Updated: Dec. 18, 2018
Issue: In late December 2018, TRS implemented a new “Accelerated Annual Increase” Program (AAI) that requires TRS to offer all retiring Tier 1 members an accelerated pension benefit payment equal to a portion of their future pension benefits. In order to receive the AAI payment, a retiring Tier 1 member must accept an irrevocable reduction in the automatic annual increase that will apply to the remainder of his/her TRS pension.
Only retiring Tier 1 members are eligible for this voluntary program. The decision to participate in the program is irreversible and final. The AAI Program will exist until June 30, 2021. The law took effect on June 4, 2018.
Discussion: Under the AAI program, TRS will ask every Tier 1 member when he/she fills out retirement paperwork whether he/she wants to participate. Members who choose to accept the program will:
- Renounce their rights to the current Tier 1 annual increase – which is 3 percent raise in their pension benefits that always is calculated from the amount of their current pensions.
- Accept a new annual increase – an annual 1.5 percent raise 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 the estimated current lifetime value of the 3 percent annual raise and the estimated current lifetime value of the 1.5 percent annual raise.
However, there is no guarantee that members agreeing to participate in the AAI Program will receive the payment. TRS is not responsible for funding the AAI Program. No TRS funds will be used to pay the accelerated benefits.
Under state law, funding for the AAI Program is generated solely by the sale of up to $1 billion in state bonds. The sale of these bonds is the responsibility of the Governor’s Office of Management and Budget. TRS cannot predict when these bonds will be sold or when AAI participants will receive their one-time payment.
Once the state issues the bonds and the funds are available, they will be distributed to applicants on a first-come, first-served basis. That means it is possible that your application may not be funded if the demand for funds is greater than the amount of money generated by the bond sale.
For a retiring Tier 1 member participating in the AAI program, the alternative 1.5 percent annual raise would take effect on the Jan. 1 after the member turns 67 or the first anniversary of the member’s retirement, whichever is later. The existing 3 percent annual raise begins on the Jan. 1 after the member turns 61 or the first anniversary of the member’s retirement, whichever is later.
AAI Program participants cannot repay the accelerated pension benefit payment to TRS in order to reclaim the 3 percent raise.
Members joining the AAI program will be able to receive their accelerated pension benefit payments as cash or as a “rollover” into a private tax-qualified retirement plan. If a member takes the payment as cash, it will be subject to all applicable federal taxes and charges, as well as any involuntary garnishments by the state or federal government, such as unpaid student loans.
If a member retires, accepts the accelerated payment, and then returns to active service, the member’s annual increase will be 1.5 percent if he/she retires again. The selection of the 1.5 percent increase by a retiring member also automatically reduces the annual increases in any survivor benefit due to beneficiaries when the member dies.