Part 3. TEACHER RETIREMENT SYSTEM OF TEXAS
Subchapter D. PLAN LIMITATIONS
The Teacher Retirement System of Texas ("TRS") proposes amended rules regarding plan limitations based on the federal Internal Revenue Code, as well as federal regulations and guidance. Amendments are proposed to the following rules: §29.50, relating to definitions; §29.51, relating to plan limitations on retirement benefits; §29.52, relating to adjustment to annual benefit limit; and §29.55, relating to limitation on contributions.
With recent changes to federal laws and regulations governing qualified retirement plans, including the Pension Protection Act of 2006 and new regulations implementing Section 415 of the Internal Revenue Code of 1986, as amended, it is necessary to update the TRS plan rules governing limitations on annual benefits and contributions to reflect current federal requirements. The proposed amendments update the TRS plan rules to reflect current federal provisions and also to describe in more detail the standards and processes by which TRS applies the limitations to annual benefits and to contributions made for the purchase of special service credit.
The proposed amendments to §29.50 add a definition for the term "limitation year" to clarify that the TRS plan year of September 1 through August 31 also is the limitation year for the purpose of applying the annual limitations on benefits and contributions. The amendments also clarify the applicability of the annual benefit limits to benefits other than service retirement benefits, including disability retirement or pre-retirement member death benefits, and modify definitions to more specifically reference applicable federal regulations.
The proposed amendments to §29.51 add the effective date of the federal limits on benefits and contributions and modify existing language to include a general reference to contribution limitations.
The proposed amendments to §29.52 add the effective date for the applicable federal limits on benefits, delete obsolete provisions no longer applicable under federal law, and add detailed provisions regarding how the benefit limitation, expressed as a straight life form of annuity (i.e., a standard annuity), is to be adjusted if the form of benefit payable to the TRS recipient is not a straight life annuity. The proposed amendments alternatively add detailed provisions regarding how the form of benefit payable, if not a straight life annuity (i.e., a standard annuity), is to be adjusted to an actuarially equivalent straight life annuity for the purpose of comparing the benefit payable to the federal limitation, which is expressed as a straight life annuity.
The proposed amendments to §29.55 expressly set forth the limitations on contributions and the authority of TRS to refuse to permit a service credit purchase if the amount of the contribution would exceed the applicable limit. The proposed amendments also set forth in detail the Internal Revenue Code provisions that permit certain service credit to be considered "permissive" service credit and thus subject to more favorable contribution limitations than service credit that is not "permissive" service credit. The amendments reflect the changes under the Pension Protection Act of 2006 to the definition of "permissive" service credit. Additionally, the amendments expressly provide that only service credit authorized to be purchased under the TRS retirement plan may be purchased; the standards for permissive service credit under federal tax law do not expand the types of service credit available for purchase under the TRS retirement plan.
Ken Welch, TRS Chief Financial Officer, estimates that, for each year of the first five years that the proposed rules will be in effect, there will be no foreseeable implications relating to cost or revenues of the state or local governments as a result of enforcing or administering the amended sections. Rather, any measurable impact on the cost or revenues of the state or local governments is the result of federal tax code provisions applicable to qualified retirement plans.
For each year of the first five years that the proposed rules will be in effect, Ronnie Jung, TRS Executive Director, has determined that the public benefits expected as a result of the adoption of the proposed rules will be to describe in greater detail the standards for applying benefit and contribution limitations to TRS benefits and to payments for TRS service credit, respectively. For each year of the first five years that the proposed rules will be in effect, Mr. Welch has determined that any probable economic costs to entities or persons required to comply with the proposed rules is the result of federal tax code provisions applicable to qualified retirement plans. There will be no effect on local employment because of the proposals, and therefore no local employment impact statement is required under §2001.022 of the Government Code. Any measurable impact on local employment is the result of the federal legislative enactment. Mr. Welch has also determined that the proposed amendments will have no adverse economic effect on small businesses or micro-businesses, and, therefore, neither an economic impact statement nor a regulatory flexibility analysis is required under §2006.002 of the Government Code.
Comments may be submitted in writing to Ronnie Jung, Executive Director, 1000 Red River Street, Austin, Texas 78701-2698. To be considered, written comments must be received by TRS no later than 30 days after publication of this notice.
Statutory Authority: The amended rules are proposed under the following statutes: §823.006, Government Code, which authorizes the retirement system to limit the purchase of service credit to the extent required by applicable limits on the amount of annual contributions a participant may make to a qualified plan under Sections 401(a) and 415(c), Internal Revenue Code of 1986; §825.102, Government Code, which authorizes the Board to adopt rules for the administration of the funds of the retirement system; and §825.506, Government Code, which authorizes the board of trustees to adopt rules to ensure that benefits paid to a retiree, or to a beneficiary of a member or retiree, do not exceed the limits provided by section 415 of the Internal Revenue Code of 1986.
Cross-Reference to Statute: The proposed amendments affect the following provisions of the Government Code: Chapter 823, relating to Creditable Service; Chapter 824, Benefits; §823.006 and §825.506, which authorize limitations on benefits and contributions in accordance with federal tax law; and §825.517, relating to Excess Benefit Arrangement.
§29.50.Definitions.
The following words and terms, when used in the sections under this subchapter, shall have the following meanings, unless the context clearly indicates otherwise.
(1) Annual additions--The sum of the following amounts credited to a member's account under any defined contribution plan (or a portion of a defined benefit plan treated as a defined contribution plan) maintained by the employer for the plan year:
(A) employer contributions;
(B) member contributions, including member contributions
to a qualified defined benefit plan that have not been picked up under
[Code] §414(h) of the Internal Revenue Code of
1986 but not including rollover contributions;
(C) forfeitures; and
(D) amounts allocated after March 31, 1984, to an individual
medical benefit account, as defined in §415(1)(2) of the
Internal Revenue
Code, that is part of a pension or annuity plan maintained
by the employer. Annual additions do not include amounts described
in §415(1)(2) of that code [the Code] for
the purpose of computing the percentage limitation described in §415(c)(1)(B)
of that code [the Code
]. For any plan year beginning
before January 1, 1987, only that portion of the member contributions
equal to the lesser of those member contributions in excess of 6.0%
of annual compensation or one-half of the member's contributions to
any qualified plan maintained by the employer is treated as annual
additions.
(2) Annual benefit--A service retirement, disability
retirement, or pre-retirement member death benefit calculated
on the basis of service and average compensation under Tex. Gov't
Code §824.203 or §824.204, whether paid to a retiree or
to a beneficiary, and
payable annually in the form of a straight
life annuity (ignoring that portion of any joint and survivor annuity
which constitutes a qualified joint and survivor annuity, as defined
in §417 of the Internal Revenue Code) with no ancillary
or incidental benefits or rollover contributions and exclusive of
any portion of the benefit derived from member contributions or other
contributions that are treated as a separate defined contribution
plan under §417 of the Internal Revenue Code (but
inclusive of any such contributions that are picked up by the employer
pursuant to §414(h)(2) of the Internal Revenue Code,
or that otherwise are not treated as a separate defined contribution
plan). If the benefit is payable in any other form, the determination
as to whether the limitation described in §29.51 of this title
(relating to Plan Limitations on Annual [Retirement]
Benefits and Member Contributions) or §29.52
of this title (relating to Adjustment to Annual Benefit Limit) has
been satisfied shall be made by adjusting such benefit so that it
is actuarially equivalent to the annual benefit described in this
section in accordance with the regulations issued by the U.S. secretary
of the treasury.
(3) Annual compensation--All wages within the meaning
of §3401(a) of the Internal Revenue Code relating
to income tax withholding at source, but determined without regard
to any rules that limit the remuneration included in wages based on
the nature or location of the services performed and without regard
to whether such wages are treated as compensation under any other
provision of this chapter. For purposes of applying plan limitations,
the definition of compensation where applicable will be compensation
defined in Treasury Regulation §1.415(c)-2(d)(3), or successor
regulations; provided, however, that the definition of compensation
will exclude member contributions picked up under §414(h)(2)
of the Internal Revenue Code, and for plan years beginning after December
31, 1997, compensation will include the amount of any elective deferrals,
as defined in §402(g)(3) of the Internal Revenue Code and any
amounts contributed or deferred by the employer at the election of
the member and which is not includible in the gross income of the
member by reason of §125 or §457 of the Internal Revenue
Code, and for plan years beginning on and after January 1, 2001, §132(f)(4)
of that code. [Annual compensation shall include amounts
deferred under §402(g)(3) of the Code and any amounts contributed
or deferred by the employer at the election of the employee which
is excluded from gross income under §§125, 132(f)(4), or
457 of the Code. Annual compensation shall not include amounts picked
up under §414(h) of the Code.]
(4) Code--The Internal Revenue Code of 1986, as amended.
(5) Defined contribution plan--A plan described in §414(i) of the Internal Revenue Code and, solely for purposes of this subchapter, employee contributions to any other qualified plan maintained by the employer, other than any picked-up contributions.
(6) Employer--The agents, agencies or political subdivisions of the State responsible for education, including the governing board of any school district created under the laws of the State, any county school board, the board of trustees, the State Board of Education, the Texas Education Agency, the board of regents of any college or university, or any other legally constituted board or agency of any public school.
(7) Limitation year--The limitation year for purposes of §415 of the Internal Revenue Code beginning on September 1 of each year and ending on the following August 31.
(8) [(7)] Member contributions--Those
contributions within the meaning of [the Code,
] §411(c)(2)(C) of the Internal Revenue Code
, but not any contributions picked
up by the employer within the meaning of §414(h)(2) of
that code [the Code].
(9) [(8)] Plan year--The plan's
accounting year beginning on September 1 of each year and ending on
the following August 31.
§29.51.Plan Limitations on Annual [ Retirement ] Benefits and Member Contributions .
(a) Effective as of July 1, 1989, and notwithstanding
any other plan provision in statute or rule, member contributions
paid to, and annual benefits paid from, TRS may not exceed the annual
limits on contributions and benefits, respectively, allowed by §415
of the Internal Revenue Code. [Notwithstanding any other
provisions of this chapter, the benefit provided with respect to any
member for any plan year shall not exceed an annual benefit computed
in accordance with the limitations prescribed by this section. Specifically,
the maximum annual benefit payable in any plan year to a member may
not exceed the applicable dollar amount established in Internal Revenue
Code §415(b)(1)(A), as adjusted pursuant to Internal Revenue
Code §415(d).]
(b) Benefits provided to a member under this plan and under any other defined benefit plan or plans maintained by the employer shall be aggregated for purposes of determining whether the limitations in subsection (a) of this section are met. If the aggregate benefits otherwise payable to any member from this plan and any other defined benefit plan or plans maintained by the employer would otherwise exceed the limitations of subsection (a) of this section, reductions in benefits are required to be made to the other plan to the extent necessary to enable each plan or plans to satisfy those limitations.
§29.52.Adjustment to Annual Benefit Limit.
(a) Before July 1, 1995, a member may not receive
an annual benefit that exceeds the dollar amount and salary limits
specified in §415(b) of the Internal Revenue Code, subject to
the applicable adjustments in that section. On or after July 1, 1995,
a member may not receive an annual benefit that exceeds the dollar
amount specified in §415(b)(1)(A) of that code, subject to the
applicable adjustments in §415(b) of that code. [The
maximum benefit otherwise permitted under §29.51 of this title
(relating to Plan Limitations on Retirement Benefits) is subject to
the following adjustments.]
(1) If the annual benefit begins before the member
attains age 62, the Internal Revenue Code §415(b)(1)(A) limitation,
as adjusted, shall be reduced in a manner prescribed by the
U.S. secretaryof the treasury. [
For plan years ending before January 1, 2002,
that adjustment may not reduce the member's annual benefit below $75,000,
if the member's benefit begins after age 55, or the actuarial equivalent
of $75,000 beginning at age 55 if benefits begin before age 55. The
preceding sentence will not apply to plan years ending after December
31, 2001.]
(2) If the annual benefit begins after the member attains age 65, the Internal Revenue Code §415(b)(1)(A) limitation, as adjusted, will be increased so that it is the actuarial equivalent of the Internal Revenue Code §415(b)(1)(A) limitation at age 65, in accordance with guidance issued by the U.S. secretary of treasury.
(3) The portion of a member's benefit that is attributable
to the member's own contributions (other than picked-up contributions)
is not part of the annual benefit subject to the limitations of
this section [§29.51
]. Instead, the amount of those
member contributions is treated as an annual addition to a qualified
defined contribution plan maintained by the employer.
(b) The dollar limitation on annual benefits provided
by this section [§29.51, but not the $75,000
limitation provided by subsection (a) of this section,] shall
be adjusted annually as provided by §415(d) of the Internal
Revenue Code and the regulations prescribed by the U.S. secretary
of the treasury to reflect cost of living adjustments. The adjusted
limitation is effective for TRS benefits for the TRS plan year that
begins on or after the earliest allowable effective date of the changes
under federal regulations.
(c) The limitation provided by this section [§29.51
] for a member who has separated from service with
a vested right to a pension shall be adjusted annually as provided
by §415(d) of the Internal Revenue Code and the regulations
prescribed by the U.S. secretary of the treasury. On
and after July 1, 1995, in no event shall a member's annual benefit
payable from TRS in any limitation year be greater than the limit
applicable at the annuity starting date, as increased in subsequent
years pursuant to §415(d) of that code and the regulations thereunder.
(d) If the form of benefit is not a straight life (standard annuity) or qualified joint and survivor annuity (Option 1, 2, or 5 with a spousal beneficiary), then the applicable limit described in subsection (c) of this section shall be determined by either reducing §415(b) of the Internal Revenue Code limit applicable at the annuity starting date or adjusting the form of benefit to an actuarially equivalent straight life annuity benefit determined using the following assumptions that take into account the death benefits under the form of benefit:
(1) For a benefit paid in a form to which §417(e)(3) of the Internal Revenue Code does not apply (Option 1, 2, or 5 with a non-spouse beneficiary, or Option 3 or 4), the actuarially equivalent straight life annuity benefit which is the greater of (or the reduced §415(b) of that code limit applicable at the annuity starting date which is the lesser of when adjusted in accordance with the following assumptions):
(A) The annual amount of the straight life annuity (if any) payable to the participant under the plan commencing at the same annuity starting date as the form of benefit payable to the participant; or
(B) The annual amount of the straight life annuity commencing at the same annuity starting date that has the same actuarial present value as the form of benefit payable to the participant, computed using a 5 percent interest assumption (or the applicable statutory interest assumption) and the applicable mortality table described in §1.417(e)-1(d)(2) of the Income Tax Regulations (the mortality table specified in Revenue Ruling 98-1 (prior to 2003) or Revenue Ruling 2001-62 or any subsequent Revenue Ruling modifying the applicable provisions of Revenue Ruling 2001-62); or
(2) For a benefit paid in a form to which §417(e)(3) of the Internal Revenue Code applies (the deferred retirement option plan (DROP) or partial lump sum option (PLSO) portion of the benefit), the actuarially equivalent straight life annuity benefit which is the greatest of (or the reduced §415(b) of that code limit applicable at the annuity starting date which is the least of when adjusted in accordance with the following assumptions):
(A) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using the interest rate and mortality table, or tabular factor, specified in the plan for actuarial experience;
(B) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using a 5.5 percent interest assumption (or the applicable statutory interest assumption) and the applicable mortality table for the distribution under §1.417(e)-1(d)(2) of the Income Tax Regulations (the mortality table specified in Revenue Ruling 98-1 (prior to 2003) or Revenue Ruling 2001-62 or any subsequent Revenue Ruling modifying the applicable provisions of Revenue Ruling 2001-62); or
(C) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable (computed using the applicable interest rate for the distribution under §1.417(e)-1(d)(3) of the Income Tax Regulations (the 30-year Treasury rate (prior to July 1, 2007, using the rate in effect for the month prior to retirement, and on and after July 1, 2007, using the rate in effect for the first day of the plan year with a one-year stabilization period)) and the applicable mortality table for the distribution under §1.417(e)-1(d)(2) of the regulations (the mortality table specified in Revenue Ruling 98-1 (prior to 2003) or Revenue Ruling 2001-62 or any subsequent Revenue Ruling modifying the applicable provisions of Revenue Ruling 2001-62), divided by 1.05.
(e) [(d)] The following interest
rate assumptions shall be used in computing the limitations under
this section [§29.51].
[(1)] For the purpose of determining the
portion of the annual benefit that is attributable to member contributions,
the factors described in §411(c)(2)(B) and (C) of the
Internal Revenue Code and the regulations thereunder shall be used even
though §411 of that code [the Code] does
not otherwise apply to the retirement system.
[(2) For the purpose of
adjusting the annual benefit to a straight life annuity, the interest
rate assumption is 5.0%, unless a different rate is required by the
secretary of the treasury.]
[(3) For the purpose of
adjusting the Internal Revenue Code §415(b)(1)(A) limitation
after a member attains age 65, the interest rate assumption is 5.0%,
unless a different rate is required by the secretary of the treasury,
and the mortality decrement shall be ignored to the extent that a
forfeiture does not occur at death.]
(f) [(e)] An adjustment under §415(d) of
that code [the Code] may not be taken into
account before the year for which that adjustment first takes effect.
(g) No adjustment is required for the value of qualified joint and survivor annuity benefits, preretirement disability or death benefits, post retirement medical benefits, or post retirement cost-of-living increases made in accordance with §415(d) of the Internal Revenue Code and §1.415-3(c) of the Income Tax Regulations. For a disability retirement benefit or a pre-retirement death benefit, no adjustment is required for payment made with respect to a member before the member reaches or would have reached age 62 or for payment made with respect to a member with fewer than ten years of service credit under TRS.
(h) [(f)] This plan may still
pay an annual benefit to any member in excess of the member's maximum
annual benefit otherwise allowed if:
(1) the annual benefit derived from the employer's contributions under all defined benefit plans of the employer subject to the limitations of §25.51 and §415 of the Internal Revenue Code does not in the aggregate exceed $10,000 for the plan year or for any prior plan year; and
(2) the member has not at any time participated in a defined contribution plan maintained by the employer. For purposes of this subsection, member contributions to the plan are not considered a separate defined contribution plan maintained by the employer.
(i) [(g)] If a member has fewer
than ten years of actual membership service credit in the plan at
the time the member begins to receive benefits under the plan, the
Internal Revenue Code §415(b)(1)(A) limitation, as adjusted,
shall be reduced by multiplying the limitation by a fraction in which
the numerator is the number of years of service credit and the denominator
is 10; provided, however, that the fraction may not be less than one-tenth.
If the member has fewer than ten years of employment with the employer,
the $10,000 limitation of subsection (h) [(f)]
of this section shall be reduced in the same manner as provided in
the preceding sentence, except the numerator shall be the number of
actual years of employment with the employer rather than number of
years of service credit.
§29.55.Limitation on Contributions.
[Contributions to the plan to establish service or compensation
credit or for other purposes shall be limited in a plan year to the
extent required by Internal Revenue Code §415 and accompanying
regulations. Payments to TRS are subject to §25.33 of this title
(relating to Contribution Limitation Based on Compensation). The availability
of service or compensation credit or benefits associated with such
credit may be affected by limitations on contributions to the plan.]
(a) Notwithstanding any other provision of law to the contrary, TRS may refuse a request by a member to make a contribution to the retirement system for the purchase of service credit if the amount of the contribution would exceed the limits provided in §415 of the Internal Revenue Code.
(b) A member may use an installment payment plan to the extent permitted under applicable law to avoid a contribution in excess of the limits under §415(c) or §415(n) of the Internal Revenue Code.
(c) Effective for permissive service credit contributions made in years beginning after December 31, 1997, if a member makes one or more contributions to purchase permissive service credit under TRS, then the requirements of this section will be treated as met only if:
(1) the requirements of §415(b) of the Internal Revenue Code are met, determined by treating the accrued benefit derived from all such contributions as an annual benefit for purposes of §415(b) of that code; or
(2) the requirements of §415(c) of the Internal Revenue Code are met, determined by treating all such contributions as annual additions for purposes of §415(c) of that code.
(d) For purposes of applying subsection (c)(1) of this section, the retirement system will not fail to meet the reduced limit under §415(b)(2)(C) of the Internal Revenue Code solely by reason of this subsection, and for purposes of applying subsection (c)(2) of this section, the system will not fail to meet the percentage limitation under §415(c)(1)(B) of that code solely by reason of this subsection.
(e) For purposes of subsection (c) of this section the term "permissive service credit" means service credit:
(1) specifically authorized by state law and recognized by the retirement system for purposes of calculating a member's benefit under the system;
(2) which such member has not received under the system, prior to the purchase of such service credit; and
(3) which such member may receive only by making a voluntary additional contribution, in an amount determined under the System, which does not exceed the amount necessary to fund the benefit attributable to such service credit.
(f) Effective for permissive service credit contributions made in years beginning after December 31, 1997, such term may include service credit for periods for which there is no performance of service, and, notwithstanding subsection (e)(2) of this section, may include service credited in order to provide an increased benefit for service credit which a member is receiving under the System. Permissive service credit shall include:
(1) military service credit under Tex. Gov't Code §823.302;
(2) developmental leave service credit under Tex. Gov't Code §823.402;
(3) membership waiting period service credit under Tex. Gov't Code §823.406;
(4) substitute service credit under §25.4 of this title (relating to Substitutes);
(5) out-of-state service credit under Tex. Gov't Code §823.401;
(6) unused leave service credit under Tex. Gov't Code §823.403; and
(7) "additional service credit" under the service credit purchase option authorized by Tex. Gov't Code §823.405.
(g) The retirement system will fail to meet the requirements of subsection (c) of this section if:
(1) more than five years of nonqualified service credit are taken into account for purposes of subsection (c) of this section; or
(2) any nonqualified service credit is taken into account under subsection (c) of this section before the member has at least five years of participation under the system.
(h) For purposes of subsection (g) of this section, effective for permissive service credit contributions made in years beginning after December 31, 1997, the term "nonqualified service credit" means permissive service credit other than that allowed with respect to:
(1) service (including parental, medical, sabbatical, and similar leave) as an employee of the government of the United States, any state or political subdivision thereof, or any agency or instrumentality of any of the foregoing (other than military service or service for credit which was obtained as a result of a repayment described in §415(k)(3) of the Internal Revenue Code);
(2) service (including parental, medical, sabbatical, and similar leave) as an employee (other than as an employee described in paragraph (1) of this subsection of an education organization described in §170(b)(1)(A)(ii) of the Internal Revenue Code which is a public, private, or sectarian school which provides elementary or secondary education (through grade 12), or a comparable level of education, as determined under the applicable law of the jurisdiction in which the service was performed;
(3) service as an employee of an association of employees who are described in paragraph (1) of this subsection; or
(4) military service (other than qualified military service under §414(u) of the Internal Revenue Code) recognized by TRS.
(i) In the case of service described in subsection (h)(1) - (3) of this section, such service will be nonqualified service if recognition of such service would cause a member to receive a retirement benefit for the same service under more than one plan. The Internal Revenue Code standards for qualified permissive service credit as reflected in subsection (h)(1) - (4) of this section do not expand the authorized types of service credit available to be purchased under the TRS plan.
(j) In the case of a trustee-to-trustee transfer after December 31, 2001, to which §403(b)(13)(A) or §457(e)(17)(A) of the Internal Revenue Code applies (without regard to whether the transfer is made between plans maintained by the same employer):
(1) the limitations of subsection (g) of this section will not apply in determining whether the transfer is for the purchase of permissive service credit; and
(2) the distribution rules applicable under federal law to TRS will apply to such amounts and any benefits attributable to such amounts.
(k) For an eligible member, the limitation of §415(c)(1) of the Internal Revenue Code shall not be applied to reduce the amount of permissive service credit which may be purchased to an amount less than the amount which was allowed to be purchased under the terms of the statutes and rules applicable to TRS as in effect on August 5, 1997. For purposes of this subsection, an eligible member is an individual who first became a member of TRS before September 1, 2000.
This agency hereby certifies that the proposal has been reviewed by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of the Secretary of State on May 22, 2008.
TRD-200802692
Pattie Featherston
Chief Operating Officer
Teacher Retirement System of Texas
Earliest possible date of adoption: July 6, 2008
For further information, please call: (512) 542-6438