Provisions Allowing Retiring Members to Elect between a Lump Sum Payment for Unused Leave or Deferral into a IRS §403(b) Tax-Deferred Annuity 

June 2002
Issue No. 6

Dear Delegate:

For your information, we are providing a copy of the most recent Administrative Bulletin sent in April to all Chief School Administrators, College and University Presidents and School Principals.

As a result of the increased limitations for deferrals into tax-deferred annuities established in conformity with IRC §401(a), we understand there is increased interest on the part of members in deferring all or a portion of payments for unused leave or termination into IRC §403(b) tax-deferred annuities.

Tier 1 members of the System who joined prior to June 17, 1971 are entitled to a retirement benefit calculated using the greater of a three-year final average salary calculation (which includes only regular compensation) or a five-year final average salary (which includes not only regular compensation but also payments for unused leave, termination pay and other items of non-regular compensation due such members). 

Employer-paid contributions to IRC §403(b) annuities have been reportable to the System as non-regular compensation in the case of Tier 1 members. They may be used in the five-year final average salary calculation of Tier 1 members who joined the System prior to June 17, 1971.

Accordingly, in the case of Tier 1 members joining prior to June 17, 1971 who are due termination pay or payments for unused leave under the applicable collective bargaining agreements, the System will include such monies in the five-year final average salary calculation of these members even if they are contributed by the employer or deferred on behalf of the member into a 403(b) program at the time of retirement rather than paid directly to the member.

 In order to be includable, however, such contributions must be made by the end of the calendar year of retirement. Payments made after the end of the calendar year of retirement, whether to the member or as payment to or a deferral into a 403(b) program, are not reportable and not usable in any final average salary calculation.

Retirement incentives, payments for unused leave and deferrals of such monies and/or employer-paid contributions to 403(b) programs, as well as any other form of non-regular compensation, are not usable in any three-year final average salary calculation regardless of tier. In addition, payments for unused leave or termination pay which are, in fact, payments for a resignation or are paid in anticipation of retirement or for the purpose of inflating final average salary are not reportable and are not includable in either the three-year or the five-year final average salary calculation.

An employer contribution is required on all compensation paid to or for the benefit of members that is reportable to the System.