The Early Retirement Option (ERO) for Illinois teachers was allowed to automatically expire on July 1 of 2016. The ERO was an option that allowed qualified TRS teachers to retire before age 60 without reducing their benefits. To qualify, a TRS member had be age 55 or older with at least 20 (but no more than 35) years of service. The ERO was funded by requiring active TRS members to contribute 0.4 percent of their earnings. Now that the ERO has expired, those who have contributed to the retirement option may be entitled to the Early Retirement Option Sunset Refund.
New TRS Contribution Amount will be reduced
Between 2005 and 2016, TRS members contributed 0.4 percent of their credible earnings to the ERO program, for a total of a 9.4 percent contribution. As of July 1, 2016, active TRS members only have to contribute 9 percent of their salaries now that the ERO program is no longer in existence.
Refunds Now Available
Refunds have just become available as of December 1st. In order to receive your refund you must apply as refunds will not be given out automatically. There is no deadline for applying, but members should keep in mind that their contributions in the ERO system will not accumulate interest. Refunds can be minimal or large, depending on previous salary and length of service.
Calculating Your Refund
Once you apply for a refund TRS will calculate your refund amount and you can complete your distribution election option in your Member Account Access on the TRS website. You should do this immediately but an approximate figure can be calculated by adding up your earnings from July 1, 2005 to June 30, 2016 and multiplying the total by 0.004. It is important to remember that this calculation is purely an estimate.
Retired Members not Eligible
To be eligible for an ERO Sunset Refund, members must still be working. Retired members are not eligible for the refund. Those who retired before June 30, 2016 and participated in the program will not receive a refund as they have already received a refund at retirement.
Receiving Your Refund
TRS members who are eligible for the refund have three options for receiving it.
A cash refund will be mailed to the member
Members can apply for a withdrawal with the intention to “roll over” the money into a qualified non-TRS retirement plan, such as an IRA, 401(k) or 403(b)
Members can do nothing and leave the ERO refund with TRS and apply for their refund at a later date. Remember though, the refund does not accrue interest
Possible Tax and Penalties
If you choose option 1 above you will be subject to federal income tax on any taxable balance and possibly a 10% penalty depending on your age. Also with option 1 TRS will automatically withhold 20% of the ERO refund for federal income taxes This withholding may not cover your entire tax liability if you are in a higher marginal rate. With option 2 you would have to have access to a 403(b) account, IRA account etc. Which qualified account you roll it into depends on many factors such as beneficiary distribution options, investment options, and fees. If you chose option 3 and the refund is not rolled over into a qualified retirement account please be aware that the refund amount is subject to any unpaid debts, delinquent state taxes, delinquent student loans, etc.
Not able to purchase TRS Credits
TRS cannot accept a direct rollover of ERO contributions. You are not able to use these funds to purchase optional service credit with TRS or a 2.2 upgrade.
Consult with Walsh & Associates
TRS does not provide advice on which option members should take for their ERO refund. Members are encouraged to consult with their own financial advisors for advice. At Walsh & Associates, we are happy to provide clients with guidance through the ERO refund process – so please do not hesitate to call.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.