1. Assembly Bill No. 2462
Passed the Assembly August 28, 2006
Chief Clerk of the Assembly
Passed the Senate August 23, 2006
Secretary of the Senate
This bill was received by the Governor this day
of , 2006, at o’clock m.
Private Secretary of the Governor

2. AB 2462 —2—
CHAPTER
An act to amend Sections 22950, 24952, 44041, and 87040 of,
and to add Sections 22307.5, 24953, 24977, 44041.5, and
87040.5 to, the Education Code, relating to state teachers’
retirement, and making an appropriation therefor.
legislative counsel’s digest
AB 2462, Mullin. State teachers’ retirement.
(1) The State Teachers’ Retirement Law prescribes the rights
and benefits of the members of the Defined Benefit Program of
the State Teachers’ Retirement Plan. The law requires
participating employers to contribute a specified percentage of
creditable compensation of members of the program to the
system, and these contributions are deposited in the Teachers’
Retirement Fund, as specified. Existing law creates the Teachers’
Health Benefits Fund, a continuously appropriated trust fund, for
the purpose of developing health care benefit programs, which is
funded by employer contributions, as specified.
This bill would create the Teachers’ Retirement Program
Development Fund, to be continuously appropriated, to pay any
costs determined by the board to be related to the development of
programs authorized by statute that the board determines directly
or indirectly enhance the financial security of members,
participants, or beneficiaries of the State Teachers’ Retirement
Plan, upon a specified resolution by the Teachers’ Retirement
Board. The Teachers’ Retirement Program Development Fund
would be funded by employer contributions in an amount to be
determined by the board. The bill would require an amount equal
to these employer contributions together with interest, as
specified, to be deposited in the Teachers’ Retirement Fund from
moneys generated from the programs receiving development
funds pursuant to these provisions, on terms and conditions
established by the board.
(2) The State Teachers’ Retirement Law requires that an
annuity contract and custodial account, as described in Section
403(b) of the Internal Revenue Code, be offered to specified
employees who perform creditable service subject to coverage by
95

3. —3— AB 2462
the Defined Benefit Program of the State Teachers’ Retirement
Plan. The annuity contract and custodial account may be
administered by a qualified 3rd-party administrator. The law
permits deferred compensation plans, as described in Section 457
of the Internal Revenue Code, to be offered to participating
employers for the employers to establish and offer to their
employees, and these plans may also be administered by a
3rd-party administrator. Existing law requires the governing
board of a school district when drawing orders for salary
payments to make, without charge, certain reductions connected
to participation in various programs, including deferred
compensation plans.
This bill would additionally provide for deferred compensation
plans and annuity contracts and custodial accounts that permit the
employer to enter into a contract with the system or a 3rd-party
administrator to provide administrative or compliance services
for those plans, contracts, and accounts, and would specify the
rights and obligations of employers, the system, and 3rd-party
administrators in this regard. The bill would also specify that the
State Teachers’ Retirement System may provide employers
services to ensure compliance with federal law, and to provide
for cost recovery, as specified.
(3) Existing law permits a community college employee to
deduct from his or her salary payments for participating in
specified programs, including, but not limited to, deferred
compensation, group life or disability insurance, legal expense
insurance, and hospital service contracts.
This bill would additionally provide for deferred compensation
plans and annuity contracts and custodial accounts that permit a
community college district to enter into a contract with the
system or a 3rd-party administrator to provide administrative or
compliance services for those plans, contracts, and accounts and
would specify the rights and obligations of the community
college district and 3rd-party administrators in this regard.
Appropriation: yes.
The people of the State of California do enact as follows:
SECTION 1. Section 22307.5 is added to the Education
Code, to read:
95

4. AB 2462 —4—
22307.5. (a) There is in the State Treasury a trust fund to be
known as the Teachers’ Retirement Program Development Fund.
There shall be deposited directly in that fund, and not transferred
from the Teachers’ Retirement Fund, that portion of employer
contributions determined by the board as necessary to fund the
expenditures authorized by this section.
(b) Notwithstanding Section 13340 of the Government Code,
moneys in the Teachers’ Retirement Program Development Fund
are continuously appropriated without regard to fiscal years to
pay any costs determined by the board to be related to the
development of programs authorized by statute that the board
determines directly or indirectly enhance the financial security of
members, participants, or beneficiaries of the State Teachers’
Retirement Plan, if the board determines, by resolution, the
proposed program is to have a reasonable expectation to generate
sufficient revenue to carry out the ongoing responsibilities of the
programs under development and permit the subsequent deposit
of funds, pursuant to subdivision (e), into the Teachers’
Retirement Fund.
(c) The board may authorize the transfer and disbursement of
funds from the Teachers’ Retirement Program Development
Fund for the purpose of carrying into effect this section upon the
signature of either or both of its chairperson and vice chairperson
or the chief executive officer or any employee of the system
designated by the chief executive officer.
(d) Disbursements of moneys from the Teachers’ Retirement
Program Development Fund of whatever nature shall be made
upon claims duly audited in the manner prescribed for the
disbursement of other public funds.
(e) An amount equal to employer contributions deposited in
the Teachers’ Retirement Program Development Fund pursuant
to subdivision (a), together with interest calculated based on the
actuarially assumed rate of investment return for the Defined
Benefit Program for the period beginning with the deposit of
employer contributions into the Teachers’ Retirement Program
Development Fund and ending with the transfer to the Teachers’
Retirement Fund, on terms and conditions established by the
board pursuant to subdivision (b), shall be deposited in the
Teachers’ Retirement Fund, from funds generated from the
programs receiving development funds pursuant to this section.
95

5. —5— AB 2462
SEC. 2. Section 22950 of the Education Code is amended to
read:
22950. (a) Employers shall contribute monthly to the system
8 percent of the creditable compensation upon which members’
contributions under this part are based.
(b) From the contributions required under subdivision (a),
there shall be deposited in the Teachers’ Retirement Fund an
amount, determined by the board, that is not less than the
amount, determined in an actuarial valuation of the Defined
Benefit Program pursuant to Section 22311.5, necessary to
finance the liabilities associated with the benefits of the Defined
Benefit Program over the funding period adopted by the board,
after taking into account the contributions made pursuant to
Sections 22901, 22951, and 22955.
(c) The amount of contributions required under subdivision (a)
that is not deposited in the Teachers’ Retirement Fund pursuant
to subdivision (b) shall be deposited directly into the Teachers’
Health Benefits Fund, as established in Section 25930, and shall
not be deposited into or transferred from the Teachers’
Retirement Fund.
(d) (1) Notwithstanding subdivisions (b) and (c), there may be
deposited into the Teachers’ Retirement Program Development
Fund, as established in Section 22307.5, from the contributions
required under subdivision (a), an amount determined by the
board, not to exceed the limit specified in paragraph (2).
(2) The balance of deposits into the Teachers’ Retirement
Development Fund, minus the subsequent transfer of funds, with
interest, into the Teachers’ Retirement Fund pursuant subdivision
(e) of Section 22307.5, shall not exceed 0.01 percent of the total
of the creditable compensation of the fiscal year ending in the
immediately preceding calendar year upon which member’s
contributions to the Defined Benefit Program are based.
(3) The deposits described in this subdivision shall not be
deposited into, or transferred from, the Teachers’ Retirement
Fund.
SEC. 3. Section 24952 of the Education Code is amended to
read:
24952. (a) Any annuity contract and custodial account
advertised, promoted, or offered through one or more third-party
service providers, shall provide for recovery, from the employees
95

6. AB 2462 —6—
who participate, of all costs and expenses of its own
administration, including, but not limited to, advertising,
promotion, legal, accounting, compliance, recordkeeping, and
investment costs and expenses.
(b) Any annuity contract and custodial account administered
by the system shall provide for the recovery of all costs and
expenses of its administration.
(c) The system may promote and advertise an annuity contract
and custodial account administered directly by the system or by a
third-party administrator.
SEC. 4. Section 24953 is added to the Education Code, to
read:
24953. (a) For purposes of this section, the following
definitions shall apply:
(1) “Annuity contract” means an annuity contract described in
Section 403(b) of the Internal Revenue Code that is available to
employees as described in Section 770.3 of the Insurance Code.
(2) “Custodial account” means a custodial account described
in Section 403(b)(7) of the Internal Revenue Code.
(3) “Third-party administrator” means a person or entity other
than the system that provides administrative or compliance
services to the system as described in subdivision (b).
(b) An employer that employs persons to perform creditable
service subject to coverage by the plan under this part may enter
into a written contract with the system for services regarding an
annuity contract and custodial account provided by the employer.
That contract may include any of the following:
(1) Services to ensure compliance with Section 403(b) of the
Internal Revenue Code regarding the annuity contract and
custodial account including, but not limited to, services that
permit the system to do any of the following:
(A) Administer and maintain written plan documents
governing the employer’s plan.
(B) Review and authorize hardship withdrawal requests,
transfer requests, loan requests and other disbursements
permitted under Section 403(b) of the Internal Revenue Code.
(C) Review and determine domestic relations orders as
qualified domestic relations orders as described in Section 414(p)
of the Internal Revenue Code.
95

7. —7— AB 2462
(D) Provide notice to eligible employees that is consistent with
Title 26 of the Code of Federal Regulations that those employees
may participate in an annuity contract and custodial account.
(E) Administer and maintain specimen salary reduction
agreements for the employer and employees of that employer to
initiate payroll deferrals.
(F) Monitor, from information provided either directly from
the employee, as part of the common remitting services provided
pursuant to paragraph (2), through information provided by the
employer, or through information provided by vendors
authorized by the employer to provide investment products, the
maximum contributions allowed by employees participating in
the annuity contract and custodial account as described in
Sections 402(g), 414(v), and 415 of the Internal Revenue Code.
(G) Calculate and maintain vesting information for
contributions made by the employer to the annuity contract and
custodial account.
(H) Identify and notify employees that are required to take a
minimum distribution of the funds in that employee’s annuity
contract and custodial account as described in Section 401(a)(9)
of the Internal Revenue Code.
(I) Coordinate responses to the Internal Revenue Service if
there is an Internal Revenue Service audit of the annuity contract
and custodial account.
(2) Services to administer the annuity contract and custodial
account that include, but are not limited to, all of the following:
(A) Common remitting services.
(B) General educational information to employees about the
annuity contract and custodial account that includes, but is not
limited to, the enrollment process, program eligibility, and
investment options.
(C) Internal reports for the employer to ensure compliance
with Section 403(b) of the Internal Revenue Code and Title 26 of
the Code of Federal Regulations.
(D) Consulting services related to the design, operation, and
administration of the plan.
(E) Internal audits, on behalf of an employer, of a provider’s
plan compliance procedures with respect to the provider’s
annuity contract and custodial account offered under the
employer’s plan. These audits shall not be conducted more than
95

8. AB 2462 —8—
once per year for a provider’s plan, unless documented evidence
indicates a problem in complying with Section 403(b) of the
Internal Revenue Code.
(c) If the system elects to contract with a third-party
administrator for the administrative or compliance services to
employers described in subdivision (b), the system shall do all of
the following:
(1) Determine that hiring the third-party administrator is in the
best interest of the participants to the annuity contract and
custodial account, their beneficiaries, and the employer that
provides that annuity contract and custodial account.
(2) Require the third-party administrator to provide proof of
liability insurance and a fidelity bond in an amount determined
by the system to be sufficient to protect the assets of participants
and beneficiaries in the annuity contract and custodial account.
(3) Require evidence, if the third-party administrator is related
to or affiliated with a provider of investment products pursuant to
Section 403(b) of the Internal Revenue Code, that data generated
from the services provided by the third-party administrator are
maintained in a manner that prevents the provider of investment
products from accessing that data.
(d) Any personal information obtained by the system in
providing services pursuant to this section shall be used by the
system only to provide those services for the employer in
accordance with the contract entered into with the employer
pursuant to subdivision (b).
(e) Nothing in this section requires an employer to contract
with the system for the administrative or compliance services
described in subdivision (b). A written contract for the
administrative or compliance services described in subdivision
(b) shall be on behalf of and at the request of the employer.
(f) Nothing in this section shall be construed to interfere with
either:
(1) The rights of employees or beneficiaries as described in
Section 770.3 of the Insurance Code.
(2) The ability of an employer to establish nonarbitrary
requirements upon providers of an annuity contract that, in the
employer’s determination, aid in the administration of its benefit
programs and do not unreasonably discriminate against any
provider of an annuity contract or interfere with the rights of
95

9. —9— AB 2462
employees or beneficiaries as described in Section 770.3 of the
Insurance Code.
(g) The cost of providing administrative or compliance
services pursuant to this section shall be deemed to be a cost
incurred by the employer and subject to subdivision (b) of
Section 44041 or subdivision (b) of Section 87040.
(h) In any conflict between this section and Section 44041.5 or
87040.5, including, with respect to the provision of services
provided pursuant to a contract between an employer and the
system, the provisions of this section shall prevail.
(i) The system shall disclose to an employer seeking the
services described in this section any fees, commissions, cost
offsets, reimbursements, or marketing or promotional items
received by the system or a third-party administrator from any
plan provider selected as a vendor of an annuity contract or
custodial account by the employer. If the system or a third-party
administrator is affiliated with or has a contractual relationship
with a provider of annuity contracts or custodial accounts, the
system or third-party administrator shall disclose the existence of
that relationship to each employer and employee participating in
the annuity contract or custodial account.
SEC. 5. Section 24977 is added to the Education Code, to
read:
24977. (a) An employer that employs persons to perform
creditable service subject to coverage by the plan under this part
that offers a deferred compensation plan as described in Section
457 of the Internal Revenue Code may enter into a written
contract with the system for services regarding that deferred
compensation plan provided by the employer. That contract may
include any of the following services:
(1) Services to ensure compliance with Section 457 of the
Internal Revenue Code regarding the deferred compensation plan
including, but not limited to, services that permit the system to do
any of the following:
(A) Administer and maintain written plan documents
governing the employer’s plan.
(B) Review and authorize requests for unforeseeable
emergency withdrawals, transfer requests, loan requests and
other disbursements permitted under Section 457 of the Internal
Revenue Code.
95

10. AB 2462 — 10 —
(C) Review and determine domestic relations orders as
qualified domestic relations orders as described in Section 414(p)
of the Internal Revenue Code.
(D) Provide notice to eligible employees that is consistent with
Title 26 of the Code of Federal Regulations that those employees
may participate in the deferred compensation plan.
(E) Administer and maintain specimen salary reduction
agreements for the employer and employees of that employer to
initiate payroll deferrals.
(F) Monitor, from information provided either directly from
the employee, as part of the common remitting services provided
pursuant to paragraph (2), through information provided by the
employer, or through information provided by vendors
authorized by the employer to provide investment products, the
maximum contributions allowed by employees participating in
the deferred compensation plan as described in Sections 414(v)
and 457 of the Internal Revenue Code.
(G) Calculate and maintain vesting information for
contributions made by the employer to the deferred
compensation plan.
(H) Identify and notify employees that are required to take a
minimum distribution of the funds in that employee’s deferred
compensation plan as described in Section 401(a)(9) of the
Internal Revenue Code.
(I) Coordinate responses to the Internal Revenue Service if
there is an Internal Revenue Service audit of the deferred
compensation plan.
(2) Services to administer the deferred compensation plan that
include, but are not limited to, all of the following:
(A) Common remitting services.
(B) General educational information to employees about the
deferred compensation plan that includes, but is not limited to,
the enrollment process, program eligibility, and investment
options.
(C) Internal reports for the employer to ensure compliance
with Section 457 of the Internal Revenue Code and Title 26 of
the Code of Federal Regulations.
(D) Consulting services related to the design, operation, and
administration of the plan.
95

11. — 11 — AB 2462
(E) Internal audits, on behalf of an employer, of a provider’s
plan compliance procedures with respect to the provider’s
custodial account offered under the employer’s plan. These
audits shall not be conducted more than once per year for any
provider’s plan unless documented evidence indicates a problem
in complying with Section 457 of the Internal Revenue Code.
(b) The system may contract with a third-party administrator
for the administrative and compliance services to employers
described in subdivision (a). For purposes of this subdivision, a
“third-party administrator” shall mean a person or entity other
than the system that provides administrative or compliance
services as described in subdivision (a). If the system contracts
with a third-party administrator, the system shall do all of the
following:
(1) Determine that hiring a third-party administrator is in the
best interest of the participants to the deferred compensation
plan, their beneficiaries, and the employer that provides that
deferred compensation plan.
(2) Require the third-party administrator to provide proof of
liability insurance and a fidelity bond in an amount determined
by the system to be sufficient to protect the assets of participants
and beneficiaries in the deferred compensation plan.
(3) Require evidence, if the third-party administrator is related
to or affiliated with a provider of investment products pursuant to
Section 457 of the Internal Revenue Code, that data generated
from the services provided by the third-party administrator are
maintained in a manner that prevents the provider of investment
products from accessing that data.
(c) Nothing in this section requires an employer to contract
with the system for the administrative or compliance services
described in subdivision (a). A written contract for the
administrative or compliance services described in subdivision
(a) shall be on behalf of and at the request of the employer.
(d) Any personal information obtained by the system in
providing services pursuant to this section shall be used by the
system only to provide those services for the employer in
accordance with the contract entered into with the employer
pursuant to subdivision (b).
(e) The cost of providing administrative or compliance
services pursuant to this section shall be deemed to be a cost
95

12. AB 2462 — 12 —
incurred by the employer and subject to subdivision (b) of
Section 44041 or subdivision (b) of Section 87040.
(f) In any conflict between this section and Section 44041.5 or
87040.5, including with respect to the provision of services
provided pursuant to a contract between an employer and the
system, the provisions of this section shall prevail.
(g) The system shall disclose to an employer seeking the
services described in this section any fees, commissions, cost
offsets, reimbursements, or marketing or promotional items
received by the system or a third-party administrator from any
plan provider selected as a vendor of a deferred compensation
plan by the employer. If the system or a third-party administrator
is affiliated with or has a contractual relationship with a provider
of deferred compensation plans, the system or third-party
administrator shall disclose the existence of that relationship to
each employer and each individual participant in the deferred
compensation plan.
SEC. 6. Section 44041 of the Education Code is amended to
read:
44041. (a) (1) The governing board of each school district
when drawing an order for the salary payment due to employees
of the district shall, without charge, reduce the order by the
amount which it has been requested in a revocable written
authorization by the employee to deduct for any or all of the
following purposes:
(A) Paying premiums on any policy or certificate of group life
insurance for the benefit of the employee or for group disability
insurance, or legal expense insurance, or any of them, for the
benefit of the employee or his or her dependents issued by an
admitted insurer on a form of policy or certificate approved by
the Insurance Commissioner.
(B) Paying rates, dues, fees, or other periodic charges on any
hospital service contract for the benefit of the employee, or his or
her dependents, issued by a nonprofit hospital service corporation
on a form approved by the Insurance Commissioner pursuant to
the provisions of Chapter 11A (commencing with Section 11491)
of Part 2 of Division 2 of the Insurance Code.
(C) Paying periodic charges on any medical and hospital
service agreement or contract for the benefit of the employee, or
his or her dependents, issued by a nonprofit corporation subject
95

13. — 13 — AB 2462
to Part 2 (commencing with Section 5110) of, Part 3
(commencing with Section 7110) of, or Part 11 (commencing
with Section 10810) of, Division 2 of Title 1 of the Corporations
Code.
(D) Paying periodic charges on any legal services contract for
the benefit of the employee, or his or her dependents issued by a
nonprofit corporation subject to Part 3 (commencing with
Section 7110) of, or Part 11 (commencing with Section 10810)
of, Division 2 of Title 1 of the Corporations Code.
(2) The requirements of this subdivision shall not apply to
subdivision (b).
(b) For purposes of a deferred compensation plan authorized
by Section 403(b) or 457 of the Internal Revenue Code or an
annuity program authorized by Section 403(b) of the Internal
Revenue Code that is offered by the school district which
provides for investments in corporate stocks, bonds, securities,
mutual funds, or annuities, except as prohibited by the California
Constitution, the governing board of each school district when
drawing an order for the salary payment due to an employees of
the district shall, with or without charge, reduce the order by the
amount which it has been requested in a revocable written
authorization by the employee to deduct for participating in a
deferred compensation plan or annuity program offered by the
school district. The governing board shall determine the cost of
performing the requested deduction and may collect that cost
from the organization, entity, or employee requesting or
authorizing the deduction. For purposes of this subdivision, the
governing board of a school district is entitled to include in the
amounts reducing the order the costs of any compliance or
administrative services that are required to perform the requested
deduction in compliance with federal or state law, and may
collect these costs from the participating employee, the
employee’s participant account, or the organization or entity
authorizing the deduction.
(c) The governing board of the district shall, beginning with
the month designated by the employee and each month thereafter
until authorization for the deduction is revoked, draw its order
upon the funds of the district in favor of the insurer which has
issued the policies or certificates or in favor of the nonprofit
hospital service corporation which has issued hospital service
95

14. AB 2462 — 14 —
contracts, or in favor of the nonprofit corporation which has
issued medical and hospital service or legal service agreements
or contracts, for an amount equal to the total of the respective
deductions therefor made during the month. The governing board
may require that the employee submit his or her authorization for
the deduction up to one month in advance of the effective date of
coverage.
(d) “Group insurance” as used in this section shall mean only
a bona fide group program of life or disability or life and
disability insurance where a master contract is held by the school
district or an employee organization but it shall, nevertheless,
include annuity programs authorized by Section 403(b) of the
Internal Revenue Code when approved by the governing board.
SEC. 7. Section 44041.5 is added to the Education Code, to
read:
44041.5. (a) purposes of this section, the following
definitions shall apply:
(1) “Annuity contract” means an annuity contract described in
Section 403(b) of the Internal Revenue Code that is available to
employees as described in Section 770.3 of the Insurance Code.
(2) “Custodial account” means a custodial account described
in Section 403(b)(7) of the Internal Revenue Code.
(3) “Deferred compensation plan” means a plan described in
Section 457 of the Internal Revenue Code.
(4) “Employer” means a school district or county office of
education.
(5) “Third-party administrator” means a person or entity that
provides administrative or compliance services to an employer as
described in subdivision (b).
(b) An employer may enter into a written contract with a
third-party administrator for services regarding an annuity
contract and custodial account or a deferred compensation plan
provided by the employer. That contract may include any of the
following:
(1) Services to ensure compliance with either Section 403(b)
of the Internal Revenue Code regarding the annuity contract and
custodial account or Section 457 of the Internal Revenue Code
regarding a deferred compensation plan including, but not limited
to, any of the following:
95

15. — 15 — AB 2462
(A) Administer and maintain written plan documents
governing the employer’s plan.
(B) Review and authorize hardship withdrawal requests under
Section 403(b) of the Internal Revenue Code, transfer requests,
loan requests, unforeseeable emergency withdrawals under
Section 457 of the Internal Revenue Code and other
disbursements permitted under either Section 403(b) or 457 of
the Internal Revenue Code.
(C) Review and determine domestic relations orders as
qualified domestic relations orders as described in Section 414(p)
of the Internal Revenue Code.
(D) Provide notice to eligible employees that is consistent with
Title 26 of the Code of Federal Regulations that those employees
may participate in an annuity contract and custodial account.
(E) Administer and maintain specimen salary reduction
agreements for the employer and employees of that employer to
initiate payroll deferrals.
(F) Monitor, from information provided either directly from
the employee, as part of the common remitting services provided
pursuant to subparagraph (2), through information provided by
the employer, or through information provided by vendors
authorized by the employer to provide investment products, the
maximum contributions allowed by employees participating in
either the annuity contract and custodial account as described in
Sections 402(g), 414(v), and 415 of the Internal Revenue Code or
the deferred compensation plan as described in Sections 414(v)
or 457 of the Internal Revenue Code.
(G) Calculate and maintain vesting information for
contributions made by the employer to the annuity contract and
custodial account or deferred compensation plan.
(H) Identify and notify employees that are required to take a
minimum distribution of the funds in that employee’s annuity
contract and custodial account or deferred compensation plan as
described in Section 401(a)(9) of the Internal Revenue Code.
(I) Coordinate responses to the Internal Revenue Service if
there is an Internal Revenue Service audit of the annuity contract
and custodial account or deferred compensation plan.
(2) Services to administer the annuity contract and custodial
account or a deferred compensation plan that includes, but is not
limited to, all of the following:
95

16. AB 2462 — 16 —
(A) Common remitting services.
(B) General educational information to employees about the
annuity contract and custodial account or the deferred
compensation plan that includes, but is not limited to, the
enrollment process, program eligibility, and investment options.
(C) Internal reports for the employer to ensure compliance
with either Section 403(b) or 457 of the Internal Revenue Code
and compliance with Title 26 of the Code of Federal Regulations.
(D) Consulting services related to the design, operation, and
administration of the plan.
(E) Internal audits, on behalf of an employer, of a provider’s
plan compliance procedures with respect to the provider’s
annuity contract or custodial account offered under the
employer’s plan. These audits shall not be conducted more than
once per year for any provider’s plan unless documented
evidence indicates a problem in complying with either Section
403(b) or 457 of the Internal Revenue Code.
(c) (1) If an employer elects to contract with a third-party
administrator for the administrative or compliance services to
employers described in subdivision (b), the employer shall do all
of the following:
(A) Require the third-party administrator to provide proof of
liability insurance and a fidelity bond in an amount determined
by the employer to be sufficient to protect the assets of
participants and beneficiaries in the annuity contract and
custodial account or deferred compensation plan.
(B) Require the third-party administrator to provide evidence
of a safe chain-of-custody of assets process for ensuring
fulfillment of fiduciary responsibilities and timely placement of
participant investments.
(C) Require evidence, if the third-party administrator is related
to or affiliated with a provider of investment products pursuant to
Section 403(b) or 457 of the Internal Revenue Code, that data
generated from the services provided by the third-party
administrator are maintained in a manner that prevents the
provider of investment products from accessing that data unless
access to the data is required to provide the services in
accordance with the contract entered into with the employer
pursuant to subdivision (b).
95

17. — 17 — AB 2462
(2) This subdivision shall apply to any administrative or
compliance services provided pursuant to a contract for services
between an employer and the State Teachers’ Retirement System
if the system does not contract with a third-party administrator to
provide those administrative and compliance services on behalf
of the system.
(d) A third-party administrator shall disclose to any employer
seeking his or her services any fees, commissions, cost offsets,
reimbursements, or marketing or promotional items received by
the administrator, a related entity, or a representative or agent of
the administrator or related entity from any plan provider
selected as a vendor of a annuity contract, custodial account, or
deferred compensation plan by the employer. A third-party
administrator that is affiliated with or has a contractual
relationship with a provider of annuity contracts, custodial
accounts, or deferred compensation plans shall disclose the
existence of the relationship to each employer and each
individual participant in the annuity contract, custodial account
or deferred compensation plan.
(e) Any personal information obtained by the third-party
administrator in providing services pursuant to this section shall
be used by the third-party administrator only to provide those
services for the employer in accordance with the contract entered
into with the employer pursuant to subdivision (b).
(f) Nothing in this section shall be construed to interfere with
either:
(1) The rights of employees or beneficiaries as described in
Section 770.3 of the Insurance Code.
(2) The ability of the employer to establish nonarbitrary
requirements upon providers of an annuity contract that, in the
employer’s discretion, aid in the administration of its benefit
programs and do not unreasonably discriminate against any
provider of an annuity contract or interfere with the rights of
employees or beneficiaries as described in Section 770.3 of the
Insurance Code.
(g) This section shall not apply to any services provided by a
third-party administrator pursuant to a contract for services
between an employer and the State Teachers’ Retirement System.
Any services provided by a third-party administrator pursuant to
a contract for services between an employer and the State
95

18. AB 2462 — 18 —
Teachers’ Retirement System shall be subject to either Section
24953, in the case of an annuity contract or custodial account, or
Section 24977, in the case of a deferred compensation plan.
SEC. 8. Section 87040 of the Education Code is amended to
read:
87040. (a) (1) The governing board of each community
college district when drawing an order for the salary payment
due to employees of the district shall, without charge, reduce the
order by the amount which it has been requested in a revocable
written authorization by the employee to deduct for any or all of
the following purposes:
(A) Paying premiums on any policy or certificate of group life
insurance for the benefit of the employee or for group disability
insurance, or legal expense insurance, or any of them, for the
benefit of the employee or his dependents issued by an admitted
insurer on a form of policy or certificate approved by the
Insurance Commissioner.
(B) Paying rates, dues, fees, or other periodic charges on any
hospital service contract for the benefit of the employee, or his
dependents, issued by a nonprofit hospital service corporation on
a form approved by the Insurance Commissioner pursuant to the
provisions of Chapter 11a (commencing with Section 11491) of
Part 2 of Division 2 of the Insurance Code.
(C) Paying periodic charges on any medical and hospital
service agreement or contract for the benefit of the employee, or
his dependents, issued by a nonprofit corporation subject to Part
2 (commencing with Section 5110) of, Part 3 (commencing with
Section 7110) of, or Part 11 (commencing with Section 10810)
of, Division 2 of Title 1 of the Corporations Code.
(D) Paying periodic charges on any legal services contract for
the benefit of the employee, or his dependents issued by a
nonprofit corporation subject to Part 3 (commencing with
Section 7110) of, or Part 11 (commencing with Section 10810)
of, Division 2 of Title 1 of the Corporations Code.
(2) The requirements of this subdivision shall not apply to
subdivision (b).
(b) For purposes of a deferred compensation plan authorized
by Section 403(b) or 457 of the Internal Revenue Code or an
annuity program authorized by Section 403(b) of the Internal
Revenue Code that is offered by the community college district
95

19. — 19 — AB 2462
which provides for investments in corporate stocks, bonds,
securities, mutual funds, or annuities, except as prohibited by the
California Constitution, the governing board of each community
college district when drawing an order for the salary payment
due to an employees of the district shall, with or without charge,
reduce the order by the amount which it has been requested in a
revocable written authorization by the employee to deduct for
participating in a deferred compensation plan or annuity program
offered by the community college district. The governing board
shall determine the cost of performing the requested deduction
and may collect that cost from the organization, entity, or
employee requesting or authorizing the deduction. For purposes
of this subdivision, the governing board of a community college
district is entitled to include in the amounts reducing the order
the costs of any compliance or administrative services that are
required to perform the requested deduction in compliance with
federal or state law, and may collect these costs from the
participating employee, the employee’s participant account, or
the organization or entity authorizing the deduction.
(c) The governing board of the district shall, beginning with
the month designated by the employee and each month thereafter
until authorization for the deduction is revoked, draw its order
upon the funds of the district in favor of the insurer which has
issued the policies or certificates or in favor of the nonprofit
hospital service corporation which has issued hospital service
contracts, or in favor of the nonprofit corporation which has
issued medical and hospital service or legal service agreements
or contracts, for an amount equal to the total of the respective
deductions therefor made during the month. The governing board
may require that the employee submit his authorization for the
deduction up to one month in advance of the effective date of
coverage.
(d) “Group insurance” as used in this section shall mean only
a bona fide group program of life or disability or life and
disability insurance where a master contract is held by the
community college district or an employee organization but it
shall, nevertheless, include annuity programs authorized by
Section 403(b) of the Internal Revenue Code when approved by
the governing board.
95

20. AB 2462 — 20 —
SEC. 9. Section 87040.5 is added to the Education Code, to
read:
87040.5. (a) For purposes of this section, the following
definitions shall apply:
(1) “Annuity contract” means an annuity contract described in
Section 403(b) of the Internal Revenue Code that is available to
employees as described in Section 770.3 of the Insurance Code.
(2) “Custodial account” means a custodial account described
in Section 403(b)(7) of the Internal Revenue Code.
(3) “Deferred compensation plan” means a plan described in
Section 457 of the Internal Revenue Code.
(4) “Third-party administrator” means a person or entity that
provides administrative or compliance services to a community
college district as described in subdivision (b).
(b) A community college district may enter into a written
contract with a third-party administrator for services regarding an
annuity contract and custodial account or a deferred
compensation plan provided by the community college district.
That contract may include any of the following:
(1) Services to ensure compliance with either Section 403(b)
of the Internal Revenue Code regarding the annuity contract and
custodial account or Section 457 of the Internal Revenue Code
regarding a deferred compensation plan including, but not limited
to, any of the following:
(A) Administer and maintain written plan documents
governing the community college district’s plan.
(B) Review and authorize hardship withdrawal requests under
Section 403(b) of the Internal Revenue Code, transfer requests,
loan requests, unforeseeable emergency withdrawals under
Section 457 of the Internal Revenue Code and other
disbursements permitted under either Section 403(b) or 457 of
the Internal Revenue Code.
(C) Review and determine domestic relations orders as
qualified domestic relations orders as described in Section 414(p)
of the Internal Revenue Code.
(D) Provide notice to eligible employees that is consistent with
Title 26 of the Code of Federal Regulations that those employees
may participate in an annuity contract and custodial account.
95

21. — 21 — AB 2462
(E) Administer and maintain specimen salary reduction
agreements for the community college district and employees of
that community college district to initiate payroll deferrals.
(F) Monitor, from information provided either directly from
the employee, as part of the common remitting services provided
pursuant to subparagraph (2), through information provided by
the community college district, or through information provided
by vendors authorized by the community college district to
provide investment products, the maximum contributions
allowed by employees participating in either the annuity contract
and custodial account as described in Sections 402(g), 414(v),
and 415 of the Internal Revenue Code or the deferred
compensation plan as described in Sections 414(v) or 457 of the
Internal Revenue Code.
(G) Calculate and maintain vesting information for
contributions made by the community college district to the
annuity contract and custodial account or deferred compensation
plan.
(H) Identify and notify employees that are required to take a
minimum distribution of the funds in that employee’s annuity
contract and custodial account or deferred compensation plan as
described in Section 401(a)(9) of the Internal Revenue Code.
(I) Coordinate responses to the Internal Revenue Service if
there is an Internal Revenue Service audit of the annuity contract
and custodial account or deferred compensation plan.
(2) Services to administer the annuity contract and custodial
account or a deferred compensation plan that includes, but is not
limited to, all of the following:
(A) Common remitting services.
(B) General educational information to employees about the
annuity contract and custodial account or the deferred
compensation plan that includes, but is not limited to, the
enrollment process, program eligibility, and investment options.
(C) Internal reports for the community college district to
ensure compliance with either Section 403(b) or 457 of the
Internal Revenue Code and compliance with Title 26 of the Code
of Federal Regulations.
(D) Consulting services related to the design, operation, and
administration of the plan.
95

22. AB 2462 — 22 —
(E) Internal audits, on behalf of a community college district,
of a provider’s plan compliance procedures with respect to the
provider’s annuity contract or custodial account offered under the
community college district’s plan. These audits shall not be
conducted more than once per year for any provider’s plan unless
documented evidence indicates a problem in complying with
either Section 403(b) or 457 of the Internal Revenue Code.
(c) (1) If a community college district elects to contract with a
third-party administrator for the administrative or compliance
services to community college districts described in subdivision
(b), the community college district shall do all of the following:
(A) Require the third-party administrator to provide proof of
liability insurance and a fidelity bond in an amount determined
by the community college district to be sufficient to protect the
assets of participants and beneficiaries in the annuity contract and
custodial account or deferred compensation plan.
(B) Require the third-party administrator to provide evidence
of a safe chain-of-custody of assets process for ensuring
fulfillment of fiduciary responsibilities and timely placement of
participant investments.
(C) Require evidence, if the third-party administrator is related
to or affiliated with a provider of investment products pursuant to
Section 403(b) or 457 of the Internal Revenue Code, that data
generated from the services provided by the third-party
administrator are maintained in a manner that prevents the
provider of investment products from accessing that data unless
access to the data is required to provide the services in
accordance with the contract entered into with the community
college district pursuant to subdivision (b).
(2) This subdivision shall apply to any administrative or
compliance services provided pursuant to a contract for services
between a community college district and the State Teachers’
Retirement System if the system does not contract with a
third-party administrator to provide those administrative and
compliance services on behalf of the system.
(d) A third-party administrator shall disclose to any
community college district seeking his or her services any fees,
commissions, cost offsets, reimbursements, or marketing or
promotional items received by the administrator, a related entity,
or a representative or agent of the administrator or related entity
95

23. — 23 — AB 2462
from any plan provider selected as a vendor of an annuity
contract, custodial account, or deferred compensation plan by the
community college district. A third-party administrator that is
affiliated with or has a contractual relationship with a provider of
annuity contracts, custodial accounts, or deferred compensation
plans shall disclose the existence of the relationship to each
community college district and each individual participant in the
annuity contract, custodial account or deferred compensation
plan.
(e) Any personal information obtained by the third-party
administrator in providing services pursuant to this section shall
be used by the third-party administrator only to provide those
services for the community college district in accordance with
the contract entered into with the community college district
pursuant to subdivision (b).
(f) Nothing in this section shall be construed to interfere with
either:
(1) The rights of employees or beneficiaries as described in
Section 770.3 of the Insurance Code.
(2) The ability of the community college district to establish
nonarbitrary requirements upon providers of an annuity contract
that, in the community college district’s discretion, aid in the
administration of its benefit programs and do not unreasonably
discriminate against any provider of an annuity contract or
interfere with the rights of employees or beneficiaries as
described in Section 770.3 of the Insurance Code.
(g) This section shall not apply to any services provided by a
third-party administrator pursuant to a contract for services
between a community college district and the State Teachers’
Retirement System. Any services provided by a third-party
administrator pursuant to a contract for services between a
community college district and the State Teachers’ Retirement
System shall be subject to either Section 24953, in the case of an
annuity contract or custodial account, or Section 24977, in the
case of a deferred compensation plan.
95

32. Approved , 2006
Governor