PERS Pretax Payroll Contributions
Purchase of Service by Additional Pretax Payroll Contributions
In order to start this process, you must contact the Accounting Section of the Division of Retirement & Benefits. A person will be assigned to handle the details related to your particular situation. You and your employer can not independently initiate this process.
Please read the following detail carefully. Do not skip over any items. The details contain the mandatory rules in order to make an additional pretax payroll deduction through your employer to pay an indebtedness to the PERS and/or TRS.
Purchase of Service by Additional Pretax Contributions is an irrevocable election. This irrevocable election, and all of the rules and requirements listed below are a matter of the Internal Revenue Code and are required by the Internal Revenue Service. Neither the Plan, the Plan Administrator, the State of Alaska, the employer, or the employee have any authority to change the irrevocable nature of the election or any of the rules .
- You must be an active member of the specific retirement fund the indebtedness applies to in order to enter into a payment agreement.
- Your indebtedness must have been set up prior to entering into a payment agreement.
- While the agreement is in effect, only the contributions withheld directly from your payroll will count toward reducing your liability on a pretax basis. Your employer, or the plan can NOT accept payment directly from you in order to make a pretax payment.
- After the agreement is in effect, you can't substitute after tax dollars; until the agreement has been satisfied. After the agreement has been satisfied, you can use after-tax dollars to pay off amounts that might remain.
- Because of the strict tracking rules set up by the IRS, only one indebtedness can be paid with additional pretax contributions at a time. Therefore, you are required to have a separate agreement for each indebtedness you intend to pay on.
- If the agreement is based on the use of leave earned as an active employee (available for payment if not taken), then the following rules also apply:
- The agreement MUST be in effect, and accepted at least 30 days prior to the date of the termination of employment.
- The payment must be taken from the final payroll or earlier warrant / check. It can NOT be taken from a separate check issued after the final payroll check that applies to accrued leave alone.
- The amount of the payroll reduction per pay period, and the estimated number of pay periods to pay the indebtedness, must be specified in the agreement and can NOT be changed for any reason once the agreement has been signed, acknowledged by the employer, and accepted (i.e., for reasons such as a change in family status, employee pay reduction or increase, LWOP, etc.). The amount of the payroll reduction per pay period MUST be sufficient to reduce the indebtedness balance (principal and all accrued interest) to zero not later than the first date you are eligible for a normal retirement (i.e., Age-Based Retirement or Service-Based Retirement).
- As long as a balance remains on the indebtedness specified in the agreement, the deduction can only be stopped by termination of employment.
- The termination / separation from service must be a valid termination of employment and fully comply with the tax law requirements. For example, terminating from your employer for a day, a week, or month, and then returning to the same position, and the circumstances under which it was made, may not be considered a valid termination by the IRS for the purposes of the agreement.
- The employer and employee are solely responsible to determine that an employee termination is considered a valid separation of service under the Internal Revenue Code. The employer and employee are solely responsible for any consequences that may result from a subsequent determination by the IRS that the separation from service was not considered valid under the law.
- If the irrevocable election is changed for any reason other than a valid termination / separation from service, all monies paid under the agreement become taxable to the member, including all tax penalties that may apply under the law.
- If you change employers, the agreement automatically ends. You can not make further payments under the agreement with a new employer. You must enter into a new agreement with the new employer.
- If you make an overpayment under the agreement, the excess amount will be returned to you. That amount will be distributed to you as regular taxable income. The excess amount is not roll over eligible.
- Once the agreement is effective, you can not subsequently stop salary reductions and instead use a separate pretax transfer from another qualified plan (i.e., SBS, Deferred Compensation, 401(a), 401(k), 403(b), etc.) to pay the remaining balance. By making this irrevocable election, you are precluded from doing so.
- You can elect to make a pretax transfer from a qualified plan first to apply against the indebtedness, but you can not later make additional pretax transfersafter this type of an agreement is in effect to pay the balance remaining.
- If, as a result of your termination or the insufficiency of your salary to make full contributions results in not having paid enough money to fully pay for the listed service, the PERS or TRS will credit you with as much of a benefit as the payments and the law will allow. You will then receive an actuarial reduction in your benefit if you do not pay the balance through another allowed form.
- Any tax-deferred funds applied to your indebtedness will retain their tax-deferred status until paid from the appropriate system as a monthly benefit payment or is refunded. The contributed amounts will have the same tax liabilities as other tax-deferred monies. Therefore, should you elect to take a refund and not a monthly benefit, the required 20% federal tax will be withheld. In addition, depending on your age, you may be subject to the additional 10% early distribution penalty.
- Your employer will be required to specifically acknowledge an agreement for such a payroll reduction. Your employer will be responsible to see that payments are deducted. If the agreement is prematurely stopped by your termination (which cancels the agreement), but you subsequently return to the same employer, your employer must have proper documentation that the termination was valid, and is solely responsible to explain any IRS inquiry that the termination and rehire were proper, and not done solely for the purpose to cancel the agreement.
All agreements are subject to audit by the Internal Revenue Service. Both the employee and employer are responsible to make sure that all parts of the agreement are adhered to. Any attempt to not adhere strictly to the agreement will be reported to the Internal Revenue Service.
Once an agreement has been signed by the employee, acknowledged by the employer, and accepted by the Division, it is strictly irrevocable as a matter of the tax law.
This agreement is not effective until accepted by the Division of Retirement and Benefits.
The Division will retain this original agreement.
This agreement must be returned to the division within 45 days from the date listed in Section B.
August 2004. Amended 1/20/05.