PERS Update
2019 once again brought some changes to PERS, many of which we covered in our previous update. However, PERS now has a page on their website that has further information on Senate Bill 1049, which went in to effect on January 1st of 2020.
As has been the case with many past changes to PERS, these are being challenged in the courts. We will keep you updated as rulings are made and the impact they will have on your benefits. We had previously discussed changes to IAP contributions, where some amount of the 6% contribution for active members would be diverted to a general pension stability fund. In our minds, this is one of the most likely items to be successfully challenged.
An important factor to keep in mind, assuming the law goes into effect as written, is that you can choose to contribute more to your IAP account to keep the portion going into your IAP at the full 6%. For example, if you are a Tier 1 or Tier 2 employee who will have 2.5% go into the pension stability fund, you will have the option to make up the 2.5% to bring your IAP deposits back up to 6%. However, if you do so, the contribution will be with after-tax dollars – currently, all contributions are pre-tax. This would be a dollar for dollar reduction of your take home pay, and it would also make the tax implications of withdrawing this money in retirement more complex.
After further review, the cap on earnings at $195,000 may impact more than just those high earners. In the year that you retire, PERS will look at your income on a monthly basis. If you have a significant amount of vacation pay that will be paid out to you as you retire, it is possible that your income amount could exceed an average of $16,250 per month. This could lower your benefit calculation, especially if you retire early in the year and have fewer months to average out, but in most cases it is likely to be a limited impact. Retirees impacted by this may want to consider retiring slightly early, at the end of the previous year, so there are more months to average.
Many of you are taking the opportunity to not only save into the IAP account, but also utilize a 403(b)/TSA or 457 (Deferred Comp) account available through your PERS employer for an extra nest egg in retirement. The IRS contribution limits for 2020, and contribution limits have been increased $500 to $1,000 depending on your age.
For folks under 50, you can contribute up to $19,500 to your 403(b) and 457 (to both if available). If you are over 50, you have the opportunity to contribute an additional $6,500 on top of that for a total of $26,000 (again to each if available).
In addition, there is another way to calculate the catch-up contribution that may allow for an even larger contribution. This requires that you have been with the same employer for 15 years, but could potentially allow for an additional $3,000 contribution. This would be well-suited to someone who is gearing up for retirement and has a good amount of savings to use for living expenses. It’s not a situation that’s realistic for everyone, but if you are interested in learning more, please let us know.
Please feel free to forward this information to other PERS members that may benefit from it, and as always, free to reach out to me with any questions.