Tier 2 Members Must Take Action by November 15, 2017
September 28, 2017 02:18 PM
On July 6, 2017, Senate Bill 42 was enacted into law, becoming Public Act 100-0023 (“Act”). The Act provides additional funding to the Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago (“LABF”) and creates a new “tier” of pension benefits. Furthermore, the Act allows any person who first became a member of the LABF or another Designated Reciprocal Fund on or after January 1, 2011, but prior to July 6, 2017 (commonly referred to a “Tier 2 Member”), to irrevocably elect to either:
remain subject to their current retirement benefit eligibility and employee contribution requirements (hereinafter, “Tier 2 Benefits”), or
be subject to certain new alternative retirement benefit eligibility and employee contribution requirements as provided in the Act (hereinafter, “Tier 3 Benefits”).
Summary Comparison of “Tier 2” and “Tier 3” Benefits
Tier 2 Members who irrevocable elect Tier 3 Benefits will be required to contribute more of their salary toward their pension in exchange for being eligible to retire at an earlier age (with at least 10 years of service).
Upon electing the Tier 3 Benefits, current Tier 2 members, who currently contribute 8.5% of pensionable salary toward their annuity, will be required to make increased employee contributions according the following schedule:
9.5% of pensionable salary beginning July 6, 2017;
10.5% of pensionable salary beginning January 1, 2018; and
11.5% of pensionable salary or normal cost (subject to 8.5% floor), whichever is less, beginning January 1, 2019
Reduced Retirement Age:
Upon electing the Tier 3 Benefits, current Tier 2 members will be eligible for the following:
Member is eligible for unreduced minimum formula annuity at age 65 (versus 67 under the Tier 2 Benefits structure) with 10 years of service
Member is eligible for reduced minimum formula annuity at age 60 (versus 62 under the Tier 2 Benefits structure) with 10 years of service; reduction for early retirement equal to ½ of 1% per month for each full month below age 65 (versus 67 under the Tier 2 Benefits structure)
For more information regarding the difference between Tier 2 and Tier 3 Benefits, please click here: Summary Comparison Table.
MAKING THE IRREVOCABLE ELECTION
Election forms were mailed to all Tier 2 Members and included instructions regarding the election. Eligible current and former City of Chicago (“City”) employees received the mailing from the City and their responses must be returned to the City by mail in the return envelope provided. Eligible current and former retirement board employees received the mailing directly from the LABF and their responses must be returned to LABF by mail in the return envelope provided. By law, the irrevocable election must be made between October 1, 2017 and November 15, 2017. Any election postmarked after November 15, 2017 will be deemed invalid. If the election is not made, or is not made during the specified election period, the Tier 2 member will be deemed to have chosen to remain subject to Tier 2 Benefits.
1. Designated Reciprocal Fund shall refer to any of the following pension funds or retirement systems: (1) Laborers’ and Retirement Board Employees’ Annuity and Benefit Fund of Chicago, (2) Municipal Employees’, Officers’ and Officials’ Annuity and Benefit Fund of Chicago, (3) Illinois Municipal Retirement Fund, (4) County Employees’ and Officers’ Annuity and Benefit Fund, (5) Forest Preserve District Employees’ Annuity and Benefit Fund, (6) Park Employees’ and Retirement Board Employees’ Annuity and Benefit Fund, (7) Metropolitan Water Reclamation District Retirement Fund, (8) State Employees’ Retirement System of Illinois, (9) State Universities Retirement System, (10) Teachers Retirement System of the State of Illinois, and (11) Public School Teachers’ Pension and Retirement Fund of Chicago
2. Treatment of Employee Contribution Receivables: Any receivable that accrues in a member's account as a direct result of insufficient pension deductions being withheld from the member's salary during the initial implementation of PA 100-0023 shall be payable to LABF by June 30, 2018. No interest will be charged so long as the payment is made by the deadline.
Frequently Asked Questions
Q: Which option (“Tier 2” or “Tier 3”) is the better for me?
A: The LABF cannot offer you financial advice as to which option is better for you. Every person's financial situation is unique. Therefore, you may want to consult a financial advisor to assist you with the decision. As a reference, please see the Summary Comparison of “Tier 2” and “Tier 3” Benefits (Summary Comparison Table) to view the different benefit and contribution structures.
Q: Why do I owe additional contributions to LABF if I elect “Tier 3” benefits?
A: The Act was written such that you cannot elect “Tier 3” benefits until after October 1, 2017 (and no later than November 15, 2017); however, as soon as you make the election, you owe additional contributions retroactive back to July 6, 2017. LABF simply administers the Act as it is written and therefore must collect the difference retroactively.
Q: How much in additional contributions will I owe if I make the “Tier 3” election and how do I make the payment?
A: Employers (either the City or a retirement fund board depending on your specific situation) will begin automatically deducting 9.5% contributions from your pensionable salary beginning with the late-November/early-December payroll. You will owe an additional 1% on your pensionable earnings retroactive back to July 6, 2017. The LABF will send you a letter in December of 2017 with the precise amount you owe and provide you with payment options. Your payment will be due by June 30, 2018. No interest will accrue so long as you make your payment in full to LABF by the stated deadline.
Q: What is “normal cost”?
A: The way the Act was written, your employee contributions become the lesser of 11.5% of your pensionable salary or a percentage based on the normal cost beginning on January 1, 2019. "Normal cost", which is an actuarial term, is essentially the annual cost of providing retirement benefits. The idea behind making employee contributions the lesser of 11.5% or a percentage based on the normal cost is to protect members from paying more for their benefits than they are worth. It is unlikely that the normal cost (as a percentage of payroll) will be less than 11.5% in the near future.
Q: Do I need to do anything if I want to keep my current “Tier 2” benefits?
A: No. You will remain subject to the “Tier 2” benefit and contribution structure unless you explicitly elect the “Tier 3” benefit.