Direct Payments Taxable Under TRS Settlement

Q.: I am a Tier 1 member of the Teachers’ Retirement System of the City of New York. My spouse is a member of Tier 2. I am retired and my spouse is active. It is my understanding that we will receive our settlement checks during the first couple of months of 2010. Will these settlement amounts be taxable or tax free? P.H.

A.: At this late date in the settlement process you should know the answer. A few months ago you and your spouse received your legal notices from the Third Party Administrator, appointed by the court, advising both of you of the Class Action Settlement and your individual rights and obligations under the law.

Having said that, the deadline afforded Retired Members to decide on the method of distribution of their Settlement Check was Aug. 28, 2009. If you, as a retiree, did not return your form in a timely manner, your settlement check will be forwarded to the TRS and held in a special account. To determine your status, I urge you to call the Administrator at: 1- 800-295-4716.

As an active member, your spouse’s Settlement Check will be deposited, as a one-time credit, to his or her Increased- Take-Home-Pay (ITHP) account maintained by the TRS. No action is required by your spouse to receive this credit. By law the ITHP account will earn interest at the annual rate of 81/4 percent through June 30, 2010. Your situation is a little more involved because retirees were given a set of choices as to how they wish to receive their Settlement amounts. See: Current Pension Topics of Oct. 30, 2009.

The Settlement Notice reads in part as follows:

If you are a Retired Class Member you will have the following options:

1. Direct Payment (full or partial):

a) If you are age 62 or older or you are under the age of 62 and the payment due to you is under $1,000, you may simply do nothing and receive your full settlement payment directly. Alternatively, you may choose to complete the Direct Payment or Rollover Election Form attached to the Special Tax Notice and specify the percentage of the payment you elect to receive directly and the percentage you elect to have directly rolled over (see Rollover instructions below);

b) If you are under the age of 62 and the payment due to you is equal to or greater than $1,000, you must complete and return the Direct Payment or Rollover Election Form attached to the Special Tax Notice to receive a direct payment. If you do not return your form, the payment you are entitled to will be credited to a special account in your name at TRS.

c) All direct payments will be subject to Federal income tax withholding at a 20-percent rate as described more fully in the Special Tax notice.

2. Rollover:

In order to have your payment under the preceding sections directly rolled over into an IRA or eligible employer plan, you must complete and submit the Direct Payment or Rollover Election Form from your Special Tax Notice packet and return it to the address at the bottom of the form no later than August 28, 2009. If you did not receive a Direct Rollover Election Form, you may request one by calling 800-295-4716.

Mr. Frank is a fee-only Retirement Financial Planner and a retired city high school Teacher of Accounting. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@ optonline.net.