School District 49% Contract Advisory
It has come to the Division’s attention through legislative testimony and some recent employer audits that the use of what is termed by employers as a 49% contract may be misunderstood. We have learned that the 49% contract is offered to retired teachers to enable employment by a school district without stopping teacher retirement benefits. Here are some issues employers need to avoid when using this type of contract:
True Termination of Employment Required
The Teachers’ Retirement System (TRS) is qualified by the Internal Revenue Service (IRS) as a tax-preferred plan and must follow IRS tax rules. Under Code Section 401(a)(36), normal retirement age is set at age 62. Retirees receiving a reduced or unreduced retirement benefit who are under the age of 62 are considered by the IRS to have retired early. To avoid tax penalties to the individual teacher, retirees under age 62 must have a true termination of employment and certify at the time they retire that there is no prearrangement for continued employment with the employer immediately after retirement. In private letter ruling 201147038 for another plan, the IRS determined, “an employee legitimately retires when he stops performing service for the employer and there is not the explicit understanding between the employer and the employee that upon retirement the employee will immediately return to service with the employer.” For teachers retiring who are under age 62, employers must be sure there is a valid termination of employment and no prearrangement for continue employment at the time of retirement.
Part-Day Versus Part-Year
Employers are confusing full-time, part-year service with part-time service when developing 49% contracts. AS 14.25.220(29) defines the threshold for part-time teachers as a teacher occupying a position requiring teaching on a regular basis for at least 50 percent of the normal workweek at a teaching assignment, excluding teaching as an assistant or graduate student, or teaching on a substitute, temporary or per diem basis. However, TRS calculates service based on full days worked. AS 14.25.220(47) contains a chart showing how days worked equates to a portion of a year of service up to a full year.
Many employers will issue what they believe to be a 49% contract that is not TRS eligible when in fact the contract is TRS eligible and affects teacher retirement benefits. For example, a contract for a teacher to work full days for 63 days is not a valid 49% contract. Because the teacher is working full days, under TRS statutes this is a full-time position and the days worked accrue towards TRS service credit. This type of service accrual would require retirement benefits to be suspended for the 63 days worked. A teacher working less than 50% of a day meets the TRS statutory definition of part-time, is ineligible for inclusion in the TRS and there would be no effect on retirement benefits.
Our audit team has encountered teachers who have been issued more than one contract for the school year at less than 50% each. The TRS combines those contracts when analyzing how the teacher is actually working to determine eligibility. For example, a teacher issued a contract for 40% to teach classes and another contract for 30% to develop curriculum is working 70% and is now TRS eligible.
Enrollment in PERS or Social Security May Be Required
Teachers working a valid contract that is less than 50% of the school day are not eligible for TRS but may have to be enrolled in the Public Employees’ Retirement System (PERS) if they work at least 15 hours per week. Employers who have PERS participation agreements that require all full-time and part-time employees to be enrolled in PERS will have to enroll teachers working a minimum of 15 hours per week. Employers who have PERS participation agreements that exclude part-time employees may have to enroll teachers working less than 50% in Social Security.
Employers who have any concerns about issuing a contract that is below minimum TRS participation requirements should contact their regional counselor for guidance. Employers with Social Security questions should contact the Division’s Social Security Administrator, Melanie Helmick, at firstname.lastname@example.org.