Purchasing With a Tax-Deferred Payment (TDP)
You can request that payments for your service credit purchase be deducted from your wages. This payment method, called a tax-deferred payment (TDP), gives you an easy payment plan plus a significant tax break. These deductions are not subject to income tax until you start receiving your pension at retirement.
While the tax advantages are great, you should be aware that a TDP agreement, once initiated, is binding and irrevocable. Once you and your payroll officer have completed the enrollment process and deductions have begun, deductions cannot stop until the agreement is complete, or you terminate employment.
Once you establish a TDP agreement to purchase a set amount of service credit, payments must be made through payroll deduction only. You cannot have possession of the funds and then pass them to the retirement system; funds must pass directly from the employer to the retirement system, per IRS regulations.
Some employers do not participate in the TDP program or do not allow substitute, part-time, temporary or intermittent employees to use TDP to buy service credit. Check with your payroll office to make sure this method is available.
- Your minimum scheduled deduction must be large enough to pay off your balance, plus any accrued interest, in less than 15 years (based on 21 pay periods a year), and never lower than $50. If you are paid on a frequency less than 21 pay periods a year, you will need to increase your payments so that the deduction will ensure a payoff in less than 15 years.
- Your maximum scheduled deduction should not be larger than your gross compensation less any required deductions like taxes, levies, or garnishments. Your payroll officer can help you determine this maximum deduction.
- You are responsible for making sure that the deductions start on time, are correct, and continue each pay period.
- A TDP agreement is binding and irrevocable. You can't decrease or stop your deduction, even if your financial circumstances change, until your agreement is complete or you terminate employment.
- You can increase your deduction. Once you increase your deduction, it can never be decreased.
- You can have multiple TDP agreements at once. Each agreement is calculated based on the cost to purchase service credit at the time the agreement is signed. Each agreement will have its own minimum scheduled deduction.
- If you leave work or retire before your agreement is paid off, you may qualify for partial credit.
Your purchase cost won't change once you and your payroll officer sign the TDP agreement. However, once a TDP agreement has been in effect for a full year, any balance you carry past June 30 will be assessed eight percent (8%) interest.
|EXAMPLE 1||EXAMPLE 2|
|Date agreement signed||June 1, 2013||July 15, 2013||Example 1. On June 1, 2013, you sign a TDP agreement to buy three years of service credit for $30,000, paying $157 every pay period for 21 pay periods a year. On June 1, 2014, your agreement will have been in effect for one full year. You will be charged interest on your remaining balance starting June 30, 2014.
Example 2. If you sign the agreement on July 15, 2013, it will be in effect for one full year on July 15, 2014. You will be charged interest on your balance starting June 30, 2015.
|Original TDP amount||$30,000||$30,000|
|Amount paid (FY 2013-2014)||3,297||3,297|
|Balance on June 30, 2014||26,703||26,703|
|8 % interest||2,136||-|
|Amount paid (FY 2014-2015)||3,297||3,297|
|Balance on June 30, 2015||25,542||23,406|
|8 % interest||2,043||1,872|
Several factors can help you decide how much you want to have withheld for your TDP agreement.
- TDP requirements. The withholding amount must meet TDP requirements listed above. Once an agreement is signed, you cannot decrease or stop payments, even if your financial situation changes.
- Purchase cost/number of years purchased. In most cases, you can buy part of a year of service credit, up to the maximum amount you are eligible to buy.
- Career plans. Plan to have the agreement paid off well in advance of any career change or retirement. Once you stop working for an employer who is a member of the Public School Employees Retirement System, the TDP ends and you can't purchase the remaining balance.
If you pay this
amount per pay period
You will pay off the balance in about And you will pay
$157 (minimum scheduled deduction) 15 years $48, 679
($18,679 in interest)
$200 9 years $41,658
($11,658 in interest)
- Cost of interest. Although you must pay off the TDP agreement in less than 15 years, you can reduce interest charges by paying more than the minimum amount required. For example, if you pay an extra $43 a pay period toward a $30,000 balance, you will pay off the agreement six years earlier and save $7,000 in interest.
Use the TDP Calculator to review how different payment options will affect your TDP agreement.
TDP deductions do not count as 403(b) deductions nor do they count against 403(b) deductions. Since TDP deductions are taken before 403(b) deductions, however, they lower the amount of your compensation available to be contributed to 403(b) plans.
|Example: 403(b) CONTRIBUTIONS AND TDP AGREEMENTS|
|Ms. Librarian works part-time, and wants to put as much of her $20,000 annual salary as possible into her 403(b) account. In 2013, the maximum allowed by Congress is $17,500 per year. She also has $200 held out of her biweekly paychecks on a TDP agreement, for $5,200 a year. From her gross wages of $20,000 she subtracts $2,000 (10 percent) for required deductions, the $5,200 for her TDP agreement. That leaves her $12,800. That's the most she can put into her 403(b) - less than the maximum allowed by law.|
If you decide to purchase any or all of the service credit shown on your Member Billing Statement through the TDP program, complete the TDP authorization form that accompanies your billing statement. Your payroll office can help you complete the form.
Return the agreement to your payroll office with a copy of your Member Billing Statement (be sure to keep copies for your records). The payroll officer will review, sign and date the form, and take action to begin your payroll deductions. Watch your pay stubs. It is your responsibility to ensure that the payroll deductions have started and are correct.
Note: If you intend to purchase out-of-system or nonpublic educational service from different employers, you can ask ORS to combine billing statements of a similar type before you initiate a TDP agreement. That way, you'll have one TDP Agreement with one scheduled deduction per pay period rather than multiple TDP agreements, each with its own separate minimum scheduled deduction per pay period.
The date your payroll officer signs the form is the effective date of the agreement. That date must be on or before the "due date" shown on your Member Billing Statement, or the agreement is invalid. If the due date has passed before your enrollment is completed, you must obtain an updated Member Billing Statement from ORS and complete a new TDP Agreement form.
Your TDP agreement is established for a fixed deduction amount per pay period. While this deduction cannot be stopped or reduced, you can increase the amount of your payroll deduction. For information on how to increase your deduction, download the Supplemental TDP Agreement (R0654C).
Watch your pay stubs to ensure that your deductions started.
Your TDP agreement remains valid while you are on unpaid leave or temporarily off payroll for any reason, as long as an employer-employee relationship exists. Your payroll office should resume your deductions when you return to work.
If you change your employer to another Michigan public school, you must complete a TDP Addendum (R0625C)
If 90 days have passed, you'll have to set up a new TDP agreement. Ask ORS for a recalculated Member Billing Statement and complete a new agreement form as described earlier in this section.
If, for some unforeseen reason, you find that you must leave public school employment before you're able to pay off your TDP balance, you have a few options for the remainder. How you handle it depends on whether you need the credit to qualify for a pension and insurances.
- Get partial credit. Prorated credit will be granted for universal buy-in, military, maternity/paternity/child rearing, nonpublic education, and post-1974 out-of-system public education employment purchases.
Prorated credit will not be granted for TDP agreements not paid in full for pre-July 1981 sabbatical leave, pre-1974 out-of-system public educational service, state of Michigan service, repayment of refunded contributions, or weekly workers' compensation. To receive credit for these service credit types, your balance must be paid in full.
- Increase your scheduled deductions. You can increase your deductions each pay period, or request that all or part of any final compensation, such as accrued leave payoffs, be applied toward your purchase. For either option, work with your payroll office to complete the Supplemental TDP Agreement (R0654C) before you terminate. Remember that required deductions such as social security and Medicare taxes are withheld from any final compensation first, so have your payroll office help you figure the net amount you have available.
- Direct payment or plan-to-plan transfer. You can make a direct payment, or you can "roll over" funds from a qualified retirement plan such as a 401(k) or 403(b) plan to pay off your TDP balance (see Purchasing With a Qualified Plan-to-Plan Transfer). To apply a qualified plan-to-plan transfer or direct payment against your TDP balance, you must either: (1) have filed a retirement application, or (2) have a bona fide termination of your employment within 90 days after ORS receives payment. ORS must receive the funds by the expiration date of the billing statement or your termination date, whichever is first.
It is also important to coordinate your payoff with ORS and your school because your TDP balance changes with each pay date. Your payroll officer can help you determine your balance. Use the worksheet at the end of the Payoff Payment Options for a TDP Agreement (R0518C) to help you figure your payment options. Once you have determined your balance and your payoff payment method, complete the payoff agreement.