INTRODUCTION

Chapter 783 of the Laws of 1988 requires the System and its participating employers to treat required employee contributions in accordance with Section 414(h) of the Internal Revenue Code.

Effective July 1, 1989, the salaries of all Tier 3 and Tier 4 members (i.e., those who joined TRS on or after July 27, 1976) will be reduced for Federal income tax purposes by the amount of their mandated 3% retirement contribution. Tier 3 and Tier 4 retirement contributions are not includable in the member's gross income for Federal income tax purposes until they are distributed or made available to the member, which is usually at retirement or upon withdrawal from the System. The member's salary prior to the reduction should be reported to the System and will be used in all benefit determinations. We want to emphasize THERE IS NO ADDITIONAL COST TO EMPLOYERS as a result of this legislation. However, as the employer, it is your responsibility to inform the Tier 3 and Tier 4 members of the tax effect this legislation has on their income.

Under Section 414(h) of the Internal Revenue Code, the employer theoretically "picks up" the Tier 3 and Tier 4 3% employee contribution by reducing the employee's wages by that amount for Federal income tax purposes. In actuality, the employee continues to pay the 3% contribution but the amount reported for Federal tax purposes is reduced by the required employee contributions. For other purposes (i.e., FICA reporting, NYS income tax reporting and TRS reporting), the former method of reporting remains unchanged.

To summarize the above information:

• Participation IS NOT AVAILABLE to Tier 1 and Tier 2 members.

• Participation IS REQUIRED for all Tier 3 and Tier 4 members.

• All Tier 3 and Tier 4 required 3% contributions WILL REDUCE the member's gross income for Federal income tax purposes; however, when those contributions are distributed as a refund or a benefit, they will then be subject to taxation.

• The Tier 3 and Tier 4 required 3% contributions WILL NOT REDUCE the salary reportable for NYS income tax, FICA and TRS purposes.

Effective 7/1/89, employers are responsible for implementing the requirements of Chapter 783 of the Laws of 1988. The following example illustrates the effect of this legislation on various salary and contribution information you report to different agencies.

Assume a Tier 3 or Tier 4 member is employed at a full-time contract of $20,000 and works the entire school year. The proper method of reporting this salary is as follows:

TRS Reporting

6

Year-To-Date Year-To-Date

6

In accordance with the provisions of the plan, the Tier 3 and 4 member contributions —$600 in the example—will be salary reportable to this System and includable in determining service credit and benefits. In addition, the employer billing will be based on the SALARY RECEIVED figure of $20,000.