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Purchasing Through Tax–Deferred Payments
You can request that payments for your service credit purchase be deducted from your wages. This payment method, called tax-deferred payments (TDP), gives you an easy payment plan plus a significant tax break. The amount you authorize for deduction from your paycheck is not subject to income tax until you begin 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. This means that once you have completed the enrollment process with the MI HR Service Center and deductions have begun, deductions cannot stop until the agreement is complete or you terminate employment.
Note: If you work for the attorney general, judicial branch, or legislative branch, please work with your human resources office.
If you work for a noncentral agency, your agency's governing board must have passed a resolution allowing participation in the TDP program. Check with your human resources office to see if you can use TDP to buy service credit.
Interest on TDP Balances.
When you and your MI HR representative sign a TDP agreement, your cost for the purchase is locked. It will not increase as your age, rate of pay, or years of service increase. However, once a TDP agreement has been in effect for at least one full year, any balance you carry past Sept. 30 will be assessed 8% interest.
|Interest on TDP Balances|
|Mr. Fleming set up an agreement to purchase service credit in December 2006 at a cost of $7,000. No interest is added the next October because he hasn't had the agreement for a full year. On Oct. 1, 2008, his balance is $5,000, and $400 (8% of $5,000) is added to it.|
Note: The interest provision on TDP balances became effective Oct. 1, 2004. Any TDP agreement established before then will not be assessed interest.
Deciding how much to have withheld.
The maximum allowable TDP deduction is your gross compensation, less any required deductions such as Social Security and Medicare, or other levies or garnishments. The MI HR Service Center can help you determine your maximum deduction.
The minimum withholding per TDP agreement is $50. If you're not sure how much you want held out of your paycheck, remember that even if your financial circumstances change later, you can't decrease or stop your deduction. You can, however, increase your deduction on an ongoing basis whenever you wish.
You can also have multiple TDP deductions simultaneously. You may want to set up an agreement to purchase some of the service credit on your current billing statement, and then when you can afford it, initiate an additional agreement. To do so, request an updated billing statement and then establish a new TDP agreement with MI HR. Remember, though, that each new agreement has its own $50 minimum deduction and will be based on the cost in effect at the time the agreement is signed and approved.
There is no minimum or maximum time limit. Your TDP agreement can be for as few or as many pay periods as you wish.
We encourage you to plan to have your purchase completed well in advance of retirement. It's also smart to reduce your balance as quickly as possible because of the interest that's added each year.
TDPs and deferred compensation deductions.
TDP deductions do not count as deferred compensation deductions, nor do they count against deferred compensation deductions. However, because TDP deductions are taken before 401(k) or 457 deductions, they lower the amount of your compensation available to be contributed to 401(k) and 457 plans.
|TDP and Deferred Compensation Withholding|
Suppose you want to max out your deferred compensation contributions, and suppose the maximum allowed (which is determined by Congress) is $15,000 per year.
You can have $15,000 go into your 401(k) plan account and another $15,000 go into your 457 plan account, for a total of $30,000 deferred compensation. If you are also buying service credit via TDP, you only need to make sure you have $30,000 left after your TDP and other required deductions have been subtracted from your pay.
How to sign up for the TDP program.
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 Agreement form that accompanies your billing statement. The MI HR Service Center can help you complete the form.
Return the agreement to MI HR with a copy of your member billing statement (be sure to keep copies for your records). Your representative will review, sign and date the form, and take action to begin your payroll deductions.
Watch your pay statements. If your deductions don't begin in a reasonable period of time, be sure to follow up with the MI HR Service Center. It is your responsibility to make sure that the deductions begin and are correct.
|Have more questions?|
Contact MI HR Service Center with any questions you may have on a TDP agreement, 877-766-6447.
An important note about due dates.
The date your MI HR Service Center representative signs the form is the effective date of the agreement. That date must be earlier than 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.
Increasing your scheduled deductions.
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. Once you increase your payroll deduction, the increased deduction remains in effect until your TDP agreement is paid off. To increase your deduction, download the Supplemental TDP Agreement (R0654G) form.
Your agreement is in effect as long as you're a state employee.
In most instances, your TDP agreement remains valid while you are on unpaid leave or temporarily off payroll. MI HR will resume your deductions when you return to work.
If you transfer from one department to another, the agreement is still valid and deductions will continue. If you are employed with an agency that doesn't participate with MI HR, it is your responsibility to provide the human resources office in your new department with a copy of your agreement and to make sure that deductions continue to be made.
If you leave state employment with a TDP balance.
If you find that you must leave state 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 your pension and insurances.
Get partial credit. Prorated credit will be granted for TDP agreements not paid in full for universal buy-in, military, parental leave, or governmental purchases.
Prorated credit will not be granted for TDP agreements not paid in full for court of record, Michigan public school, university, and repaying refunded contributions. To receive any 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 MI HR to complete a Supplemental TDP Agreement (R0654G) form before you terminate. Note: Banked leave time is paid to your 401(k) at the time of retirement and cannot be applied to your TDP balance.
Pay the balance. You can make a direct payment, transfer funds from a qualified retirement plan, or any combination thereof if you (1) have filed a retirement application; or (2) have a bona fide termination of employment within 90 days after the Michigan Office of Retirement Services (ORS) receives payment.
The Paying Off a TDP Agreement (R0718G) form tells you how to pay off a current TDP agreement and includes a worksheet to help you project your TDP agreement balance when you terminate employment or retire.
ORS must receive the funds by the expiration date of the billing statement or your termination date, whichever is first.
If you are retiring or terminating employment and need to pay off a current TDP agreement, submit the Payoff Payment Options for a TDP Agreement (R0518G) form.
If you wish to transfer funds from a qualified retirement plan - 401(a), 401(k), 403(b), or 457 - to purchase service credit, submit the Qualified Plan-to-Plan Transfer Certification (R0158X) form.