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.)
Because the issue as to the 401(k) and Deferred Compensation Plans related to how one "vests," not the date of vesting, for purposes of participation in the class, the Order concerning class definition and membership must be read in light of the reserved issue as well as the underlying Bailey decision by the Supreme Court. August 12, 1989, remains the critical date by which a person must have "vested" or otherwise qualified for Class Membership pursuant to the Bailey opinion and the Consent Order. For 401(k) and Deferred Compensation Plan participants, the issue was what they had to do by that date in order to be Class Members. The Order Regarding Class Definition provides, in Conclusion of Law No. 3, that participants in those plans "are deemed to ‘vest’ . . . upon first making contributions to the plan." Order, ¶ 3 p. 7. The effect of that Order is to include as Class Members those persons who "vested" by making contributions to either the 401(k) Plan or the Deferred Compensation Plan by August 12, 1989, and to exclude from the class those persons who had not "vested" because they did not first make contributions to those plans by the relevant date.
I hope this answers your question. Please let us know if we can be of further help in this matter.
signed by:
Grayson G. Kelley Senior Deputy Attorney General
Norma S. Harrell
Special Deputy Attorney General
