TRS and Other Benefits Issues Arising in Collective Bargaining and Administrator Contracts Andrew...
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Transcript of TRS and Other Benefits Issues Arising in Collective Bargaining and Administrator Contracts Andrew...
TRS and Other Benefits TRS and Other Benefits Issues Arising in Collective Issues Arising in Collective
Bargaining and Bargaining and Administrator ContractsAdministrator Contracts
Andrew MalahowskiAndrew Malahowski
Franczek Sullivan P.C.Franczek Sullivan P.C.
Why Do Benefits Matter?Why Do Benefits Matter?
Constructive reason: Creative benefits Constructive reason: Creative benefits solutions can help you meet your goals for solutions can help you meet your goals for negotiating labor contracts and negotiating labor contracts and administrator contracts.administrator contracts.
Destructive reason: Potential pitfalls under Destructive reason: Potential pitfalls under the Internal Revenue Code and Illinois the Internal Revenue Code and Illinois Pension Code Pension Code mustmust bebe spottedspotted earlyearly to to avoid problems with the IRS or TRS. avoid problems with the IRS or TRS.
Collective BargainingCollective Bargaining
Goals:Goals:• Reach a deal that is affordableReach a deal that is affordable
Figure out expectationsFigure out expectations Know that something unexpected will Know that something unexpected will
happenhappen
• Reach a deal that you can sell to the Reach a deal that you can sell to the BoardBoard
• Reach a deal that the Union can sell to Reach a deal that the Union can sell to the Union membership for ratificationthe Union membership for ratification
• Avoid TRS penaltiesAvoid TRS penalties
Administrator ContractsAdministrator Contracts
Goals: Goals: • Entice the administrator to accept the Entice the administrator to accept the
position or remain with the school position or remain with the school districtdistrict
• Increase creditable earnings or service Increase creditable earnings or service credit for TRS purposescredit for TRS purposes
• Post-retirement benefitsPost-retirement benefits• Fringe benefitsFringe benefits• Avoid TRS penaltiesAvoid TRS penalties
TRS 6% Salary Increase PenaltiesTRS 6% Salary Increase Penalties
Salary increases in excess of 6 percent in the Salary increases in excess of 6 percent in the highest 4 consecutive years out of the last 10 highest 4 consecutive years out of the last 10 years of employment result in a penaltyyears of employment result in a penalty
Contracts prior to June 1, 2005 are grandfatheredContracts prior to June 1, 2005 are grandfathered Certain exemptions apply:Certain exemptions apply:
• Salary increases paid when the individual is 10 or more Salary increases paid when the individual is 10 or more years from retirement eligibilityyears from retirement eligibility
• Transfer from one employer to another caused by school Transfer from one employer to another caused by school consolidation or annexationconsolidation or annexation
• Overload work or summer schoolOverload work or summer school• Salary from the state government or ISBE for which the Salary from the state government or ISBE for which the
employer does not have discretionemployer does not have discretion• Certain promotionsCertain promotions
TRS 6% Salary Increase PenaltiesTRS 6% Salary Increase Penalties
Promotion exemption: salary increases resulting Promotion exemption: salary increases resulting from a promotion are excluded if all of the from a promotion are excluded if all of the following conditions are met:following conditions are met:• The employee is required to hold a certificate or The employee is required to hold a certificate or
supervisory endorsement that is a different certification supervisory endorsement that is a different certification or endorsement than is required for the employee’s or endorsement than is required for the employee’s previous positionprevious position
• The position has existed and has been filled by a The position has existed and has been filled by a member for no less than one academic yearmember for no less than one academic year
• The increase results in an amount of salary no greater The increase results in an amount of salary no greater than the lesser of the average salary paid for other than the lesser of the average salary paid for other similar positions in the district requiring the same similar positions in the district requiring the same certification or the amount stipulated in the collective certification or the amount stipulated in the collective bargaining agreement for a similar position requiring the bargaining agreement for a similar position requiring the same certification same certification
What Are TRS Creditable What Are TRS Creditable Earnings?Earnings?
More than just base salaryMore than just base salary But, less than every dollar and fringe But, less than every dollar and fringe
benefit that an employee receivesbenefit that an employee receives Before you negotiate a new payment Before you negotiate a new payment
or fringe benefit for an employee, it or fringe benefit for an employee, it is critically important to determine is critically important to determine whether or not it counts as TRS whether or not it counts as TRS creditable earningscreditable earnings
2.2 Upgrade2.2 Upgrade
Allows a participant with TRS-Allows a participant with TRS-covered service prior to June, 1998 to covered service prior to June, 1998 to have his or her retirement benefit have his or her retirement benefit calculation increasedcalculation increased• Fairly common in administrator Fairly common in administrator
contractscontracts• Sometimes offered as a retirement Sometimes offered as a retirement
incentive in collective bargaining incentive in collective bargaining agreementsagreements
District “Pick-Up” of TRS District “Pick-Up” of TRS ContributionsContributions
TRS members are required to contribute 9.4 TRS members are required to contribute 9.4 percent of creditable earningspercent of creditable earnings
If the District picks up these contributions, that If the District picks up these contributions, that results in additional creditable earnings that are results in additional creditable earnings that are also subject to contributionsalso subject to contributions
TRS Factors: A pick up of the entire 9.4 percent TRS Factors: A pick up of the entire 9.4 percent results in a factor of 10.3753 percent being added results in a factor of 10.3753 percent being added to creditable earningsto creditable earnings
Common in administrator contracts; not common Common in administrator contracts; not common in collective bargaining agreementsin collective bargaining agreements
403(b)/457 Plan Contributions403(b)/457 Plan Contributions
Employees may defer their own salary, or Employees may defer their own salary, or the employer may make contributionsthe employer may make contributions
Limits set by Tax CodeLimits set by Tax Code Post-retirement 403(b) contributions Post-retirement 403(b) contributions
allowed for up to five years after allowed for up to five years after retirementretirement
457(b) plans are common for 457(b) plans are common for administrators to provide supplemental administrators to provide supplemental retirement benefits; teachers usually retirement benefits; teachers usually limited to 403(b) contributionslimited to 403(b) contributions
403(b) Plans403(b) Plans
The IRS will require all 403(b) plans The IRS will require all 403(b) plans to be administered pursuant to a to be administered pursuant to a formal plan document, starting on formal plan document, starting on January 1, 2008January 1, 2008
A plan document must contain the A plan document must contain the basic terms of the 403(b) plan:basic terms of the 403(b) plan:• Eligibility, benefits, limits, form of and Eligibility, benefits, limits, form of and
time of distributions, as well as time of distributions, as well as permissive features such as loans, permissive features such as loans, hardship distributions, etc. hardship distributions, etc.
Flexible Spending AccountsFlexible Spending Accounts
May provide a choice between May provide a choice between qualified benefits and cashqualified benefits and cash
May either be part of a district-wide May either be part of a district-wide FSA, and will be tax-free, or can be FSA, and will be tax-free, or can be offered solely to a select group of offered solely to a select group of administrators, and will be taxableadministrators, and will be taxable
All contributions to FSA are All contributions to FSA are reportable as creditable earningsreportable as creditable earnings
Benefits That Do Not Count Benefits That Do Not Count As TRS Creditable As TRS Creditable
EarningsEarnings
Reimbursements and AllowancesReimbursements and Allowances
Not TRS creditable earningsNot TRS creditable earnings May be excludable for federal tax May be excludable for federal tax
purposespurposes Common for administratorsCommon for administrators
Retiree Medical CoverageRetiree Medical Coverage Less and less common for administrators; not Less and less common for administrators; not
common, and not recommended for teachers (at least common, and not recommended for teachers (at least in its traditional form)in its traditional form)
The district may agree to pay an individual’s portion of The district may agree to pay an individual’s portion of TRS medical premiums after retirementTRS medical premiums after retirement
In the alternative, the individual may be kept on the In the alternative, the individual may be kept on the district’s retirement plandistrict’s retirement plan
Not subject to federal income taxationNot subject to federal income taxation Non-traditional alternative: HRA or VEBA contributions Non-traditional alternative: HRA or VEBA contributions
during employment and use after retirementduring employment and use after retirement• VEBA contributions funded by deductions from VEBA contributions funded by deductions from
salary would be creditable compensation for TRS salary would be creditable compensation for TRS purposespurposes
What is a VEBA?What is a VEBA?
VEBA stands for “Voluntary Employees VEBA stands for “Voluntary Employees Beneficiary Association.”Beneficiary Association.”• It is a tax exempt entity (usually a trust) that is It is a tax exempt entity (usually a trust) that is
established to provide medical, dental, established to provide medical, dental, prescription drug, accident, life insurance, and prescription drug, accident, life insurance, and other qualified benefits to its members or their other qualified benefits to its members or their dependentsdependents
• Contributions to the trust are not taxable to Contributions to the trust are not taxable to employees employees
• Payments from the trust are not taxed if they are Payments from the trust are not taxed if they are used to pay for or provide tax qualified benefitsused to pay for or provide tax qualified benefits
Post-Retirement/Post-Resignation Post-Retirement/Post-Resignation PaymentsPayments
Compensation paid after the individual’s Compensation paid after the individual’s final day of work and after his or her final final day of work and after his or her final paycheck for regular earnings are not TRS paycheck for regular earnings are not TRS creditable earningscreditable earnings
Note on post-retirement payments: Note on post-retirement payments: governed by Section 457(f)governed by Section 457(f)
Note on post-resignation payments to Note on post-resignation payments to administrator: payments after an administrator: payments after an employee’s resignation would still be TRS employee’s resignation would still be TRS creditable earnings if he or she continues creditable earnings if he or she continues to work for another TRS-covered employer to work for another TRS-covered employer after resignationafter resignation
Sick Leave IncreasesSick Leave Increases Up to two years of unused, uncompensated Up to two years of unused, uncompensated
sick leave may be used to increase TRS sick leave may be used to increase TRS service creditservice credit
To be considered for TRS service credit To be considered for TRS service credit purposes, it must be “available for use”purposes, it must be “available for use”
Amounts provided in last four years before Amounts provided in last four years before retirement in excess of the “normal retirement in excess of the “normal allotment” may be subject to penaltiesallotment” may be subject to penalties
Penalties for excess sick leave are not as Penalties for excess sick leave are not as substantial as the contributions required for substantial as the contributions required for EROERO• As a result, a sick leave penalty may be As a result, a sick leave penalty may be
warranted to avoid ERO contributionswarranted to avoid ERO contributions
TRS Early Retirement OptionTRS Early Retirement Option Employer and member contributions, though the member Employer and member contributions, though the member
contribution may be picked up by the employer (not contribution may be picked up by the employer (not common for teachers)common for teachers)
For employees who have at least 55 years of age and 20 For employees who have at least 55 years of age and 20 years of service, and who are both under age 60 and have years of service, and who are both under age 60 and have less than 35 years of serviceless than 35 years of service
Contribution rates for ERO have increased:Contribution rates for ERO have increased:• The participant contribution increased from 7% to 11.5% The participant contribution increased from 7% to 11.5%
multiplied by the lesser of the administrator’s years or partial multiplied by the lesser of the administrator’s years or partial years under 35 years of service or 60 years of ageyears under 35 years of service or 60 years of age
• The employer contribution increased from 20% to 23.5% The employer contribution increased from 20% to 23.5% multiplied by the number of years the administrator is under multiplied by the number of years the administrator is under 60 years of age60 years of age
10% cap permitted by TRS10% cap permitted by TRS IRC 414(h) language is necessaryIRC 414(h) language is necessary
TRS 6% Salary Increase PenaltiesTRS 6% Salary Increase Penalties(Revisited)(Revisited)
Avoiding the penalty:Avoiding the penalty:• Retirement incentive plan offering 6% Retirement incentive plan offering 6%
increasesincreases• Provide non-creditable compensationProvide non-creditable compensation• Follow the 6 percent salary increase Follow the 6 percent salary increase
penalty exemptionspenalty exemptions• Provide post-retirement compensationProvide post-retirement compensation• Agree to pay increases in excess of 6 Agree to pay increases in excess of 6
percent five or more years before percent five or more years before retirement (common for administrators)retirement (common for administrators)
TRS 6% Salary Increase PenaltiesTRS 6% Salary Increase Penalties(Example A)(Example A)
Salary w/ 4% Salary w/ 4% annual increaseannual increase
Salary w/ 4% Salary w/ 4% annual increase annual increase and two 20% and two 20% increasesincreases
Increase Increase Amount Amount Exceeding 6%Exceeding 6%
2007-20082007-2008
2008-20092008-2009
2009-20102009-2010
2010-20112010-2011
2011-20122011-2012
170,000170,000
176,800176,800
183,872183,872
191,227191,227
198,876198,876
170,000170,000
176,800176,800
183,872183,872
220,646220,646
264,776264,776
------
------
------
25,74225,742
30,89130,891
Total Creditable Total Creditable Earnings in Final 4 Earnings in Final 4 Years/ AverageYears/ Average
750,775 /750,775 /
187,694187,694846,094 /846,094 /
211,524211,524------
TRS Annual TRS Annual Benefit (Assuming Benefit (Assuming a 75% annuity)a 75% annuity)
140,770140,770 158,643158,643 ------
TRS 6% Salary TRS 6% Salary Increase PenaltyIncrease Penalty
------ 138,381138,381 ------
TRS 6% Salary Increase PenaltiesTRS 6% Salary Increase Penalties(Example B)(Example B)
Salary w/ 4% Salary w/ 4% annual increaseannual increase
Salary w/ 4% Salary w/ 4% annual increase annual increase and two 20% and two 20% increasesincreases
Salary w/ Salary w/ additional 7.6% additional 7.6% increase and increase and 6% increases 6% increases thereafterthereafter
2007-20082007-2008
2008-20092008-2009
2009-20102009-2010
2010-20112010-2011
2011-20122011-2012
170,000170,000
176,800176,800
183,872183,872
191,227191,227
198,876198,876
170,000170,000
176,800176,800
183,872183,872
220,646220,646
264,776264,776
183,000183,000
193,980193,980
205,619205,619
217,956217,956
231,033231,033
Total Creditable Total Creditable Earnings in Final 4 Earnings in Final 4 Years/ AverageYears/ Average
750,775 /750,775 /
187,694187,694846,094 /846,094 /
211,524211,524848,588 /848,588 /
212,147212,147
TRS Annual TRS Annual Benefit (Assuming Benefit (Assuming a 75% annuity)a 75% annuity)
140,770140,770 158,643158,643 159,110159,110
TRS 6% Salary TRS 6% Salary Increase PenaltyIncrease Penalty
------ 138,381138,381 ------
Collective Bargaining Agreement Collective Bargaining Agreement 6% Retirement Incentive Plans6% Retirement Incentive Plans
Common to offer 1, 2, 3, or 4 years of 6% Common to offer 1, 2, 3, or 4 years of 6% increases as a retirement incentiveincreases as a retirement incentive
Post-retirement incentives can be useful to Post-retirement incentives can be useful to persuade teachers to elect the planpersuade teachers to elect the plan
Other 6% protections:Other 6% protections:• Recoup penalties? (disfavored by TRS)Recoup penalties? (disfavored by TRS)• Recoup excess salary over 6%? (disfavored by Recoup excess salary over 6%? (disfavored by
TRS)TRS)• Make an employee “ineligible” for benefits not Make an employee “ineligible” for benefits not
yet receivedyet received• Require early documentation of TRS creditable Require early documentation of TRS creditable
serviceservice