In early June, three changes to the Illinois Pension Code that affect some TRS members were signed into law:
- A reduction in the “threshold” affecting employer contributions on year-to-year salary increases for a TRS member from 6 percent to 3 percent, if the pay hikes would factor into the calculation of a member’s initial pension.
- A new law requires TRS to offer all eligible inactive members a chance for a one-time, irrevocable “accelerated pension benefit payment” in return for giving up any future claim to a TRS benefit.
- A new law requires TRS to offer all retiring Tier 1 members a chance for a one-time, irrevocable change in the automatic annual increase to their TRS pensions, along with an “accelerated pension benefit payment.”
Implementation of these new laws will take time. The statute says TRS must implement the law “as soon as practical,” and is in the process of developing the IT systems and protocols necessary to administer these acts.
We cannot answer all questions at this time regarding any effect these laws will have on any member’s TRS benefits.
Here’s what we know:
Employer Contributions for Member Salary Increases in Excess of 6 Percent
- After July 1, 2018, the threshold is 3 percent. Until July 1, 2018, the threshold is 6 percent.
- The 3 percent threshold applies only to raises and salaries paid to TRS members “under a contract or collective bargaining agreement entered into, amended, or renewed on or after” June 4, 2018 for a school year that begins after July 1, 2018.
- The 6 percent threshold applies to raises and salaries paid to TRS members “under a contract or collective bargaining agreement entered into, amended, or renewed” before June 4, 2018, even if payments pursuant to the contract or collective bargaining agreement extend beyond July 1, 2018.
- TRS will work with school districts in the future to help them determine which threshold applies in specific cases.
- Under the new law, if a school district grants an educator a raise in excess of 3 percent in any given year and that raise factors into the educator’s initial pension calculation, then the school district must pay for the long–term cost of the portion of an educator’s pension created by the portion of the raise that exceeds 3 percent.
- This law applies only to raises that will influence the salaries that members will use to calculate their “final average salaries,” a key number in the formula that determines members’ initial pensions.
- There are two permanent exemptions in the law that spell out when the 3 percent threshold does not apply:
- An educator that leaves one district and receives a raise greater than 3 percent when they start to teach in another school district.
- Educators whose jobs and salaries are affected by school district consolidations or annexations.
Accelerated Pension Benefit Payment for Inactive Members
- Inactive members in both Tier 1 and Tier 2 are eligible for the “accelerated pension benefit payment.”
- To be eligible, an inactive member must have “accrued sufficient service credit to be eligible to receive a retirement annuity” at some point in the future when other eligibility criteria are met.
- An inactive Tier 1 member must have at least five years of TRS service.
- An inactive Tier 2 member must have at least 10 years of TRS service.
- Inactive members cannot add service credit from another public pension system to their TRS service in order to meet the eligibility requirement for a TRS benefit.
- The buyout program will exist until June 30, 2021.
- The buyout amount will equal 60 percent of the present value of the member’s anticipated pension benefits.
- The member cannot receive the buyout as cash.
- The buyout amount will only be paid to the member in the form of a “rollover” into a private tax-qualified retirement plan.
- As soon as practical after the law takes effect, TRS must “offer each eligible person the opportunity” to participate in the buyout program.
- The offer shall include a TRS estimate of how much the member will receive through the buyout program.
- If an inactive member accepts the buyout, he/she cannot pay the buyout back to TRS in order to re-establish past service.
- If an inactive member accepts the buyout and she/he returns to active service, her/his TRS service credit starts accumulating on the day she/he returns to active service.
Accelerated Pension Benefit Payment for Retiring Tier 1 Members
- When the law is implemented, TRS must ask every Tier 1 member upon retirement whether she/he wants to participate in this program.
- This is a voluntary program.
- Only retiring Tier 1 members are eligible.
- The decision to participate in the program is irreversible and final.
- Members participating in the program will:
- Renounce their rights to the current Tier 1 AAI – a 3 percent annual increase in their pension benefits that always is calculated from the amount of their current pensions.
- Accept a new AAI – an annual 1.5 percent increase in their pensions that always is calculated from the amount of their original pensions.
- Receive a lump-sum “accelerated pension benefit payment” that equals 70 percent of the monetary difference between estimated current value of the 3 percent Tier 1 AAI and the estimated current value of the 1.5 percent Tier 1 AAI.
- The alternative AAI and “accelerated pension benefit payment” program will exist until June 30, 2021.
- The alternative 1.5 percent Tier 1 AAI takes effect on the January 1 following age 67, or the first anniversary of the member’s retirement, whichever is later.
- Program participants cannot repay the “accelerated pension benefit payment” to TRS.
- The member cannot receive the “accelerated pension benefit payment” as cash.
- The accelerated payment will only be paid to the member in the form of a “rollover” into a private tax-qualified retirement plan.
- If a member retires, accepts the alternative 1.5 percent AAI and then returns to active service, the member’s AAI will be 1.5 percent if they retire again.
- The selection of the alternative 1.5 percent AAI by a retiring member also affects the annual increases in any survivor benefit due to beneficiaries when the member dies.