After the Bailey court order on 401(k) and 457 plan vesting, does the August 12, 1989 date still control class membership, or did the court drop that requirement?

Plain-English summary

Jack Pruitt asked whether a missing date in one conclusion of a November 1998 class-definition order changed who belonged to the Bailey/Emory/Patton class. The order's Finding of Fact No. 3 said participants in the state's 401(k) and Deferred Compensation (457) plans vested when they first contributed, if that happened by August 12, 1989. Conclusion of Law No. 3 repeated the first-contribution rule without that date.

The AG said the omitted date did not change the membership requirement. The order resolved how participants in these plans vest; it did not change when they had to vest to belong to the class. The opinion quotes Bailey: “Class plaintiffs are North Carolina state and local government employees whose retirement benefits vested on or before 12 August 1989.” A participant in the 401(k) or 457 plan therefore needed to have contributed by August 12, 1989 to qualify through that plan.

The AG also quoted Bailey's conclusion that retirement benefits of employees whose rights vested before August 12, 1989 “must be exempt from state tax without regard to whether those benefits are attributable to service prior to or after that date.” The settlement Consent Order reserved the method of vesting in 401(k) and deferred-compensation plans for later resolution; the AG said it did not change the critical date.

Currency note

This opinion was issued in 1998 and interprets a particular class-definition order and settlement. Check the controlling orders and current tax law before applying it to a present-day benefit.

What this means for you

Retirement-plan participants

If you are checking class membership through the state's 401(k) or Deferred Compensation plan, this opinion says the first contribution must have occurred by August 12, 1989. It does not decide how membership through another plan affects a particular distribution.

Retirement-system administrators

The AG read the order's Finding of Fact No. 3 and Conclusion of Law No. 3 together. The missing date in the latter did not expand the class. The relevant inquiry for these plans remained the date of the participant's first contribution.

Common questions

Q: Did the order's Conclusion of Law No. 3 remove the August 12, 1989 deadline?
A: No. The AG said the conclusion addressed how participants vest, while the date remained essential to class membership.

Q: Does later service erase the exemption for someone whose rights vested before that date?
A: The opinion quotes Bailey as exempting those employees' retirement benefits “without regard to whether those benefits are attributable to service prior to or after that date.”

Q: What if someone vested in a different state retirement plan before August 12, 1989 but first contributed to a 401(k) later?
A: This opinion does not decide how that combination affects class membership or the tax treatment of the 401(k) distribution. It addresses the first-contribution test for participants in the 401(k) and 457 plans.

Q: Does the letter decide whether a spouse or another beneficiary receives the tax exemption?
A: No. The question and answer concern plan participants' class membership; the letter does not address beneficiaries.

Background and statutory framework

The opinion describes the November 20, 1998 class-definition order and quotes its finding and conclusion about first contributions. It also describes a June 10, 1998 settlement Consent Order. For principal state plans, that order used five years of service by August 12, 1989 as the vesting period, while reserving how to determine vesting in 401(k), deferred-compensation, and comparable federal plans. The AG said nothing in the Consent Order suggested a change to August 12, 1989 as the critical date.

Citations

• Bailey, et al. v. State, 348 N.C. 130, 500 S.E.2d 54 (1998)

Source

• Landing page: https://ncdoj.gov/opinions/qualification-for-class-membership-in-bailey-emory-patton-lawsuits/

Original opinion text

November 25, 1998

Jack Pruitt, Director
Retirement Systems Division
Department of State Treasurer
325 North Salisbury Street
Raleigh, North Carolina 27603-1385

Re: Advisory Opinion; Qualification for Class Membership in Bailey/Emory/Patton lawsuits for participants in 401(k) and 457 plans

Dear Mr. Pruitt:

This letter responds to your request for an opinion concerning Class Membership in the Bailey/Emory/Patton lawsuits for participants in the State's Supplemental Retirement Income Plan (401(k)) and Deferred Compensation Plan (457). In particular, your concern derives from language in the Findings of Fact, Conclusions of Law and Order Regarding Class Definition signed by Judge Thompson and entered on November 20, 1998. Specifically, that Order provides in Finding of Fact No. 3 that "[p]articipants in the Supplemental Retirement Income Plan 401(k) and the Deferred Compensation Plan are deemed to 'vest' in those plans upon first making contributions to the plan if said 'vesting' took place by August 12, 1989." Order, ¶ 3 p. 3. Conclusion of Law No. 3, however, does not refer to the August 12, 1989, date. Instead, it provides that "[p]articipants in the Supplemental Retirement Income Plan 401(k) and the Deferred Compensation Plan are deemed to 'vest' in those plans upon first making contributions to the plan." Order, ¶ 3 p. 7. Your concern centered around the lack of any reference to August 12, 1989, in the relevant Conclusion of Law.

The lack of any reference to August 12, 1989, in Conclusion of Law No. 3 does not affect the necessity for 401(k) and Deferred Compensation participants to have contributed by August 12, 1989, in order to be Class Members. Fundamentally, the issue before the Court resolved by this Order was how to determine when participants in those plans vest, not the relevant date for vesting. The North Carolina Supreme Court's decision in Bailey, et al. v. State, 348 N.C. 130, 500 S.E.2d 54 (1998), addressed the plaintiffs' claims that state and local government retirees or future retirees who had "vested" in the respective retirement plans as of August 12, 1989, the date of legislation making those plans' benefits subject to state income taxes, had vested contractual rights to receive their retirement benefits free of state income taxes. In Bailey, the Supreme Court stated that "[c]lass plaintiffs are North Carolina state and local government employees whose retirement benefits vested on or before 12 August 1989, the ratification date of the Act." Bailey, 348 N.C. at 139, 500 S.E.2d at 59. The Court, after discussing the issue further, concluded that

it follows that the retirement benefits of all employees whose retirement rights became vested prior to 12 August 1989 must be exempt from state tax without regard to whether those benefits are attributable to service prior to or after that date.

Bailey, 348 N.C. at 142, 500 S.E.2d at 61. Plainly, the foundation for the Bailey/Emory/Patton settlement and payments is the Supreme Court's Bailey decision, which itself makes Class Membership dependent on "vesting" by August 12, 1989.

Subsequent to the Supreme Court's decision in Bailey, a Consent Order reflecting a settlement of Bailey and federal-retiree litigation was entered on June 10, 1998. That Consent Order provides that persons receiving the benefit of the settlement are federal and state retirees or retirement system members who had five years of service, the "vesting" period for the principal state plans, by August 12, 1989, with one exception. The exception is for 401(k) and Deferred Compensation plan participants and for federal retirees in comparable plans. As to those plans, the parties specified that they reserve the right to continue to seek agreement, or in the alternative submit to the Court for its determination, the issue of "vesting" periods for purposes of tax liability on withdrawals from Deferred Compensation and 401-K Plans by federal and North Carolina state and local government retirees.

Consent Order, ¶ 6 p. 6. Nothing in that Consent Order suggested any deviation from the August 12, 1989, date as the critical factor in determining whether a person would or would not be a Class Member. The issue reserved for later resolution related to how one "vests," not the critical date for vesting, in order to be a Class Member. (The Consent Order has since been put into effect by virtue of legislation enacted by the General Assembly and signed into law by the Governor on September 30, 1998, and by the Superior Court's entry of its Order Approving Class Action Settlement on October 9, 1998.)