Introduction to the Tier 3 Hybrid Cash Balance Plan
The Tier 3 Hybrid Cash Balance Plan is a retirement option for Kentucky public employees who began participation on or after January\ 1,\ 2014. This plan combines elements of both a defined benefit plan and a defined contribution plan, offering a structured yet flexible retirement solution. Members’ benefits are expressed as a hypothetical account balance, and the employer is responsible for funding the plan and investing assets prudently. Asset allocation decisions are central to the plan’s long-term sustainability, as they determine whether assets will match liabilities and ensure benefits are secure.
Key Features of the Tier 3 Plan
Eligibility
Members who began participation on or after January\ 1,\ 2014 are automatically enrolled. Tier 2 members (those who began participation between September\ 1,\ 2008 and January\ 1,\ 2014) may irrevocably opt into the Tier 3 plan through their Self Service account. Once elected, the change is permanent and the member is subject to the same rules as those enrolled after January\ 1,\ 2014.
Contributions
- Employee Contributions:
- Nonhazardous Members: 5%\ of\ creditable\ compensation
- Hazardous Members: 8%\ of\ creditable\ compensation
- Employer Contributions:
- Nonhazardous Members: 4%\ of\ creditable\ compensation
- Hazardous Members: 7.5%\ of\ creditable\ compensation
These contributions are deposited into the member’s individual account and represent a portion of the employer contribution.
Interest Credits
- Guaranteed Interest: Accounts earn a guaranteed 4% interest annually on both the member contributions and the employer pay credit balance. Interest is credited to the member’s account each June 30, based on the account balance from the preceding June 30.
- Upside Sharing Interest: If the 5-year Geometric Average Net Investment Return (GANIR) exceeds 4%, the member’s account will be credited with 75%\ of\ the\ amount\ of\ return\ over\ 4%. For example, if the GANIR is 6%, the member would receive an additional 1.5% interest credit.
Benefit Calculation
Upon retirement, a member’s benefit is calculated using the formula:
\text{Monthly Life Annuity} = \frac{\text{Accumulated Account Balance}}{\text{Actuarial Factor}}The actuarial factor is determined based on the member’s age at retirement and type of service (hazardous or nonhazardous).
Retirement Eligibility
There are no early or reduced retirement benefits under Tier 3. A member is eligible to retire when one of the following requirements is met:
- Nonhazardous Members:
- Age 57 or older, if the member’s age and years of service equal 87 (Rule of 87)
- Age 65 with at least 60 months of service credit
- Hazardous Members:
- Any age with 25 or more years of service
- Age 60 with at least 60 months of service credit
Members who have both nonhazardous and hazardous service credit are eligible to retire if they meet one of the four requirements above.
Service Credit, Refunds, and Insurance
Service credit determines retirement eligibility but is not part of the Tier 3 benefit calculation. Tier 3 members may be eligible to make certain types of service purchases. Members with less than 60 months of service who are not vested may receive a refund of their contributions but will not receive employer pay credits, interest on the pay credit balance, or upside sharing interest. Only members receiving a monthly pension benefit may participate in the health insurance program.
Example: Employer and Employee Contribution
If a nonhazardous member earns 50,000 annually:
- Employee Contribution = 0.05 \times 50,000 = 2,500 annually
- Employer Contribution = 0.04 \times 50,000 = 2,000 annually
If the account balance at the start of the year is 10,000, the interest credit for the year would be:
- Interest Credit = 10,000 \times 0.04 = 400 annually
- Total Annual Account Growth = 2,500 + 2,000 + 400 = 4,900
Example: Upside Sharing Interest
If the 5-year GANIR is 7%:
- Upside Over 4% = 7 - 4 = 3%
- Upside Sharing Interest = 3 \times 0.75 = 2.25%
- Additional Credit = 10,000 \times 0.0225 = 225
Total Account Growth including upside sharing = 4,900 + 225 = 5,125
Conclusion
The Tier 3 Hybrid Cash Balance Plan provides Kentucky public employees with a structured retirement savings plan featuring guaranteed interest credits and potential additional earnings through upside sharing interest. Understanding contributions, interest credits, and retirement eligibility is crucial for planning and maximizing retirement benefits. For detailed guidance, members can refer to the Kentucky Public Pensions Authority Tier 3 Guide and the Tier 3 Members page.
