What does the elimination of ERO mean for Illinois teachers?

ERO (Early Retirement Option) has been around since 2005, and Illinois teachers have been using it to retire early without a reduction in their pension benefit. If a teacher had two years left until they had full pension benefits, they could pay these pensions contributions up front – if the district agreed to do the same – and then retire with a full pension two years early. It was a great planning tool for teachers who wanted to leave early and had the cash to do so, but also for districts who wanted to “retire” higher paid teachers and replace them with newer, lower-paid employees.

But that is no more – the ERO program has been discontinued.

At this time, no teacher can retire early, pay lump sum contributions and have a full pension. They’ll either have to work those remaining two years, or leave and decide when to collect their pension and what benefit they need.

Illinois-TRS1

So what do teachers do now?

Honestly, not much. This was a benefit that was subsidized through payroll deductions and a large burden fell on the district when it came time for an employee to participate in ERO. It was also a system largely based on the discretion of the school board / unions to decide which teacher could use the program, so this burden has been taken from them. (I’m aware of one district who ran their system differently, but most systems worked on a discretionary basis). By discontinuing the program, it has allowed school boards / unions to become more impartial in the wellbeing of their retiring teachers.

 

But there are two silver linings to this program being removed

Since 2005, teachers have paid 0.4% of their paycheck to subsidize the ERO program (see other deductions here: https://financeforteachers.com/deductions-on-teacher-paycheck/). As of July 1, 2016, this payment will not be made, so teachers will receive 0.4% of their income back into their monthly pay. It’s not much (a teacher earning $75,000 would receive $300/year) but it’s helpful to know that it will not go to fund other programs.

One important part that will happen as a result of ERO ceasing to exist will be the refund of ERO contributions made by teachers who haven’t used it. While retiring teachers received this refund at retirement if they didn’t use ERO, all teachers – regardless of tenure – will receive this refund after December 2016. You have to apply for this benefit and it won’t accrue interest if you delay. TRS will be reaching out when they have salary records of all teachers and can process the refunds with ease.

For teachers with a long tenure, this refund can be significant. Using round math figures, if you have earned $75,000 since 2005 (11 years) and paid 0.4% each year, then your refund will be $3,300 ($75,000 x 11 x 0.4%).

One important factor to note is that this money has not been taxed, so if you elect to take the refund as a personal check, it will be considered income and be reported as taxable when you file your tax returns. TRS will withhold 20% of this payment to cover potential tax liabilities, but if you’re in a higher tax bracket, this may not be enough. (If it’s too much, your refund will be larger when you file your taxes). There is also a possibility of there being an additional 10% penalty for withdrawing a retirement benefit before age 59.5, but this has not been confirmed by the IRS or TRS as yet. In order to avoid this situation, elect to take the refund as a transfer to your 403(b) or IRA. Have the check made out to your retirement account, and not to you directly, and you’ll be able to avoid the tax withholding and recognizing it as income. It will also grow tax-deferred allow you extra funds for retirement.

As stated before, do not forget to file for this refund as TRS will not be doing them without an application. Should you forget, you’ll still receive this refund at retirement, but it’s best to do it now.