January 18, 1977

Mr. Gerald L. Rix 
President of the School Board 
Groton Public School District No. 6-3 
Groton, South Dakota 57445

Official Opinion No. 77-9

Tax-sheltered annuities under SDCL 3-10-4 through 3-10-7 are not a violation of SDCL 3-12-66

Dear Mr. Rix:

You have submitted the following factual situation:

FACTS: 

During the 1975 contract negotiations, the custodians, cooks, clerical help and mechanics of the Groton Public School District No. 6-3 raised the issue of their personal retirement programs.  Many of these people had been contacted by various insurance company representatives about the probability of establishing an individual retirement account or some type of annuity plan for each individual.  These are the types of plans that the individual can contribute to each year no matter who he may be employed by. 
    
Pursuant to the contract negotiations the School Board passed a resolution at a meeting on May 12, 1975, whereby the school district agreed to contribute five percent of the annual salary earned by these nonteaching people who work more than twenty hours per week, such contribution to be made to an individual retirement account or annuity plan chosen by the individual.  No fund has been established by the school district and no fund is being maintained by the school district on behalf of these individuals. 
    
This program has now been attacked by the South Dakota Department of Labor, Division of Retirement and Insurance, as being in violation of SDCL 3-12- 66, and the Department of Labor is demanding that the school district cease making any further payments to these individual employees' retirement accounts.

You have requested an opinion on the following question:

QUESTION: 

Is the plan of the school district in violation of SDCL 3-12-66?

SDCL 13-10-4 reads as follows:
    
Subject to the provisions of § § 3-12-65 and 3-12-66, any school board shall have the power to enter into a retirement pension agreement with its employees for their benefit and to pay any part or all of the necessary premiums therefor.

SDCL 3-12-66 reads as follows:
    
No political subdivision or public corporation, including municipalities, counties and chartered governmental units, may establish any retirement plan unless such political subdivision or public corporation becomes a participating unit of the system created in this chapter.

In Official Opinion 74-50, a municipality proposed to create a trust fund with the International City Management Association as trustee for a deferred compensation plan for the city manager.  My predecessor said with references to such plan, the following:
    
It appears from the contracts contemplated that this would be a trust fund retirement system set up for this particular employee. It would not be in the manner of a payroll deduction as authorized under SDCL 3-10-8, nor would it seem to qualify as a tax-sheltered annuity under SDCL 3-10-4 through 3-10-7.  There is no vested interest gained by the employee, as in an annuity.  There is direct municipal participation that could, by the contract, include matching funds added by the municipality, as in a standard retirement system, rather than simply deducting moneys to pay for an annuity. 
    
What the city would be doing then is deferring some of the compensation normally given to the employee that would be put into a trust fund to be administered by the International City Management Association as trustee.  The effect is much the same as a deduction that is automatically put into a retirement fund such as the new state-wide Public Officers and Employees Retirement System. 
    
It would appear then that the proposed system requested by the City Manager and the City of Vermillion would be in contravention of Section 24, Chapter 35 of the 1974 Session Laws (SDCL 3-12-66).

SDCL 3-10-4 reads as follows:
    
The state and its political subdivisions and the employees thereof are hereby authorized to participate in tax-sheltered annuities.  Said employees may authorize their employer to withhold a designated amount from their salary for a retirement annuity purchased for their benefit.

SDCL 3-10-5 reads as follows: 
    
When so authorized by an employee, it shall be the duty of the employer to withhold the amount designated from the salary of the employee and to purchase a retirement annuity from a company or organization licensed to do business in the state of South Dakota, for such employee and to make the periodic payments on such retirement annuity according to the terms of the annuity contract.

SDCL 3-10-6 reads as follows:
    
The state and its political subdivisions, and the employees thereof, are authorized to purchase individual life insurance contracts to guarantee such retirement annuity and the employer is hereby authorized to withhold payment from the salary of employees to cover the cost of such purchases as provided in internal revenue service regulations which permit the purchase of tax- sheltered annuities and retirement income contracts.

SDCL 3-10-7 reads as follows:
    
When a public employee has a tax-sheltered annuity prior to employment by the state or a political subdivision of the state, such employee shall have the privilege of transferring the periodic payments on such an annuity to the current employer.

It is my opinion that tax-sheltered annuities for your employees established under SDCL 3-10-4 through 3-10-7 would not be in violation of SDCL 3- 12-66; however, it is also my opinion that in order for your annuity plan to qualify, the five percent should be paid to the employee as salary and then deducted from such salary and paid to the insurance company for each individual employee's annuity contract.

In answer to your specific question, it is my opinion that any plan created subsequent to July 1, 1974, whereby the employer contributes to the plan would be in violation of SDCL 3-12-66 and the only valid plan would have to be established under SDCL 3-10-4 through 3-10-7.  It would appear that a modification of your plan could be made so that it could be a deduction rather than a contribution and therefore meet the requirements of SDCL 3-10-4 through 3-10-7.

It is also my opinion that participation in the tax-sheltered annuities referred to above must be a voluntary matter and not become mandatory, so that in effect it becomes a retirement system and comes into conflict with SDCL 3-12-66.

Respectfully submitted,

William J. Janklow
Attorney General

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