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Wade v. Arizona State Retirement System

Supreme Court of Arizona

March 23, 2017

Mary Wade and Marla Paddock, Plaintiffs/Appellants,
v.
Arizona State Retirement System; Arizona State Retirement System Board, Defendants/Appellees.

         Appeal from the Superior Court in Maricopa County The Honorable Randall H. Warner, Judge No. CV2013-015082

         Opinion of the Court of Appeals, Division One 239 Ariz. 263, 370 P.3d 132 (App. 2016)

         REVERSED

         COUNSEL:

          Susan Martin (argued), Daniel L. Bonnett, Jennifer Kroll, Martin & Bonnett, P.L.L.C., Phoenix; and Thomas M. Rogers, Robaina & Kresin, PLLC, Phoenix, Attorneys for Mary Wade and Marla Paddock

          Mark Brnovich, Arizona Attorney General, Dominic Draye, Solicitor General, Paula S. Bickett, Chief Counsel, Civil Appeals Section, Jothi Beljan (argued), Assistant Attorney General, Phoenix, Attorneys for Arizona State Retirement System and Arizona State Retirement System Board

          JUSTICE TIMMER authored the opinion of the Court, in which CHIEF JUSTICE BALES, VICE CHIEF JUSTICE PELANDER, and JUSTICES BRUTINEL and BOLICK joined.

          TIMMER JUSTICE

         ¶1 The Arizona State Retirement System ("ASRS") operates a defined-benefit plan for employees of the state and participating political subdivisions, including the City of Chandler. Both employers and employees contribute to ASRS. The contribution amounts, and the benefits paid to a retired employee, depend on the employee's "compensation" while employed.

         ¶2 The City operates a deferred-compensation plan in which it contributes money for its employees and permits employees to defer additional amounts. These monies are invested and held in trust until distributed to employees, generally at age seventy and one-half. Here, we decide whether City-contributed payments into the deferred-compensation-plan trust constitute "compensation" for the purpose of calculating ASRS contributions and benefits. We hold that such payments are "compensation" for ASRS purposes.

         I. Background

         ¶3 Employer and employee contributions to ASRS are calculated using a formula tied to employee compensation. Employers must contribute to ASRS based on "a percentage of compensation of all employees" enrolled in ASRS. A.R.S. § 38-737(A). The contribution rate is established annually. A.R.S. § 38-737(C). Employees, referred to as "members, " contribute "a percentage of a member's compensation, " via payroll deductions. A.R.S. § 38-736(A). Upon retirement, an eligible member receives a monthly life annuity calculated, in part, from "[t]he member's average monthly compensation." A.R.S. § 38-757(B)(2).

         ¶4 The City operates a deferred compensation plan, the "457 Plan, " which provides retirement income and other deferred benefits to its employees in accordance with 26 U.S.C. § 457(b). The 457 Plan authorizes two contribution methods. An employee can elect to defer some pay from each paycheck. The City can also elect to "credit" "any other amount" to the employee's account. All contributions are held in trust for the exclusive benefit of employees and their beneficiaries. Although income taxes on the amounts are deferred until withdrawal, an employee immediately pays Federal Insurance Contribution Act ("FICA") taxes on amounts contributed by both the City and the employee. See 26 U.S.C. §§ 3101(a), 3121(a)(5)(E), (v)(3)(A).

         ¶5 Mary Wade served as the City's attorney for about five years until 2013, and Marla Paddock has served as the City's clerk since 2002. Both signed yearly contracts that entitled them to a base salary and periodic, employer-contributed payments into the 457 Plan. For example, Paddock's 2013 contract entitled her to an "annual base" salary approximating $120, 000 plus "annual deferred compensation payment in an amount equal to seven and one-half percent (7.5%) of [Paddock's] annual base salary, " payable in equal, bi-weekly amounts. The City-contributed deferred ...


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