1. TRS and Other Benefits Issues Arising in Collective Bargaining and Administrator Contracts Andrew Malahowski Franczek Sullivan P.C.

2. Why Do Benefits Matter? Constructive reason: Creative benefits solutions can help you meet your goals for negotiating labor contracts and administrator contracts. Constructive reason: Creative benefits solutions can help you meet your goals for negotiating labor contracts and administrator contracts. Destructive reason: Potential pitfalls under the Internal Revenue Code and Illinois Pension Code must be spotted early to avoid problems with the IRS or TRS. Destructive reason: Potential pitfalls under the Internal Revenue Code and Illinois Pension Code must be spotted early to avoid problems with the IRS or TRS.

3. Collective Bargaining Goals: Goals: Reach a deal that is affordableReach a deal that is affordable Figure out expectations Figure out expectations Know that something unexpected will happen Know that something unexpected will happen Reach a deal that you can sell to the BoardReach a deal that you can sell to the Board Reach a deal that the Union can sell to the Union membership for ratificationReach a deal that the Union can sell to the Union membership for ratification Avoid TRS penaltiesAvoid TRS penalties

4. Administrator Contracts Goals: Goals: Entice the administrator to accept the position or remain with the school districtEntice the administrator to accept the position or remain with the school district Increase creditable earnings or service credit for TRS purposesIncrease creditable earnings or service credit for TRS purposes Post-retirement benefitsPost-retirement benefits Fringe benefitsFringe benefits Avoid TRS penaltiesAvoid TRS penalties

5. TRS 6% Salary Increase Penalties Salary increases in excess of 6 percent in the highest 4 consecutive years out of the last 10 years of employment result in a penalty Salary increases in excess of 6 percent in the highest 4 consecutive years out of the last 10 years of employment result in a penalty Contracts prior to June 1, 2005 are grandfathered Contracts prior to June 1, 2005 are grandfathered Certain exemptions apply: Certain exemptions apply: Salary increases paid when the individual is 10 or more years from retirement eligibilitySalary increases paid when the individual is 10 or more years from retirement eligibility Transfer from one employer to another caused by school consolidation or annexationTransfer from one employer to another caused by school consolidation or annexation Overload work or summer schoolOverload work or summer school Salary from the state government or ISBE for which the employer does not have discretionSalary from the state government or ISBE for which the employer does not have discretion Certain promotionsCertain promotions

6. TRS 6% Salary Increase Penalties Promotion exemption: salary increases resulting from a promotion are excluded if all of the following conditions are met: Promotion exemption: salary increases resulting from a promotion are excluded if all of the following conditions are met: The employee is required to hold a certificate or supervisory endorsement that is a different certification or endorsement than is required for the employee’s previous positionThe employee is required to hold a certificate or supervisory endorsement that is a different certification or endorsement than is required for the employee’s previous position The position has existed and has been filled by a member for no less than one academic yearThe position has existed and has been filled by a member for no less than one academic year The increase results in an amount of salary no greater than the lesser of the average salary paid for other similar positions in the district requiring the same certification or the amount stipulated in the collective bargaining agreement for a similar position requiring the same certificationThe increase results in an amount of salary no greater than the lesser of the average salary paid for other similar positions in the district requiring the same certification or the amount stipulated in the collective bargaining agreement for a similar position requiring the same certification

7. What Are TRS Creditable Earnings? More than just base salary More than just base salary But, less than every dollar and fringe benefit that an employee receives But, less than every dollar and fringe benefit that an employee receives Before you negotiate a new payment or fringe benefit for an employee, it is critically important to determine whether or not it counts as TRS creditable earnings Before you negotiate a new payment or fringe benefit for an employee, it is critically important to determine whether or not it counts as TRS creditable earnings

8. Non-Salary TRS Creditable Earnings

9. 2.2 Upgrade Allows a participant with TRS- covered service prior to June, 1998 to have his or her retirement benefit calculation increased Allows a participant with TRS- covered service prior to June, 1998 to have his or her retirement benefit calculation increased Fairly common in administrator contractsFairly common in administrator contracts Sometimes offered as a retirement incentive in collective bargaining agreementsSometimes offered as a retirement incentive in collective bargaining agreements

10. District “Pick-Up” of TRS Contributions TRS members are required to contribute 9.4 percent of creditable earnings TRS members are required to contribute 9.4 percent of creditable earnings If the District picks up these contributions, that results in additional creditable earnings that are also subject to contributions If the District picks up these contributions, that results in additional creditable earnings that are also subject to contributions TRS Factors: A pick up of the entire 9.4 percent results in a factor of 10.3753 percent being added to creditable earnings TRS Factors: A pick up of the entire 9.4 percent results in a factor of 10.3753 percent being added to creditable earnings Common in administrator contracts; not common in collective bargaining agreements Common in administrator contracts; not common in collective bargaining agreements

11. 403(b)/457 Plan Contributions Employees may defer their own salary, or the employer may make contributions Employees may defer their own salary, or the employer may make contributions Limits set by Tax Code Limits set by Tax Code Post-retirement 403(b) contributions allowed for up to five years after retirement Post-retirement 403(b) contributions allowed for up to five years after retirement 457(b) plans are common for administrators to provide supplemental retirement benefits; teachers usually limited to 403(b) contributions 457(b) plans are common for administrators to provide supplemental retirement benefits; teachers usually limited to 403(b) contributions

12. 403(b) Plans The IRS will require all 403(b) plans to be administered pursuant to a formal plan document, starting on January 1, 2008 The IRS will require all 403(b) plans to be administered pursuant to a formal plan document, starting on January 1, 2008 A plan document must contain the basic terms of the 403(b) plan: A plan document must contain the basic terms of the 403(b) plan: Eligibility, benefits, limits, form of and time of distributions, as well as permissive features such as loans, hardship distributions, etc.Eligibility, benefits, limits, form of and time of distributions, as well as permissive features such as loans, hardship distributions, etc.

13. Flexible Spending Accounts May provide a choice between qualified benefits and cash May provide a choice between qualified benefits and cash May either be part of a district-wide FSA, and will be tax-free, or can be offered solely to a select group of administrators, and will be taxable May either be part of a district-wide FSA, and will be tax-free, or can be offered solely to a select group of administrators, and will be taxable All contributions to FSA are reportable as creditable earnings All contributions to FSA are reportable as creditable earnings

14. Benefits That Do Not Count As TRS Creditable Earnings

15. Reimbursements and Allowances Not TRS creditable earnings Not TRS creditable earnings May be excludable for federal tax purposes May be excludable for federal tax purposes Common for administrators Common for administrators

16. Retiree Medical Coverage Less and less common for administrators; not common, and not recommended for teachers (at least in its traditional form) Less and less common for administrators; not common, and not recommended for teachers (at least in its traditional form) The district may agree to pay an individual’s portion of TRS medical premiums after retirement The district may agree to pay an individual’s portion of TRS medical premiums after retirement In the alternative, the individual may be kept on the district’s retirement plan In the alternative, the individual may be kept on the district’s retirement plan Not subject to federal income taxation Not subject to federal income taxation Non-traditional alternative: HRA or VEBA contributions during employment and use after retirement Non-traditional alternative: HRA or VEBA contributions during employment and use after retirement VEBA contributions funded by deductions from salary would be creditable compensation for TRS purposesVEBA contributions funded by deductions from salary would be creditable compensation for TRS purposes

17. What is a VEBA? VEBA stands for “Voluntary Employees Beneficiary Association.” VEBA stands for “Voluntary Employees Beneficiary Association.” It is a tax exempt entity (usually a trust) that is established to provide medical, dental, prescription drug, accident, life insurance, and other qualified benefits to its members or their dependentsIt is a tax exempt entity (usually a trust) that is established to provide medical, dental, prescription drug, accident, life insurance, and other qualified benefits to its members or their dependents Contributions to the trust are not taxable to employeesContributions to the trust are not taxable to employees Payments from the trust are not taxed if they are used to pay for or provide tax qualified benefitsPayments from the trust are not taxed if they are used to pay for or provide tax qualified benefits

18. Post-Retirement/Post-Resignation Payments Compensation paid after the individual’s final day of work and after his or her final paycheck for regular earnings are not TRS creditable earnings Compensation paid after the individual’s final day of work and after his or her final paycheck for regular earnings are not TRS creditable earnings Note on post-retirement payments: governed by Section 457(f) Note on post-retirement payments: governed by Section 457(f) Note on post-resignation payments to administrator: payments after an employee’s resignation would still be TRS creditable earnings if he or she continues to work for another TRS-covered employer after resignation Note on post-resignation payments to administrator: payments after an employee’s resignation would still be TRS creditable earnings if he or she continues to work for another TRS-covered employer after resignation

19. Sick Leave Increases Up to two years of unused, uncompensated sick leave may be used to increase TRS service credit Up to two years of unused, uncompensated sick leave may be used to increase TRS service credit To be considered for TRS service credit purposes, it must be “available for use” To be considered for TRS service credit purposes, it must be “available for use” Amounts provided in last four years before retirement in excess of the “normal allotment” may be subject to penalties Amounts provided in last four years before retirement in excess of the “normal allotment” may be subject to penalties Penalties for excess sick leave are not as substantial as the contributions required for ERO Penalties for excess sick leave are not as substantial as the contributions required for ERO As a result, a sick leave penalty may be warranted to avoid ERO contributionsAs a result, a sick leave penalty may be warranted to avoid ERO contributions

20. TRS Early Retirement Option Employer and member contributions, though the member contribution may be picked up by the employer (not common for teachers) Employer and member contributions, though the member contribution may be picked up by the employer (not common for teachers) For employees who have at least 55 years of age and 20 years of service, and who are both under age 60 and have less than 35 years of service For employees who have at least 55 years of age and 20 years of service, and who are both under age 60 and have less than 35 years of service Contribution rates for ERO have increased: Contribution rates for ERO have increased: The participant contribution increased from 7% to 11.5% multiplied by the lesser of the administrator’s years or partial years under 35 years of service or 60 years of ageThe participant contribution increased from 7% to 11.5% multiplied by the lesser of the administrator’s years or partial years under 35 years of service or 60 years of age The employer contribution increased from 20% to 23.5% multiplied by the number of years the administrator is under 60 years of ageThe employer contribution increased from 20% to 23.5% multiplied by the number of years the administrator is under 60 years of age 10% cap permitted by TRS 10% cap permitted by TRS IRC 414(h) language is necessary IRC 414(h) language is necessary

21. TRS 6% Salary Increase Penalties (Revisited) Avoiding the penalty: Avoiding the penalty: Retirement incentive plan offering 6% increasesRetirement incentive plan offering 6% increases Provide non-creditable compensationProvide non-creditable compensation Follow the 6 percent salary increase penalty exemptionsFollow the 6 percent salary increase penalty exemptions Provide post-retirement compensationProvide post-retirement compensation Agree to pay increases in excess of 6 percent five or more years before retirement (common for administrators)Agree to pay increases in excess of 6 percent five or more years before retirement (common for administrators)

22. TRS 6% Salary Increase Penalties (Example A) Salary w/ 4% annual increase Salary w/ 4% annual increase and two 20% increases Increase Amount Exceeding 6% 2007-20082008-20092009-20102010-20112011-2012170,000176,800183,872191,227198,876170,000176,800183,872220,646264,776---------25,74230,891 Total Creditable Earnings in Final 4 Years/ Average 750,775 / 187,694 846,094 / 211,524--- TRS Annual Benefit (Assuming a 75% annuity) 140,770158,643--- TRS 6% Salary Increase Penalty ---138,381---

23. TRS 6% Salary Increase Penalties (Example B) Salary w/ 4% annual increase Salary w/ 4% annual increase and two 20% increases Salary w/ additional 7.6% increase and 6% increases thereafter 2007-20082008-20092009-20102010-20112011-2012170,000176,800183,872191,227198,876170,000176,800183,872220,646264,776183,000193,980205,619217,956231,033 Total Creditable Earnings in Final 4 Years/ Average 750,775 / 187,694 846,094 / 211,524 848,588 / 212,147 TRS Annual Benefit (Assuming a 75% annuity) 140,770158,643159,110 TRS 6% Salary Increase Penalty ---138,381---

24. Collective Bargaining Agreement 6% Retirement Incentive Plans Common to offer 1, 2, 3, or 4 years of 6% increases as a retirement incentive Common to offer 1, 2, 3, or 4 years of 6% increases as a retirement incentive Post-retirement incentives can be useful to persuade teachers to elect the plan Post-retirement incentives can be useful to persuade teachers to elect the plan Other 6% protections: Other 6% protections: Recoup penalties? (disfavored by TRS)Recoup penalties? (disfavored by TRS) Recoup excess salary over 6%? (disfavored by TRS)Recoup excess salary over 6%? (disfavored by TRS) Make an employee “ineligible” for benefits not yet receivedMake an employee “ineligible” for benefits not yet received Require early documentation of TRS creditable serviceRequire early documentation of TRS creditable service

25. Questions?