Changes Announced to Individual Account Retirement Plan (IRAP)

Recently, MinnState campuses have begun communicating to all faculty and staff members about changes to the employee contributions for participants in the Individual Account Retirement Plan (IRAP). I am writing to give you some more information about these changes, how they came about, and the IFO’s response.

Increased Employee Contributions to the Individual Retirement Account Plan (IRAP).

People enrolled in IRAP will see an increased deduction from their salaries going into their retirement savings accounts, beginning with the first paycheck of the new fiscal year. These changes will not impact any employees currently enrolled in the Teachers Retirement Association (TRA) retirement plan.

The Legislature made this change to ensure that MinnState retirement plans continue to qualify for favorable tax treatment under federal law. Recent IRS rulings require that, when a pension program gives employees an option to choose between different retirement plans during their employment, each option must have the same employee contribution rate. MinnState’s pension program gives employees a choice to participate either in IRAP or in TRA as their primary retirement plan. Faculty members can choose between IRAP and TRA during their first twelve months of employment and can switch from IRAP to TRA during the twelve months after becoming tenured. These options are a major benefit, giving employees an opportunity to choose the sort of retirement plan that best meets their life needs.

The IRS rulings pose a problem because IRAP and TRA have different employee contribution rates. IRAP participants have always contributed 4.5% of their salaries to their retirement savings, while TRA participants currently contribute 7.5% of their salaries to the TRA trust fund that supports their pension benefits and will contribute 7.75%, beginning in 2024. These facts presented a risk that IRAP and TRA could lose their tax-sheltered status under federal law, with very severe economic consequences for the plans’ participants. For that reason, the Legislature’s legal staff recommended that lawmakers either eliminate employees’ right to choose between IRAP and TRA or increase IRAP’s employee contribution rate to match TRA’s (Reducing TRA’s contribution rate was not an option, because that rate is driven by actuarial requirements).

Faced with this legal dilemma, the IFO took the lead in organizing the unions representing employees in MinnState’s pension program, so that we might bring a consensus view to the Legislature. After extensive consultation, all agreed that we should preserve employees’ options to choose the retirement plan which best meets their individual needs. In keeping with that priority, the Legislature increased the IRAP employee contribution to match TRA’s employee contribution for all IRAP participants who currently have the option to switch to TRA or could possibly have that option in the future. Effective July 12, 2019, all non-tenured faculty members and coaches, and those faculty members who were awarded tenure within the last twelve months will contribute 3% more of their salaries to their IRAP accounts.

The legislative options concerning how to treat IRAP participants who are past any possible opportunity to switch to TRA, such as faculty members who have been tenured for more than twelve months, were more complex. Arguably, the IRS rulings did not require an increase in these participant’s contribution rate, and some employee representatives felt that the choice regarding whether to increase retirement savings should be left to these individuals. Other stakeholder representatives felt that it was unfair to make untenured employees contribute more to their retirement accounts without requiring the same of their tenured colleagues. Ultimately, a compromise was reached, providing for increase contributions by tenured IRAP participants to be phased in with a 0.65% increase each year for five years, until all MinnState employees are making the same, 7.75% retirement contribution in 2024.

Employer Contributions to the Individual Account Retirement Plan (IRAP).

The IFO also fought hard for an increase in the employer contribution to IRAP accounts. With the help of Sen. Nick Frentz (DFL-Mankato,) we were able to introduce a bill that raised employer contributions to IRAP to the same level as employer contributions to TRA. Currently, MinnState contributes 6.5% of salary to for participants in IRAP but 7.92% (increasing to 8.75% by FY24) for faculty in TRA. The IFO believes this inequity should be corrected and has pushed hard the last two Legislative sessions to bring parity between the two plans. In 2019, we were able to get this increase included as part of the Omnibus Pension Bill during the regular session, but unfortunately, it was dropped as part of the compromise package during the special session. The IFO will continue to strive to achieve equity between the two plans during the Legislature’s next session.

Our Commitment

We remain committed to providing our faculty with a set of the best retirement options in the country. We recognize that this 3% increase will reduce the take-home pay for many of our lowest paid faculty, and we are working very hard right now at the negotiating table to rectify that. Our negotiations team began meeting with the System recently. We will share updates about the progress of negotiations as they become available.

As always, please contact me if you have any questions.

Dick Kaspari
Legal/Benefits & Equity Representative
kaspari@ifo.org
651-227-8442 ext. 26