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 tax-deferred payments, or 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 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. 

The IRS also mandates that you cannot have constructive receipt of the tax-deferred funds you use to purchase service credit. 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.

Your employer must have agreed to participate in the TDP program. Some employers don't allow substitute, part-time, temporary, or intermittent employees to use TDP to buy service credit. Check with your payroll office first.

Interest on TDP balances.

When you and your payroll officer 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 increases. However, once a TDP agreement has been in effect for a full year, any balance you carry past June 30 will be assessed interest, currently 8 percent.

	INTEREST ON TDP BALANCES Mary Jo set up an agreement to purchase $7,000 of service credit when school began in 2004. No interest is added the next July because she hasn't had the agreement for a full year. On July 1 of 2006 her balance is $5,000 and $400 (8 percent of $5,000) is added to it.

Note: The interest provision on TDP balances became effective January 1, 2004. Any TDP agreement established before then will not be assessed interest.

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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. Your payroll office can help you determine your maximum deduction.

The minimum withholding per TDP agreement is $50 a pay period. 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, you simply request an updated billing statement and then establish a new TDP agreement with your payroll office. 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.

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TDPs and 403(b) plan deductions.

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.

	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 2006, the maximum allowed by Congress is $15,000 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.

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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 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 a $50 minimum deduction per pay period.

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An important note about due dates. 

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.   

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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. For information on how to increase your deduction, download the Supplemental TDP Agreement (R654C).  

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What to do if your employment changes.

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 (R625C) to continue the payments. The addendum must be signed within 90 days after you have terminated with your previous employer to retain the service credit cost from your prior agreement. It is your responsibility to provide your new payroll office with a copy of your previous agreement.

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.  

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If you leave public school employment with a TDP balance.

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 (R654C) 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. 

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 TDP Agreement Payoff Worksheet (R522X) to help you figure your payment options. Once you have determined your balance and your payoff payment method, complete the Payoff Payment Options for a TDP Agreement (R518C).

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