RS DAL00605.364 Determining Pension Applicability, Eligibility Date and Monthly Amount for WEP (RTN 22 – 10/2013)
A. Background – Texas Teachers Retirement System and the Texas Optional Retirement Program (ORP)
The Texas Teachers Retirement System (TRS) provides two types of retirement plans. Entitlement to benefits from either of these plans may require the application of the Windfall Elimination Provision (WEP). Follow instructions in RS 00605.360 to determine applicability of WEP to the TRS defined benefit (DB) plan and follow the instructions below to determine applicability of WEP to the defined contribution (DC) plan.
If a DC plan is a supplemental plan (i.e., not a primary retirement plan) the payments are subject to WEP only when the payments contain employer contributions or employer and employee contributions.
1. Defined Benefit Plan
The traditional TRS plan provides a benefit amount paid under a defined benefit plan. TRS bases the retirement benefit on length of employment, amount earned, and the worker’s age at retirement. Under this plan, the retiring worker usually receives a monthly annuity. If a retiring worker takes a lump sum payment in lieu of a monthly annuity, the retiree may withdraw only the employee contributions plus five percent interest. All employer contributions remain in the TRS state fund. See instructions in RS 00605.364A.2 for the treatment of this type of withdrawal.
2. Defined Contribution Plan
In 1967, TRS established the Texas Optional Retirement Program (ORP) as an alternate retirement plan for public higher education institutions’ full time faculty, librarians, and certain professional administrators. All Texas public higher education institutions, except some Community College Districts, cover their employees under Social Security through a Section 218 Agreement.
The ORP is a 403 (b) defined contribution plan under the Internal Revenue Code. Benefits received from the ORP are a function of the contribution rate, total salary earned during a participant’s career in Texas public higher education, and the rate of return on investment. Tax-deferred contributions, made by both the employer and the employee, fund the ORP. Employees direct the allocation of the contributions among each employer’s authorized list of insurance companies, financial institutions, and/or investment companies that offer tax-deferred annuities or custodial accounts.
NOTE: The Texas ORP is not an "optional savings plan." Optional savings plans are separate from the employer’s mandatory retirement plan and comprised solely of optional contributions.
B. Policy — WEP and the Texas ORP
WEP applies when an insured person:
becomes entitled to old age or disability benefits after 1985; and
also becomes entitled to a monthly pension(s) for which he or she first became eligible after 1985; and
the pension is based in whole or in part on his or her own non-covered employment.
WEP does not apply if an exception specified in RS 00605.362 exists.
2. Determining eligibility and entitlement to the ORP
ORP Eligibility (RS 00605.364B.1.a)
ORP participants become eligible for an ORP pension (i.e., eligible to receive a distribution of ORP funds) only upon termination of participation or attainment of age 70½, whichever comes first. Termination of participation occurs upon the individual’s death, retirement, or termination of employment in all public institutions of higher education in Texas. A transfer from one Texas ORP employer to another is not a termination of participation; therefore, employees who transfer are not eligible to receive a distribution from any of their ORP accounts.
Simply having access to funds in the ORP does not equate to eligibility for an immediate retirement distribution. While vesting in a retirement plan confers ownership and, therefore, access to the funds in a retirement plan, it does not give the individual the right to a retirement distribution at the time of vesting. Vesting in the ORP occurs after 12 cumulative (but not necessarily consecutive) months of actual participation. Vesting before 1986 alone does not constitute pension eligibility or entitlement.
ORP Entitlement (RS 00605.360B.3)
ORP entitlement occurs the month in which the individual receives the first distribution of funds from the ORP. As the “owner” of the ORP funds, an individual does not have to “apply” for or “prove his or her rights” to those funds in the same sense as participants in defined benefit plans. Ownership to the funds automatically confers the individual’s rights to the funds. Requesting a distribution of the funds constitutes the application for benefits.
Distribution of ORP funds
For WEP purposes, consider any of the following to be a distribution:
periodic payment (e.g., monthly, bi-weekly, etc.);
rollover into a personal pension plan (e.g., an IRA, Annuity, etc.); or
rollover into a private or government employer’s pension plan based on covered employment.
For WEP purposes, do not consider any of the following dispositions of the ORP funds to be a distribution:
Funds left on deposit with the authorized company;
A rollover into another government pension plan based on non-covered employment. (This later plan will be subject to WEP and the total value will include the rolled over amount.);
Withdrawals made before age 59½ that incur the IRS 10% penalty for early distribution.
The first ORP distribution may occur:
no earlier than upon termination of participation (i.e., upon the individual’s death, retirement, or termination of employment in all public institutions of higher education in Texas); but
no later than April 1 of the year following the year the participant attains 70½, if the ORP participant retired at age 70½ or earlier; or
no later than April 1 of the year following the year the participant ultimately retires, if the ORP participant retired after age 70½.
For defined contribution plans, we use the value of the plan at the time of the first distribution (as defined in RS DAL00605.364B.2.c) to derive a prorated monthly amount for WEP purposes. Therefore, treat the value of the entire plan immediately before the first ORP distribution as a lump sum distribution for the purposes of imposing WEP, and derive a “lifetime” equivalent monthly amount using the actuarial value tables available in RS 00605.364C.5. Use the derived monthly pension amount to apply WEP, regardless of the amount actually received by the beneficiary.
The WEP Guarantee provides that we cannot reduce an individual’s Social Security benefit by more than one-half of the amount of his or her pension. See RS 00605.370 for additional information on the WEP Guarantee and RS 00605.366C.2 for verification of pension amount, if the WEP Guarantee applies.
Changes in the amount or timing of ORP disbursements or the voluntary stopping of disbursements will not change the initial PIA determined under WEP (RS 00605.364D). However, additional years of Social Security coverage may result in a recomputation of the WEP PIA (RS 00605.369B).
C. Procedure — Applying WEP
Complete the following steps when WEP applies:
Determine the month and year the participant became or expects to become entitled to the funds in the ORP plan.
Apply WEP effective with the first month of concurrent entitlement to both title II (RIB or DIB) benefits and the Texas ORP (as defined in RS DAL00605.364B.2.b).
Request verification of the value of the ORP funds immediately before the first distribution. If the participant does not have proof of this value, have the individual contact his or her ORP provider(s) or Plan Administrator. Refer Texas Community College District employees to the following links: List of 403 (b) Certified Companies or Texas Public Community College Districts.
Derive a monthly pension amount by applying the actuarial value table in RS 00605.364C.5.b. to the value of the funds in the ORP immediately before the first distribution.
If immediate Social Security payment is due and ORP entitlement exits, process the award by imposing WEP based on information in file, and follow the instructions as stated in RS 00605.366C.1.c. and RS 00605.366C.1.d.
If the ORP date of entitlement is unknown, or a date in the future, follow instructions in RS 00605.366A, GN 01040.010 , and MSOM MCS 009.015 .
Mr. John Doe, date of birth 08/02/1934, worked under non-covered employment for the Dallas County Community College (DCCC) from 08/1974 through 08/2006. He elected to participate in the Texas ORP, which is his primary retirement plan. He filed for title II retirement benefits with a month of entitlement of 01/2000, but continued to work at DCCC. Mr. Doe retired from the DCCC at age 72 in 08/2006.
Although he was “vested” in Texas ORP after one year of employment with DCCC, he neither terminated his employment prior to 1986 nor attained age 70½ before 1986. His date of entitlement to the ORP pension is the month he received the first ORP distribution, which can be no later than April 1 following the calendar year in which he retired (termination of employment). See IRS Rules - Required Minimum Distributions.
Determine the monthly pension amount by first finding the total value of the ORP funds immediately before the first distribution. Prorate the total value of the ORP funds using the actuarial value table in RS 00605.364C.5.b.
Mr. Bill Smith, date of birth 08/02/1942, filed for title II retirement benefits effective 06/2008 at “full retirement age” (FRA). Mr. Smith continues to work in non-covered employment with the Texas Community College District and has no plans to retire in the near future. He elected participation in the Texas ORP in lieu of the traditional TRS DB plan when hired in 08/1972.
Although fully vested in his ORP pension as of 08/1973, Mr. Smith is not entitled to an ORP pension because employment continues and he has not yet received a distribution of ORP funds. In this situation, since the date of entitlement to the ORP funds is in the future, the claim should be adjudicated with a diary (code 25) for one year per RS 00605.366A.2.
NOTE: The Modernized Claims System (MCS) Application screens capture a complete form of the SSA-150 (Modified Benefit Formula Questionnaire) in every case where the claimant is first eligible for a non-covered pension after 1985, and is entitled or will be entitled within the prospective life of the application. See RS 00605.390 for an Exhibit of Form SSA 150.
Access additional information regarding the completion of the MCS screen pertaining to WEP cases using the following links:
MSOM MCS 005.012, Additional Benefits (ADDB)
MSOM ICD 004.002, Windfall Elimination Exclusion (WEPX)
MSOM ICD 004.003, Windfall El