Base line compensation — what is that?

Many of us have a ticking clock inside our heads counting down to our retirement date. Retirement eligibility may start in the distant future as a date we cannot fathom reaching, and then before we know it, we’re nearly there. Before dreams of a destination retirement come to fruition, you need to understand the realities of your TRS benefits — especially if you have significant compensation growth in your last few years before retiring.

Did you know that you might not get full credit for your highest salary years when your retirement benefits are calculated? The rules on compensation can be a huge surprise to educators nearing retirement. A provision in TRS rules puts a hard cap on the amount of salary growth that you can be credited for in the years leading up to your retirement, and it’s based on a definition of base line compensation.  

CHECK YOUR TRS RECORDS

All employees should check their TRS records — every single year. TRS rules mandate that all errors on an educator’s service record must be corrected within five years of when the service was performed. 

This notification restriction applies to any service that does not properly show on your service record. It does not matter if it was an error by the employer or TRS. If it does not show on your record/annual statement, then you will not receive credit for it.

You have a hard deadline of five years to verify the service and bring it to the attention of TRS. If you do not, you will lose the opportunity to have that time included in your record. 

You can contact TRS at 800-223-8778.

Two categories of school employees are affected differently by this rule. First is a shrinking group of “members who on or before Aug. 31, 2005, had attained the age of 50, had at least 25 years of service credit, or whose combined age and service credit equals 70 or greater.” Retirement benefits for these employees are based on the average of their three highest years of salary. The second group is everyone else. If you are not in the first group, your annuity is calculated based on the average of your five highest years of salary.

When determining the amount of salary to be used in your benefit formula, TRS will establish a base line compensation from which the amount of creditable salary for annuity purposes may be restricted. 

The practical application of the rule is the same for either category — if you experience significant salary growth as you approach retirement, it may restrict the amount of your salary that counts for TRS annuity purposes. It is the look-back period that changes depending on the category one falls into.  

If you fall into the first category, TRS will look at the fourth year and the fifth year preceding your retirement. The highest salary you receive in those two school years will establish your base line compensation. Starting with that base line number, you will not be credited for salary growth of more than 10% or $10,000, whichever is greater, in each of the three years that count in your annuity calculation. (Note that if you do not have service credit in at least three school years of the five before retirement, the restrictions do not apply.) 

For most current educators, whose annuity is based on their highest five salaries, TRS will look at your sixth year and seventh year preceding your proposed retirement date. The highest salary you receive in those two school years will establish your base line compensation. Starting with that base line number, salary growth of more than 10% or $10,000, whichever is greater, for each of the five years counting for the annuity calculation will not be creditable. (If you do not have service credit in at least five school years of the seven before retirement, the restrictions do not apply.)

The TIA designations of master or exemplary can have allotment payments of up to $32,000. This massive increase in salary will inch teachers closer to what they should be paid, but it may not all be compensable for TRS annuity purposes if you get that boost right before retirement. 

For example, if a member earned between $60,000 and $62,000 in the seven years before retirement, and then receives a $32,000 TIA bump in their final year, all that money will not be creditable salary for TRS annuity purposes because it exceeds the 10% or $10,000 limit. In this case, the creditable salary for that final year would be limited to $10,000 more than the teacher made in the previous year.

Your full salary may be shown in your TRS member portal, but it is not necessarily creditable salary that will be used for annuity purposes. TRS member statements stipulate that this reported salary may not have been audited or adjusted by TRS to ensure that the compensation is within the limit allowed for in the final years before retirement.

In addition to TIA stipends, the other common situation affected by the rule is when an employee switches from a 187-day contract to a year-round contract, sometimes by moving into an administrative position, creating higher than usual salary growth. 
If you retire and your actual salary is higher than the amount allowed under this rule TRS will adjust the compensation for annuity purposes and refund the excessive member contributions. The refund will be made after the date TRS makes your first annuity payment. 

The rule is somewhat complicated, so scheduling an appointment with a TRS counselor should provide you with accurate and adjusted amounts and help you properly plan for retirement. 

Bottom line? Stay on top of your TRS annuity statement, keep informed about the laws and rules related to your benefits, and start your retirement planning by talking to TRS.

This article is not a substitute for legal advice. TCTA members with questions should call 888-879-8282 to speak with a staff attorney.