One consequence of the significant increase in the state minimum salary schedule (MSS) is how to process surcharges for retire-rehires. The following guidance recaps our 2016 surcharge guidance and includes additional information about how districts should process surcharges with the new MSS.
General considerations for processing surcharges
Many districts require retire-rehires to assume the cost of surcharges paid to the Teacher Retirement System (TRS). The law requiring districts to pay a surcharge to TRS does not provide specific guidelines for deducting the surcharge from the employee’s salary. As a result, how and when the deduction occurs is a local decision, but here are some items to consider when determining local practice:
- The law is silent as to the source of funds of the surcharge payment; the law merely requires that the district, not the employee, remit the payment to TRS.
- There appears to be no legal guidance in statute, rule, or administrative statement by TRS or the Texas Education Agency (TEA) regarding whether and when the surcharge may be deducted from a retiree’s salary if a district requires the retiree to pay all or part of the surcharge.
There are a few things districts should do when hiring a retiree to work in a capacity that will incur a surcharge:
- Use the TASB Model Retire/Rehire Addendum, which includes an optional provision addressing the reduction of salary to offset the surcharge expenses incurred by the district. However, it’s always advisable for districts to work with their local counsel to review the text to ensure it’s applicable to the district/employee work assignment and agreement.
- Calculate the surcharge to be assessed for the retire-rehire. For the 2019–2020 school year, the pension surcharge percentage is 15.2 percent of the employee’s wages, and the district may also owe a TRS-Care surcharge of $535 per month if the retire-rehire is covered under TRS-Care health insurance. The surcharge percentage will remain the same for 2020–2021 but will increase in each subsequent school year through 2024–2025.
Deductions for surcharges
TASB has long provided the following guidance:
- Districts cannot treat a retire-rehire differently, in terms of salary determination, than a similarly situated employee who has not retired. For example, a retire-rehire teacher with 20 years of teaching experience should initially be placed at the same base salary as a current district teacher with 20 years of teaching experience. While some deductions for surcharges may be made later, initial salary determination should not treat a retiree any different than a pre-retirement employee.
- Texas Administrative Code requires that employees in positions subject to the MSS (teacher, librarian, counselor, nurse) cannot be paid less than the MSS based on their creditable years of service.
This guidance allowed districts to deduct surcharges from the initial salaries set for retire-rehires, as long as the deductions did not take the employee’s salary below the MSS. In more recent guidance in 2017, HR Services and TASB Legal Services advised that districts could make additional surcharge deductions from the retire-rehire’s salary below MSS for the amount 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 that amount generally is deducted from the salary of an active employee who is subject to the MSS.
Under the previous MSS, most districts could deduct most or all surcharges without taking the employee below the MSS. Now, given the significant increase in the MSS, districts will encounter more challenges in deducting the surcharges.
HR Services and TASB Legal continue to work together to develop and refine guidance to help districts remain compliant. To keep the guidance simple and understandable, we’ve boiled it down to two statements:
If after deduction of the 7.7 percent the retire-rehire’s salary is still above the new MSS, the district might consider making further surcharge deductions as long as the salary remains above the MSS.
If after deduction of the 7.7 percent the retire-rehire’s salary is below the new MSS, no further deductions should be made.
Given how many districts are paying closer to the MSS, we expect more districts will have to limit surcharge deductions than in the past, which may result in districts hiring fewer retirees.
Additional surcharge logistics
As noted in our previous guidance, districts can determine the allowable surcharge deductions on a monthly or annual basis. However, there are substantially more benefits to determining the surcharge on an annual basis. This method is easier for district staff to calculate, more straight-forward, and easier for employees to understand.
The annual 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. 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. 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. This also allows district staff to clearly communicate to an employee what the employee’s pay will be after surcharge deductions.
If the district uses the monthly method, the surcharge deductions must be done post-tax. As a result, the employee will be subject to federal income tax on the total monthly salary.
Districts should consider providing retire-rehires with a salary letter that clearly describes what the district will deduct for surcharges so the employee knows what to expect on the employee’s paychecks.
While nearly all districts in the state pay those staff subject to the MSS across 12 months, districts may consider changing pay cycles for retire-rehires to simplify surcharge deductions and payments. Surcharges can only be transmitted to TRS when work is being performed, so no surcharges typically are paid during summer months, even though districts likely have calculated surcharge deductions based on 12 months of pay. By paying retire-rehires over only 10 months, accurate surcharges owed by the district can be transmitted to TRS, and surcharges taken from the employee will match surcharges paid to TRS.
Amy Campbell is director at TASB HR Services. Send Amy an email at email@example.com.
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