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TRS issues have made the news in recent months (and we will highlight other issues including the new investment strategy, TRS staff compensation, and the latest valuation of the fund in an upcoming magazine article) but some important changes in federal retirement laws may have escaped your attention.
403(b) regulations
Many school employees take advantage of this pre-tax method of saving for retirement to provide income in addition to the benefits available from a TRS pension.
Most school districts offer employees the option to defer a portion of their salary into a 403(b) plan approved by the district. New state and federal regulations have changed some aspects of 403(b) plan administration, affecting both employers and employees.
Texas law now limits the 403(b) products available for salary reduction agreements to those certified through the Teacher Retirement System.
Until recently employees could transfer their 403(b) money into a different plan, an option typically use when an employee changed employers. New federal regulations that became effective September 25, 2007, are imposing additional requirements on school districts, requiring the disclosure of more information and development of a written policy before transfers from one 403(b) plan to another would be allowed. Your school district must establish a written 403(b) plan by December 31, 2008; the plan may prohibit transfers or allow them under certain conditions.
The most immediate implication for employees is that transferring funds from your 403(b) into another plan may be prohibited by your district for some time, or even permanently. Thus, initial investment in a 403(b) plan should be made with even more care than usual, since those decisions may be irreversible.
Some districts may consider offering a 457 plan instead of the 403(b); the 457 plan is another, similar vehicle for supplemental retirement savings, but one in which providers may be “bundled” (essentially resulting in a single provider) and administrative burdens on the district reduced.
We recommend that employees request district administrators to keep employees in the loop as decisions are made regarding the district’s retirement offerings. In addition, employees may benefit from a consultation with a trusted financial advisor regarding future salary deferral agreements.
Have you named someone besides your spouse as a TRS beneficiary?
If your named TRS beneficiary is someone other than your spouse, your TRS benefit options may be limited if you retire after December 31, 2007. New federal laws will restrict your ability to choose lifetime benefit payments for a non-spouse beneficiary who is significantly younger than you.
Benefit payment options currently available to employees are: Unreduced benefit to retiree
In lieu of a standard annuity retirees have five options. The alternatives reduce the annuity paid to the retiree, but provide payments to a beneficiary after the retiree's death, either for life or for a guaranteed period of time. Reduced benefit options
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The federal law regarding minimum pension distributions was designed to ensure that retirees, rather than beneficiaries, receive the bulk of pension benefits. The new laws limit ongoing payments that can be made to younger beneficiaries. The law proposes to avoid, for example, a situation where the employee receives a pension for 20 years, then the surviving beneficiary also receives a substantial benefit for an additional 30 or 40 years.
Therefore, beginning with retirements effective after December 31, 2007, certain plan option/beneficiary combinations will be limited.
The most notable change will be in the selection of Options 1 and 5, which allow the highest payout to beneficiaries (100% and 75 %, respectively). According to TRS, retirees will not be allowed to utilize Option 1 with a beneficiary who is at least 10 years younger than the retiree, or Option 5 with a beneficiary who is at least 19 years younger.
In unusual circumstances, Options 3 and 4 might also be limited – TRS notes that neither option would be allowed for an employee who is older than 92 at retirement (if you know of any teachers that stayed in the classroom that long, let us know, they deserve an award!); and that Option 3 would be prohibited with a beneficiary who is older than 91.
TRS mailed letters this summer to members pending retirement or awaiting an estimate who had named a non-spouse beneficiary more than 10 years younger than the member. Some retirees may be considering retiring before the January 1, 2008, effective date, but this decision should not be made lightly and should be done only after consultation with a TRS benefits counselor.
Social Security update
Though we have been anticipating a committee hearing on HR 82, the federal legislation to repeal the two Social Security offsets (the Government Pension Offset and the Windfall Elimination Provision) penalizing most Texas teachers, the meeting has not yet been scheduled. House Ways and Means Committee Chair Charles Rangel had asked Social Security Subcommittee Chair Michael McNulty to schedule a meeting on the issue, and initial word was that the hearing would take place before the end of this year. The odds of a 2007 hearing are rapidly decreasing, and TCTA will be in touch with the members of the Social Security subcommittee to urge that the issue be addressed as soon as possible.
Three-hundred thirty-one members of Congress, over 70 % of the US House, have signed on as co-sponsors of HR 82. Twenty-five of Texas’s 32 Congressional delegates are co-sponsors. (Those who have not yet signed on are Cong. Sam Johnson, Jeb Hensarling, Joe Barton, John Culberson, Kevin Brady, Mac Thornberry, and Lamar Smith; note that Rep. Brady has filed separate legislation that would provide a more beneficial calculation of the Windfall Elimination Provision.)
The legislation repealing the Government Pension Offset and Windfall Elimination Provision has received similar levels of support in Congress in previous sessions, but never received a hearing. The cost of the repeal (calculated at more than $30 billion over a 10-year period) remains a major obstacle to this bill’s success.
Several other bills filed in Congress would also address either or both of the two offsets, but none have been scheduled for a hearing.
Web posted: 10/29/07
