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RETIREMENT AND DEFERRED COMPENSATION COMMITTEE

September 19, 2019

TO: PECG Board of Directors FROM: Paul Milkey (chair), Tim Sharp,

Akbar “Nick” Afshinnik, Azar Habibafshar, and Oscar Cortes

SUBJECT: October 2019 Quarterly Report. In this report, our Committee provides information regarding retirement and deferred compensation that we hope will be of interest to you. This report (and previous reports) will be available on PECG’s website at this link: http://pecg.org/issues/pensions/. Please provide some time for PECG staff to post the latest report. We ask that PECG section leaders let your section membership know that this information is available. As always, let us know if you have any suggestions on topics you would like us to consider for future Committee reports.

PROFESSIONAL ENGINEERS IN CALIFORNIA GOVERNMENT

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Wellness Programs The mission of state employee wellness program is to promote a work environment that encourages healthy lifestyle choices, decreases the risk of illness and disease, and enhances employee effectiveness and well-being. The California Department of Human Resources (CalHR) acts in a leadership role to help departments develop a healthy worksite and implement a proactive onsite wellness program that encourages employee engagement at all levels. Wellness Coordinators in each State department work to offer wellness education or program activities and healthy information for you and your fellow employees. CalPERS encourage you to stay informed about health issues that affect you. Take steps to maintain or improve your health and use the resources at your department and on this website to help make your life a long and healthy one. The CalHR offers online wellness service that allows state active employees to continually track health behaviors and access wellness resources, such as healthy recipes, exercise videos, ask a physician, and much more. CalPERS also offers incentive management programs such as:

• Participation-based programs where participants earn incentives for completing an activity such as attending a wellness event or reaching a challenge milestone.

• Results-based programs, where participants earn incentives for

achieving client-specified biometric targets.

• Incentives may be awarded to participants who do not meet required target levels but have shown significant improvement from a prior program

• Qualifying activity programs where participants must complete client-

specified wellness activities (such as attend a health screening) to gain certain plan benefits.

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CalHR offers wellness discounts for employees and their family. There are a whole host of online courses, games, tips and more available to you through Renew by UnitedHealthcare or any other insurance. One example is brain-boosting courses on dementia, depression, and memory health. While experts debate whether preventive measures lower healthcare costs on a national level, there's plenty of evidence that prevention is beneficial when it comes to your individual health—and your wallet. Of the 10 most common causes of death, including heart disease and cancer, half are related to lifestyle choices, according to the Center for Bioethics and Human Dignity. Keeping your weight down, quitting smoking, staying fit and reducing stress are some of the best ways to prevent illness and prolong life, and they could reduce the amount of money you have to spend on hospitalization, drugs and other therapies. Health insurance, in most cases, covers preventive medical checkups—such as yearly physicals and OB/GYN visits, as well as wellness options that may help pay for exercise or weight-loss programs, orthopedic massage therapy and stop-smoking programs. More insurance companies have begun partnering with health clubs to offer discounted memberships or services. The benefits cover everyone, from the super-fit to those with chronic medical conditions, according to J.P. Wieske, of the Council for Affordable Insurance. For more information, please contact Azar Habibafshar. New Changes to Hardship and Unforeseeable Emergency Withdrawals from Savings Plus Program On April 5, 2019, Savings Plus implemented changes for both 401(k) hardship withdrawals and 457(b) unforeseeable emergency withdrawals. The following changes will allow you more flexibility during challenging times.

• You are no longer required to take out a loan from your Savings Plus account before you make a 457(b) unforeseeable emergency

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withdrawal. When making a 401(k)-hardship withdrawal, you are still required to first take out a loan from your account unless you certify that the loan itself would cause additional economic hardship.

• Previously, you could only withdraw your principal (contributions) when making a hardship withdrawal. Now, you may draw from your investment earnings. In addition, you may now utilize any funds in your employer discretionary account for both hardship and unforeseeable emergency withdrawals.

• Finally, the requirement to cease plan contributions for six months after taking either a hardship or unforeseeable emergency withdrawal has been lifted, and you may continue your contributions to the plan without interruption.

401(k) Plan Withdrawals

You may qualify for an in-service withdrawal from your 401(k) Plan account due to financial hardship for the following reasons:

• Payment of tuition and related room and board expenses for postsecondary education for the following 12 months for you, your spouse, children, or a dependent;

• Costs associated with the purchase of your principal residence (excluding mortgage payment);

• Prevention of foreclosure on or eviction from your principal residence (you are limited to no more than two hardship withdrawals for evictions within a 12-month period);

• Payment of expenses for medical or dental care described in Section 213(d) of the Internal Revenue Code incurred by you, your spouse, or a dependent;

• Payment for burial or funeral expenses for your deceased parent, spouse, children, or a dependent; or

• Expenses for the repair of damage to your principal residence that would qualify as a casualty deduction from your federal income taxes Section 165 of the Internal Revenue Code.

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A hardship withdrawal from your 401(k) account will have income tax implications. You may wish to obtain the advice of a tax advisor before you request a hardship withdrawal. To qualify for a 401(k)-hardship withdrawal, you must first exhaust all other resources reasonably available. The hardship withdrawal will be made pro-rata from all sources or pro-rata from just the source(s) you indicate. If you elect to withdraw from your Roth assets, that portion of the hardship withdrawal may be subject to an additional tax due to restrictions on early distribution of Roth assets.

You are not eligible for a hardship withdrawal if your hardship can be completely or partially relieved through one of the following:

• Reimbursement or payment by insurance or other sources;

• The reasonable liquidation of assets provided the liquidation would not itself cause an immediate heavy financial need;

• The suspension of elective contributions under the 401(k) Plan and/or 457(b) Plan. Stopping your contributions may help alleviate your financial need. If you would like to stop your contributions, please contact the Savings Plus Service Center; or

• Loans available from your Savings Plus account, provided repayment of the loan would not itself cause an immediate heavy financial need.

To make a hardship withdrawal, complete the 401(k) Plan Hardship Withdrawal Form, attach the required documentation as outlined in the 401(k) Hardship Withdrawal Booklet, and mail to the address indicated at the end of the form. All documentation will be reviewed and your submission does not guarantee approval of your request. In some cases, additional documentation may be requested. If you have a Personal Choice Retirement Account (PCRA), it may be necessary to transfer your PCRA funds into your core funds to satisfy the amount of your withdrawal request and maintain the required minimum in your core account. In certain situations, you can take an unforeseeable emergency withdrawal from your account. An unforeseeable emergency is defined as 1) a severe financial hardship to the participant resulting from a sudden and unexpected illness or accident of the participant or a dependent; 2) a loss of the Participant's property because

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of a casualty; or 3) other similar extraordinary and unforeseen circumstances arising because of events beyond your control. 457 Plan Unforeseeable Emergency Withdrawals

An unforeseeable emergency is defined as a severe financial hardship to you resulting from:

• Payments necessary to prevent foreclosure or eviction from your primary residence;

• Payment of expenses for medical care described in Section 213(d) of the Internal Revenue Code incurred by you, your spouse, or your dependents;

• Payment for burial or funeral expenses for your deceased parent, spouse, or dependents as defined in Section 152 of the Internal Revenue Code;

• Expenses for the repair of unforeseen damage to your principal residence that would qualify as a casualty deduction from your federal income taxes under Section 165 of the Internal Revenue Code; or

• Involuntary loss of your or your spouse's income.

Complete the 457(b) Plan Unforeseeable Emergency Withdrawal Booklet, attach the required documentation, and submit as outlined. Approval for an unforeseeable emergency withdrawal is not automatic. You must provide supporting documentation to Savings Plus. If approved, you can receive up to the full amount of your 457(b)-account balance. There is no tax penalty for this early withdrawal unless your 457(b) account contains amounts received by a rollover contribution from a source other than another 457(b) plans. The amount that you receive as an early withdrawal that is attributable to such a rollover contribution could be subject to early withdrawal penalties. The entire withdrawal would then be taxed as ordinary income. If you have a Personal Choice Retirement Account (PCRA), it may be necessary to transfer your PCRA funds into your core funds to satisfy the amount of your withdrawal request and maintain the required minimum in your core account

For more information, please contact Oscar Cortes.

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Medicare Part B Reimbursement The following information applies to PECG members receiving Medicare health insurance. Higher income individuals may be paying and income-related adjustment that can be reimbursed by Cal PERS, IF the steps discussed below are followed. Background on Medicare Medicare is the federal health insurance program for individuals age 65 and older. The Social Security Administration (SSA) is responsible for Medicare eligibility determinations, enrollment, and premiums. The Centers for Medicare and Medicaid Services (CMS) regulates the Medicare program. Medicare coverage includes four parts: Part A – Hospital Part B – Medical Part C – Medicare Advantage Plans Part D – Prescription Drugs Part A Covers in-patient hospital care, skilled nursing facility, hospice, and some home health care. Part A is premium free for eligible individuals. Part B Covers outpatient medical care, such as doctor visits. You must pay a premium to stay enrolled in Part B. The SSA annually determines the monthly Part B premiums, and if your income exceeds certain thresholds, the premiums are adjusted higher. If you receive SSA benefits, your premiums will be taken out our your SSA benefits. Otherwise, SSA will bill you quarterly. If you are enrolled in a CalPERS Medicare health plan, you must pay for and maintain enrollment in Medicare Part B to remain enrolled in CalPERS health plan. Part C Also referred to as “Medicare Advantage,” this is a CMS-approved health coverage option that is provided by private insurance under contract with CMS. Medicare Advantage plans include Part A and Part B, and some plans

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also include Part D. Cal PERS’s Medicare Advantage plan includes Part A, Part B, and Part D. Part D A voluntary outpatient prescription drug benefit available to everyone with Medicare. The Medicare Part D premium is paid to your health carrier as part of the CalPERS health premium. As with Medicare Part B, if your income exceeds certain thresholds, the SSA will assess an additional income-related monthly adjustment amount that must be paid to SSA. Payment of this amount is mandatory to protect your Medicare enrollment and eligibility to remain enrolled in a CalPERS Medicare health plan. If you are receiving SSA benefits, the additional premium will be deducted from your SSA benefits. Otherwise, you will be billed quarterly. Part B Reimbursement As mentioned previously, you must pay premiums for Medicare Part B. If you are enrolled in a CalPERS Medicare health plan, you may be entitled to a reimbursement of your Medicare Part B premium. If you are eligible for reimbursement of a Medicare Part B premium, CalPERS will automatically reimburse all or part of your premium, up to the minimum standard rate (i.e., not adjusted up for high income as discussed below). The Part B reimbursement will not exceed the difference between the maximum employer contribution and the premium for the health plan for which you are enrolled. Therefore, if you pick a lower cost health plan, there is a better chance for full reimbursement of the Part B premium. Another reimbursement opportunity that is often overlooked applies when your Medicare Part B premium is adjusted for higher income (making the premium higher than the minimum standard rate). In this case, you can request reimbursement of the additional (income-related Medicare Part B) premium by submitting a copy of your Social Security benefits notice to CalPERS. Specifically, you can apply by mailing or faxing your entire Social Security benefits notice to:

CalPERS Member Account Management Division Medicare Administration

P.O. Box 942715 Sacramento, CA 94229-2715

FAX: (800) 959-6545

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The total reimbursement cannot exceed the difference between the employer contribution and the total premium. To provide some additional detail on the premium adjustment, if your modified adjusted gross income (MAGI) is above a certain amount, you pay an “Income Related Monthly Adjustment Amount” (IRMAA). Medicare uses the MAGI from your IRS tax return from two years ago. Most people pay the standard premium, which was $135.50 in 2019. However, people with a MAGA above a certain amount (from two years ago) will pay the standard premium plus IRMAA. IRMAA is essentially an extra charge added to your monthly premium. For 2019, the premiums are as follows:

2019 Medicare Part B Premiums with IRMAA Adjustments 2017 Income Monthly

Premium in 2019 File Individual Tax Return

Joint Tax Return File Married & Separate Tax Return

$85,000 or less $170,000 or less $85,000 or less $135.50 (standard rate)

>$85k to $107k >$170k to $214k N/A $189.60 >$107 to $133.5k >$214 to $267k N/A $270.90 >$133.5k to $160k

>$267k to $320k N/A $352.20

>$160 to <$500k >$320 to <$750k >$85k to <$415k $433.40 $500k and above $750k and above $415 and above $460.50 Note: The information provided above is a summary based primarily on the following publications: https://www.calpers.ca.gov/docs/forms-publications/medicare-enrollment-guide.pdf https://www.medicare.gov/your-medicare-costs/part-b-costs Please review these publications for further information and details that may be important for your individual situation.

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CSR also provided a nice summary here: http://www.californiastateretirees.org/portals/0/Documents/Newspaper/201901-Retiree.pdf For more information, please contact Paul Milkey Update on Cal PERS Long-Term Care Class Action Lawsuit July 2019 Update

This is an update as to the class action lawsuit against CalPERS pertaining to the 85% premium increase it announced in 2013 and implemented in 2015 and 2016 for its Long-Term Care Insurance. The 85% premium increase was targeted only at members who had purchased long-term care insurance from 1995-2004 (LTC1 and LTC2), and who had also purchased inflation protection and/or lifetime benefits.

The trial judge, the Hon. William Highberger, divided the trial into three phases. Phase 1 was a court trial as to the legal issue of contract interpretation of the Evidence of Coverage. The Phase 1 court trial took place on June 10-11, 2019. Phase 2 was scheduled to be a jury trial on CalPERS’ statute of limitations defense where CalPERS claimed the suit should have been brought years earlier based on prior premium increases. Phase 3 is a jury trial involving whether CalPERS breached the contract, and the monetary damages to be awarded to the class. If CalPERS had prevailed entirely on its defenses in either Phase 1 or Phase 2, the case would not proceed to the Phase 3 jury trial.

On July 1, 2019, the trial judge issued a tentative statement of decision pertaining to Phase 1 and Phase 2. As to Phase 1, the trial judge addressed issues of the interpretation of the Evidence of Coverage, and the permissible reasons and prohibitions in which CalPERS could increase premiums. The trial judge, after hearing and considering evidence in Phase 1, found that while CalPERS had a general right to increase premiums on a class-wide basis, it was prohibited to do so “as a result of” the inflation protection benefit. The court found that a jury should determine whether all or part of the 85% increase was “as a result of” inflation protection and therefore CalPERS’ breached the contract. If a jury determines CalPERS breached the contract, the jury will determine the amount of damages to the class for all or a portion of the 85% premium increase that was as a result of

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the compounding 5% annual benefit increases which CalPERS would be required to provide from the promised inflation protection benefit. CalPERS therefore did not prevail on its inflation protection defense.

As to Phase 2, the trial judge ruled against CalPERS as a matter of law on its defense that the suit should have been brought based on prior premium increases. This meant that a jury trial on that issue was not required for Phase 2. The trial judge found that since the only damages being sought in the class action suit was based on the 85% premium increase that was first announced in 2013 and implemented in 2015 and 2016, as a matter of law the case could not have been filed years earlier based on the previous premium increases.

The trial judge has strongly encouraged the parties go to a mediation to try to resolve the matter. The parties have agreed to mediation on September 4, 2019 and October 7, 2019 before the Hon. Layn Phillips (ret.), who is a former U.S. Attorney and Federal Judge from Oklahoma with a highly regarded mediation practice in Orange County, California and New York City. The Court has presently scheduled the jury trial on Phase 3 to begin on October 30, 2019 should the matter not settle.

--------- Below are two recent LTC Lawsuit articles from the Sacramento Bee:

The Sacramento Bee, The State Worker, June 28, 2019

$1.2 billion CalPERS lawsuit over long-term care gets go-ahead from judge. Public workers and retirees who sued CalPERS over an 85 percent rate increase to long-term care insurance plans could find out whether their lawsuit will move forward.

The lawsuit created a potential hurdle when a judge tentatively ruled that it shouldn’t be thrown out based on how much time passed before it was filed, and a decision on a second piece of the trial is expected.

A few people who bought the plans filed a class-action lawsuit after the California Public Employees’ Retirement System notified them it planned to

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hike premiums in 2015 and 2016. The suit’s class includes up to about 100,000 people who faced the rate hikes. Plaintiff’s claim the increases and associated costs amount to about $1.2 billion.

The people who filed the lawsuit said the rate hike violated contracts and promises in marketing materials for the plans. CalPERS said it had the authority to raise the rates and needed to do so to sustain the insurance plans.

A trial started June 10 with hearings in Los Angeles County Superior Court. The trail was divided into three central questions: whether too much time had passed for the policyholders’ claim to be valid, whether CalPERS had contractual authority to raise rates, and whether CalPERS breached its contract with policyholders.

Judge William Highberger tentatively ruled that the lawsuit shouldn’t be thrown out based on too much time passing, according to transcripts from the trial.

CalPERS had argued that since it raised rates in 2003, 2007, 2010, 2011, 2012, and 2013, the lawsuit should have been filed earlier to comply with the statute of limitations.

Highberger’s decision on whether CalPERS had contractual authority to raise rates is expected.

The transcript indicates Highberger was more inclined to rule that the claims of 85,000 people who bought “inflation protection” – an option to pay more each month with an assurance that the rates would remain steady – were valid than the other 15,000 class members who didn’t purchase the protection.

If Highberger sides with the policyholders, a jury trial would be scheduled this fall, unless the sides reach a settlement agreement.

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The Sacramento Bee, The State Worker, August 14, 2019

CalPERS faces ‘very serious risk’ in $1.2 billion long-term care case, judge warns BY WES VENTEICHER

CalPERS, California Public Employees Retirement System, aims to build retirement and health security for state workers. Here's a quick look at the retirement system.

A judge is urging CalPERS to settle a major lawsuit over price increases for its long-term care insurance policies, suggesting the system could have to pay a lot of money if the lawsuit goes to a jury trial in October.

The lawsuit, filed in 2013, alleges CalPERS violated contracts when it hiked premiums by 85 percent for about 100,000 public employees after promising stable prices in marketing materials. CalPERS has said it had the authority to increase the rates and did so solely to keep the plans sustainable.

Superior Court Judge William Highberger issued a tentative ruling last month saying he was inclined to decide CalPERS raised rates for an impermissible reason for a group of about 85,000 policyholders with a unique plan benefit

Those policyholders bought “inflation protection” plans, which featured steady increases to their benefits to cover the rising costs of long-term care – coupled with promises that premiums would stay the same.

They agreed to pay about twice as much in premiums as policyholders with more basic plans, and CalPERS’ marketing materials said their premiums would be “locked in.” Marketing materials came with graphs that showed a flat-line projection for future premiums as policyholders aged.

Highberger said he is inclined to rule that the marketing language means CalPERS may not raise rates simply because they promised an inflation protection benefit. He didn’t include roughly 18,000 policyholders who are part of the suit’s class but didn’t purchase the extra benefit.

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If the lawsuit goes to trial as scheduled on Oct. 30, a jury will decide whether CalPERS did or didn’t increase premiums specifically because of the inflation protection benefit. The jury could decide whether all, none, or part of the increase was specifically due to the benefit, which would determine how much money CalPERS would have to pay, if any.

Plaintiffs have estimated the lawsuit could cost CalPERS $1.2 billion if the retirement system loses.

“There is a very serious risk that a money judgment for a rather large amount of money will be issued in due course in this case,” Highberger wrote, saying he agreed with plaintiffs’ interpretation of the “your premiums will not increase” language.

CalPERS maintains it had the authority to selectively raise rates despite the language in the marketing materials.

“While we respectfully disagree with Judge Highberger’s tentative ruling that the insurance policies limited CalPERS’ ability to increase premiums, he did opine that increases are permitted in certain situations,” CalPERS spokesman Joe DeAnda said in a prepared statement. He said CalPERS intends to prove that the increase “was one of those situations, and hence that it was consistent with the judge’s ruling and was therefore permissible under the policies.”

DeAnda said the outcome of the lawsuit wouldn’t affect the rest of the retirement system’s benefits. The $375 billion fund administers retirement benefits for about 2 million people, including pensions for about 596,000 retirees.

Highberger’s tentative ruling said a settlement would “necessarily involve the state’s executive branch, particularly the Department of Finance, and the Legislature.”

He wrote that an inability by CalPERS to pay claims could “create an obvious default by an arm of the state in the fulfillment of its contract obligations. This, in turn, could seriously impair the credit rating of the state.”

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CalPERS’ struggles with long-term care insurance aren’t unique. Highberger’s tentative ruling cites the challenges of pricing a new type of insurance in his explanation of how CalPERS ended up raising rates so dramatically in the two-part 85 percent increase in 2015 and 2016, which followed other rate increases in prior years.

While many insurers offered the plans in the 1990s, premium increases and insurer losses drove most out of that line of business, according to the AARP.

“We will continue to explore all legal and other options to maintain the viability of the long-term care insurance program, and will not enter into an agreement that would compromise the right of our policyholders to get the benefits to which they are entitled under their policies,” DeAnda said in the statement.

For more information, please contact Tim Sharp