1. (a) Benefits of participation. The plan administrator shall cease to accept deferrals to investment products approved under the previous plan, with exception of life insurance products on or after September 1, 2000. Subject to any changes in federal law:

   1. (1) a participant's deferrals are not subject to federal income taxation until the deferrals are paid or otherwise made available to the participant; and
   2. (2) investment income is not subject to federal income taxation until it is paid or otherwise made available to the participant.

2. (b) Enrollment of participants in the plan.

   1. (1) An employee may complete a participation agreement, enroll online or enroll through a customer service representative at the TPA in the revised plan.
   2. (2) An employee may not initiate participation in the plan unless the employee simultaneously chooses a qualified investment product to receive the employee's deferrals.
   3. (3) The plan administrator may not complete any forms provided by a qualified vendor in connection with initial participation.
3. (c) Effective date of a participation agreement. An executed participation agreement is effective for compensation earned beginning with the month following the month in which the participant enrolls.

4. (d) Contents of a participation agreement.

   1. (1) A participation agreement must contain but shall not be limited to:

      1. (A) the participant's consent for payroll deductions equal to the amount of deferrals during each pay period;
      2. (B) the amount that will be deducted from the participant's compensation during each pay period;
      3. (C) the qualified vendor and qualified investment product in which the participant's deferrals will be invested;
      4. (D) the date on which the payroll deductions will begin or end, as appropriate;
      5. (E) the signature of an individual with authority to bind the qualified vendor;
      6. (F) the signature of an individual with authority to bind the participant; and
      7. (G) an incorporation by reference of the requirements of state law and the sections in this chapter.
   2. (2) A participant may name primary or secondary beneficiaries, or both.

5. (e) Participants with existing life insurance products.

   1. (1) This paragraph is effective until December 31, 1998. When a participant has deferrals and investment income in a life insurance product, the State of Texas:

      1. (A) retains all of the incidents of ownership of the life insurance product;
      2. (B) is the sole beneficiary of the life insurance product;
      3. (C) is not required to transfer the life insurance product to the participant or the participant's beneficiary; and
      4. (D) is not required to pass through the proceeds of the product to the participant or the participant's beneficiary.
   2. (2) This paragraph is effective January 1, 1999, and thereafter. When a participant has deferrals and investment income in a life insurance product, the life insurance product shall be held in trust for the exclusive benefit of the participant and beneficiaries.

6. (f) Normal maximum amount of deferrals.

   1. (1) The amount a participant defers during each tax year may not exceed the normal maximum amount of deferrals.
   2. (2) The normal maximum amount of deferrals is equal to the lesser of $12,000 (as periodically adjusted in accordance with Internal Revenue Code §457(e)(15), EGTRRA and the Job Creation and Worker Assistance Act of 2002, or 100% of a participant's includible compensation.

   3. (3) The participant's employing agency will monitor the annual deferral limits for each plan participant to ensure the maximum annual deferral limit of the lesser of $12,000 (as adjusted) or 100% of a participant's gross income is not exceeded. If a participant makes deferrals in excess of the normal maximum annual deferral limit and is not participating under the catch-up provision, the following actions will be taken.

      1. (A) Upon notification by the participant's agency, the vendor will return to the participant's agency the amount of deferrals in excess of the normal plan limits, that is, the lesser of $12,000 (as adjusted) or 100% of the participant's gross income without any reduction for fees or other charges.
      2. (B) Upon receipt of the funds, the participant's agency will reimburse the participant through its payroll system.

7. (g) Catch-up exception to the normal maximum amount of deferrals.

   1. (1) This subsection provides a limited exception to the normal maximum amount of deferrals.
   2. (2) In the event that a participant chooses to begin the catch-up option, the participant is required to complete and provide the plan administrator with a copy of the catch-up provision agreement form.

   3. (3) In this subsection, the term "normal retirement age" for any participant means a range of ages:

      1. (A) beginning with the earliest age at which a person may retire under the participant's basic pension plan:

         1. (i) without an actuarial or similar reduction in retirement benefits; and
         2. (ii) without the state's consent for the retirement; and
      2. (B) ending at age 70.5.
      3. (C) A participant who is a police or firefighter (defined in Internal Revenue Code §415(b), may designate a normal retirement age that is earlier than that described above, but in any event may not be earlier than age 40.
   4. (4) If a participant works beyond age 70.5, the normal retirement age for the participant is the age designated by the participant which, in this instance, may not be later than the participant's separation from service.

   5. (5) For any or all of the last three full taxable years ending before the taxable year in which a participant attains normal retirement age, the maximum amount that the participant may defer for each tax year is the lesser of:

      1. (A) twice the annual 457(g) deferral limit as adjusted, or
      2. (B) the sum of the normal maximum amount of deferrals that the participant did not use in prior tax years commencing January 1, 1979, provided the participant was eligible to participate in the plan during those years.

   6. (6) The participant's employing agency will calculate and monitor all catch-up limits and furnish the plan administrator with the applicable catch-up forms. If a participant makes deferrals in excess of the participant's catch-up limit, the following actions will be taken.

      1. (A) Upon notification by the participant's agency, the vendor will return to the participant's agency, the amount of deferrals in excess of the catch-up limit without any reduction for fees or other charges.
      2. (B) Upon receipt of the funds, the participant's agency will reimburse the participant through its payroll system.
   7. (7) This subsection applies only if the participant has not previously used the catch-up exception with respect to a different normal retirement age under the plan or another deferred compensation plan governed by the Internal Revenue Code of 1986, §457 and EGTRRA.

   8. (8) If a participant makes deferrals in excess of the normal plan limits under the catch-up provision during or after the calendar year in which the participant reaches normal retirement age, the following actions will be taken.

      1. (A) Upon notification by the participant's state agency, the vendor will return to the participant's state agency, the amount of deferrals in excess of the normal plan limits, that is, the lesser of $12,000 (as adjusted in accordance with Internal Revenue Code §457(e)(15) or 100% of a participant's includible compensation) without any reduction for fees or other charges.
      2. (B) Upon receipt of the funds, the participant's state agency will reimburse the participant through its payroll system.
   9. (9) Over age 50 catch-up. A participant age 50 or older during any calendar year shall be eligible to make additional pre-tax contributions in accordance with Internal Revenue Code Section 414(v) applicable to 457 plans, in excess of normal deferral amounts. A participant may make an additional contribution over and above the applicable deferral limit. The additional contribution is $2,000 for 2003, increasing by $1,000 each year up to $5,000 in 2006. After 2006, the amount of the "Age 50 and over catch-up" will be indexed in $500 increments based upon cost-of-living adjustments. A participant who elects to defer contributions under the normal catch-up provisions may not also defer under the special catch-up and code Section 414(v).

8. (h) Changes before a participant becomes entitled to a distribution.

   1. (1) A participant may change the amount of the deferral at any time.

   2. (2) A participant must execute a change agreement and file the agreement with the participant's agency coordinator when the participant:

      1. (A) initiates a transfer;
      2. (B) changes the participant's primary or secondary beneficiary, or both;
      3. (C) changes the qualified vendor or qualified investment product that receives the participant's deferrals; or
      4. (D) performs a combination of the items specified in subparagraphs (A)-(C) of this paragraph.
   3. (3) A participant must execute a change agreement and file the agreement directly with the plan administrator when the participant moves deferrals and investment income from a qualified vendor's qualified investment product to another qualified investment product offered by the same vendor.

   4. (4) Upon receipt of a participation agreement or change agreement, an agency coordinator shall review the agreement to determine whether it complies with the sections in this chapter.

      1. (A) With a participant's enrollment, the agency coordinator shall take the action necessary for payroll initiation.
      2. (B) If a change agreement complies, the agency coordinator shall send the agreement to the plan administrator.
   5. (5) This paragraph applies to changes of beneficiaries, changes of the qualified vendor or qualified investment product that receives a participant's deferrals, and changes to the amount a participant defers per pay period. An executed change agreement or participation agreement is effective beginning with the month following the month in which the agency coordinator receives the agreement from the participant.
   6. (6) This paragraph applies to transfers. An executed change agreement is effective on the date that the transfer procedures specified in §87.15 of this title (relating to Transfers) have been completed.

   7. (7) If a participant changes a primary or secondary beneficiary, or both, on the same change agreement that is used to make another type of change, the change of beneficiary applies only to the qualified investment product:

      1. (A) that receives the transfer; or
      2. (B) that is designated to receive the participant's future deferrals.
9. (i) Conflict in beneficiary designations. The designation of a primary or secondary beneficiary, or both, in a participation agreement, change agreement, or distribution agreement prevails over a conflicting designation in any other document.
10. (j) A beneficiary designation that names a former spouse is invalid unless the designation is completed after the date of divorce and received by the plan administrator.
11. (k) Paid leave of absence. Deferrals may continue during a participant's paid leave of absence.

12. (l) Termination and resumption of deferrals.

    1. (1) An employee may voluntarily terminate additional deferrals by completing a participation agreement.
    2. (2) An employee who has terminated additional deferrals, but who has not separated from service, may resume deferrals by completing a participation agreement.
    3. (3) An employee who returns to active service after a separation from service must execute a new participation agreement before deferrals may resume. Deferrals after a resumption of service may not be made to the same account that received the deferrals before the separation from service occurred.

13. (m) Ownership of deferrals and investment income.

    1. (1) Until December 31, 1998, a participant's deferrals and investment income are the property of the State of Texas until the deferrals and investment income are actually distributed to the employee.
    2. (2) Effective January 1, 1999, in accordance with Chapter 609, Government Code and Internal Revenue Code §457(g), all amounts currently and hereafter held under the plan, including deferrals and investment income, shall be held in trust by the Board of Trustees for the exclusive benefit of participants and their beneficiaries and may not be used for or diverted to any other purpose, except to defray the reasonable expenses of administering the plan. In its sole discretion, the Board of Trustees may cause plan assets to be held in one or more custodial accounts or annuity contracts that meet the requirements of Internal Revenue Code §457(g), §401(f) and EGTRRA. In addition, effective January 1, 1999, the Board of Trustees does hereby irrevocably renounce, on behalf of the State of Texas and participating state agencies, any claim or right which it may have retained to use amounts held under the plan for its own benefit or for the benefit of its creditors and does hereby irrevocably transfer and assign all plan assets under its control to the Board of Trustees in its capacity as the trustee of the trust created hereunder. Adoption of this rule shall constitute notice to vendors holding assets under the plan to change their records effective January 1, 1999, to reflect that assets are held in trust by the Board of Trustees for the exclusive benefit of the participants and beneficiaries. Failure of a vendor to change its records on a timely basis may result in the expulsion of the vendor from the plan.

14. (n) Market risk and related matters.

    1. (1) The plan administrator, the trustee, an employing state agency, or an employee of the preceding are not liable to a participant if all or part of the participant's deferrals and investment income are diminished in value or lost because of:

       1. (A) market conditions;
       2. (B) the failure, insolvency, or bankruptcy of a qualified vendor; or
       3. (C) the plan administrator's initiation of a transfer in accordance with the sections in this chapter.

    2. (2) A participant is solely responsible for monitoring his or her own investments and being knowledgeable about:

       1. (A) the financial status and stability of the qualified vendor in which the participant's deferrals and investment income are invested;
       2. (B) market conditions;
       3. (C) the resulting cost of making a transfer or distribution from a qualified investment product;
       4. (D) the amount of the participant's deferrals and investment income that are invested in a qualified vendor's qualified investment products;
       5. (E) the riskiness of a qualified investment product; and
       6. (F) the federal tax advantages and consequences of participating in the plan and receiving distributions of deferrals and investment income.

15. (o) Alienation of deferrals and investment income. A participant's deferrals and investment income may not be:

    1. (1) assigned or conveyed;
    2. (2) pledged as collateral or other security for a loan;
    3. (3) attached, garnished, or subjected to execution; or
    4. (4) conveyed by operation of law in the event of the participant's bankruptcy, or insolvency.

Source Note:The provisions of this §87.5 adopted to be effective March 28, 1991, 16 TexReg 1560; amended to be effective January 10, 1992, 16 TexReg 7743; amended to be effective November 23, 1992, 17 TexReg 7911; amended to be effective January 1, 1994, 18 TexReg 8460; amended to be effective January 5, 1996, 20 TexReg 11022; amended to be effective March 21, 1997, 22 TexReg 2513; amended to be effective September 10, 1998, 23 TexReg 9067; amended to be effective January 5, 2003, 27 TexReg 12370.