Q&A: Processing TRS surcharges

Editor’s Note: Our initial guidance provided in the April 2016 Q&A on TRS Surcharges can be described as a very conservative approach. After considerable research and discussion, TASB HR Services and TASB Legal have determined the following:

  • The law is silent as to the source of funds for the surcharge payment, other than the payment must be remitted by the district, not the employee, to TRS.
  • There appears to be no legal guidance in statute, rule, or administrative position stated by TRS or TEA regarding whether and when the surcharge may be deducted from a retiree’s salary if a district requires the retiree to pay the surcharge, or a portion thereof.
  • While a district may require an employee to pay the surcharge amounts, TASB believes a district should pay a retiree no less than the state minimum salary amount reduced by the portion of the surcharge that represents the “current contribution amount that would be contributed by the retiree if the retiree were an active, contributing member” (currently 7.7 percent), because this amount generally is deducted from the salary of an active employee who is subject to the state minimum salary schedule.
  • And, while it is still true that districts can determine the surcharge amount on an annual or monthly basis, there are substantially more benefits to determining the surcharge amount on an annual basis. This method is easier for district staff to calculate, more straight-forward, and easier for employees to understand. This calculation entails starting with the annual salary for the retire-rehire based on the district’s salary schedule for the retire-rehire’s creditable years of experience, then deducting the annual surcharge and, if applicable, annual TRS-Care surcharge costs. As noted in the previous bullet, the deductions cannot cause the retire-rehire’s salary to dip below the annual state minimum salary schedule amount, less 7.7 percent. Because this results in an annual salary negotiated with the employee prior to work beginning, the surcharge “deduction” occurs before any pay is earned or paid and before any tax deductions are required. This allows a district to clearly communicate to an employee what his or her monthly pay will be before work begins.

Q: How do we process TRS surcharge deductions if we require our retire rehires to assume the cost?
A: The law requiring districts to pay a surcharge to the Teacher Retirement System (TRS) does not provide specific guidelines for deducting the surcharge from an employee’s salary. As a result, how and when the deduction occurs is a local decision. To determine how it will be handled, districts need to consider the factors discussed below.
TRS determines and assesses the surcharge on a monthly basis. The amount varies from member to member because it is based on the retiree’s salary and includes the combined state (6.8 percent) and member contribution rates, plus a health insurance surcharge. Beginning in 2014–15 the employee contribution rates have increased by 0.5 percent. The total contribution rate based on the employee’s salary for 2015–16 is 14 percent and for 2016–17 the rate will increase to 14.5 percent.
If the retiree participates in TRS-Care, the district also is required to pay the health benefit surcharge to TRS. Currently, the health insurance surcharge is based on the TRS-Care plan in which the retiree is enrolled. Effective, Sept. 1, 2016, this surcharge will become a set rate of $535 per month (see Extra).
TRS only accepts payment for surcharges from the district. However, the state law that requires the TRS-covered employer to pay the surcharges to TRS does not state the source of the funds. As a result, some districts require the retiree to pay all or a portion of the surcharges.
This is acceptable as long as retirees hired in positions subject to the state minimum salary schedule are paid at least the state minimum salary for their years of experience. For example, a teacher with 20 or more years of experience must be paid at least $45,510 per year ($4,510/month). Editor’s note: The $4,510/month is based on 10 payments. For 12 payments the minimum salary is $3,792.50. Based on the note at the top of this page, it may be acceptable to reduce this amount by the 7.7 percent employee contribution to which all employees, whether a retiree or not, are subject.
Districts that require the employee to assume the cost of the surcharge may determine the surcharge on an annual or monthly basis. If the annual basis is used, the employee’s annual salary is reduced by the cumulative total of the surcharge(s). The net result may not be less than the state minimum salary based on the employee’s experience. Deductions do not appear on the employee’s monthly pay statement and the employee’s federal income tax is based on the reduced annual salary.
If the district chooses to use the monthly method, the surcharges deduction must be done post-tax. As a result, the employee will be subject to federal income tax on the total monthly salary. Districts using this method must also ensure that the monthly surcharge deduction does not reduce the employee’s salary below the state minimum salary based on the years of experience.
It is recommended that districts hiring retirees use the model retire/rehire contract addendum (available in Contract and assignment section of the HR Library). This addendum includes an optional provision that addresses the reduction of salary to offset the surcharge expenses incurred by the district. It is recommended that your district’s school attorney review the text.