PSfit – Public Safety Financial Independence Training Article 4 Fire Pensions Tier 2 Participants Hired After January 1 2011 IPPFA - PSfit

The Three-Legs of Retirement For most workers, wages are replaced in retirement by the so-called “three legs” of the retirement stool: Pension, Social Security and personal savings. For many public employees, the main element of personal savings is a deferred compensation plan. So for core retirement training, our “chapters” are: Pension Social Security Deferred Compensation Retirement Planning

What is a Pension? A pension is a fixed monthly payment that replaces income that is lost due to: Age Disability Death (particularly pre-mature death) A pension benefit for retired firefighters (outside of Chicago and small towns) is established under Article 4 of the Illinois Pension Code and referred to as the “Downstate” fire pension system.

Article 4 – Definition of Salary Defined Benefit pension systems pay a pension to a retiree based on his or her salary and length of service. As to salary for Illinois firefighters…. For Tier 2 retirees, the average of the last eight years is used, excluding overtime. Also, the pension salary for Tier 2 retirees is “capped” at an amount set in the law, adjusted for inflation. In 2018, that amount is $113,645.

Pension Formula – Tier 2 For persons attaining 10 or more years of service, the pension formula for Tier 2 is:….. 2.5% x full years of service x salary (max: 75%). Example: 2.5% x 30 years x $75,000 = $4,688 per month (75% of a monthly salary of $6,250). Example: 2.5% x 15 years x $75,000 = $2,344 per month (37.5% of a monthly salary of $6,250).

Retirement Ages – Tier 2 The Tier 2 pension benefit is payable in full at the Age 55. However, Tier 2 employees can commence pension as early as age 50 but will incur a 6% decrease for each year pension is drawn before age 55.

Increases in Pension – Tier 2 - If retired before age 60, at January 1st after attaining age 60, the Tier 2 pensioner receives an increase equal to ½ of the increase in the CPI-U (inflation), but not more than 3%. Then, each January 1st thereafter, an additional increase equal to ½ of the increase in the CPI-U x the original amount of pension (i.e. not compounded). - If retired on or after age 60, the same increases as described above begin on the January 1st after the pensioner has been retired for one year.

Disability Benefits For non-duty related conditions, benefits are 50% of salary if the member has at least seven years of service. For duty-related conditions, benefits are 65% of salary – or – the pension earned by virtue of years of service (such as 70% of pay for 28 years of service). Also, there is a small stipend ($20) for children of duty-disabled firefighters. Occupational Disease conditions merit duty-related consideration, such as heart disease, stroke, TB, lung disease and certain cancers.

Payments to Survivors – Tier 2 - A spouse surviving a service or disability retiree receives 66-2/3% the monthly pension being paid. - A spouse surviving an active firefighter who dies in the line-of-duty is entitled to 100% of pay. - A spouse surviving an active firefighter who had 10 years of service and who dies not in the line-of-duty receives 66-2/3% of the pension he or she had earned.

Increases in Pension - Survivors Tier 2 Survivors. Surprisingly, the Tier 2 law does include an annual increase for Tier 2 survivors in Article 4 Fire Funds. The increase is the same as that for the pensioner – ½ of the CPI to a maximum of 3%, non-compounded, each January 1st.

Employee Contributions Tier 1 and Tier 2 members pay 9.455% of pensionable salary to the fund each payday. Contributions are often tax-exempt under a provision known as “employer pick-up.” It is not really payment by the employer, but is an allowable tax saving provision. Contributions are refundable or can be rolled-over to an IRA for employees who separate with less than 10 years of service. Contributions help fund the system and are an important part of the total pension financing plan.

Reciprocity Between Article 4 Funds The Pension Code allows a person to receive a fire pension from a community where he or she worked before transferring to another Article 4 plan. Fire funds use the concept of reciprocity; your credit stays with each separate pension plan. Police funds us the concept of portability; the pension credit moves from one plan to the next (along with the money to pay for the benefit). Fire reciprocity is best explained via example.

Reciprocity: Example Robert has 4 years of service at Eastown FPD and 18 years at Westown FPD. To effectuate reciprocity, Robert owes Eastown a return of his contributions plus 6% interest (if he took a refund) and 1% additional contributions on his pay at Eastown plus interest. He also owes Westown 1% in additional contributions. At retirement, he will receive (a) a pension from Eastown based on his service and final salary there and (b) a pension from Westown using their final salary and combined service minus the pension from Eastown.

Reciprocity Example Robert’s Pension from Eastown: 4 years x 2.5% x $3,500 monthly salary = $ 350 Robert’s Pension from Westown: 22 years x 2.5% x $6,500 minus $350 = $3,225 Total Pension: $3,575

Article 4 Fire Funds – Other Issues Governance: state law and local board – two actives, a retiree and two citizens. The Illinois Department of Insurance – acts as the regulator, including audits. Visit their website for information on your and other public pension funds. Member Data for Participation: help your pension plan keep track of marriages, divorces and children. Administrative Review – your access to the court system if you disagree with a board decision. Other Players – “sponsor,” actuary, lawyer, accountant and, possibly, an administrator company.

Questions ? Contact IPPFA!