMITTEE

SusanL. Garrison,Chairman Rick Gilpin PatriciaHinojosa JimMoellinger CharmaineRhodes .

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