Partial Lump Sum Option(PLSO)

Teacher Retirement System of Texas

Table of Contents

Explanation of PLSO. . . . . . . . . . . . . . . . .1

Eligibility Criteria . . . . . . . . . . . . . . . . . . .1

PLSO Distribution Amounts and Payment Methods . . . . . . . . . . . . . . . . 2

PLSO Beneficiary Designations . . . . . . . 5

Calculating PLSO Reductions to a Member’s Standard Annuity . . . . . . . . 5

Illustration of PLSO for a“Grandfathered” Member . . . . . . . . 6

Work Sheet for Estimating PLSO Benefits for a “Grandfathered” Member . . . . . . . . . . . . . . . . . . . . . . . . 8

Illustration of PLSO for a “Non-grandfathered” Member . . . . . 10

Work Sheet for Estimating PLSO Benefits for a “Non-grandfathered”

Member . . . . . . . . . . . . . . . . . . . . . . . 12

Reduced Standard Annuity Table for Those Participating in PLSO . . . . . . 15

Frequently Asked Questions . . . . . . . . . 16

Explanation of PLSO

The retirement plan administeredby the Teacher Retirement System ofTexas (TRS) includes a Partial LumpSum Option (PLSO) feature. Atretirement, eligible members may selecta partial lump sum distribution inaddition to an actuarially reducedmonthly retirement annuity.

Eligibility Criteria

Effective September 1, 2005,eligibility to elect PLSO depends onwhether a member is “grandfathered” touse the pre-September 1, 2005requirements, or is not grandfatheredand thus must use the new eligibilityrequirements that went into effect onthat date. The PLSO election is made atthe time of retirement, and eligibility willbe evaluated at that time.

If a member is not “grand-fathered” under the criteria below,then the member may select PLSO atretirement if the member

� is eligible for a service retirementannuity,

� meets the “Rule of 90” (combinedage plus years of service creditequal at least 90),

� is not participating in the DeferredRetirement Option Plan (DROP),

� is not retiring with disabilitybenefits, and

� is not retiring under theproportionate retirement law.

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If the member is “grandfathered”under the criteria below, then themember may select PLSO at retirementif the member is:

� eligible for normal-age serviceretirement benefits,

� not participating in DROP,� not retiring with disability benefits,

and� not retiring under the proportionate

retirement law.

Criteria to be “Grandfathered”

A retiree must have met one of thefollowing criteria as a member on orbefore August 31, 2005, in order to be“grandfathered:”

� was at least 50 years old, or� had age and years of service

credit that equaled at least 70(“Rule of 70”), or

� had at least 25 years of servicecredit.

PLSO Distribution Amounts andPayment Methods

At retirement, an eligible member mayselect a partial lump sum distributionamount equal to 12, 24, or 36months of a standard service retirementannuity. When PLSO is selected, themember’s monthly annuity will be actuariallyreduced to reflect the value of the PLSOamount selected.

Special Note: Changes tothe retirement plan that arescheduled to take effect afterthe date of publication of thisbrochure may make it

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possible for a non-grandfathered member to beeligible for PLSO whileeligible for early age serviceretirement but not normalage service retirement. Inthe event a non-grandfathered member iseligible for PLSO but is noteligible for normal ageservice retirement, thestandard service retirementannuity, as reduced forearly age, will be used inPLSO calculations. The worksheets and illustrations fornon-grandfathered membersbelow assume the memberis eligible for normal ageretirement.

Disbursement of the PLSO selection willbe made according to one of the followingmethods, depending on which PLSOdistribution amount the member selects:

� If the member selects a lump sumamount equal to 12 months of astandard annuity, the amount will bepaid at the same time as themember’s first monthly annuitypayment; or

� if the member selects a lump sumamount equal to 24 months, theamount may be taken in either oneor two annual payments; or

� if the member selects a lump sumamount equal to 36 months, theamount may be taken in one, two orthree annual payments.

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Members who select two or threeannual lump sum payments will have theirsecond and third payments made on theanniversary due date of their initial lumpsum payment. Interest will not be paid onany lump sum amounts deferred forpayment in the second or third year.Retirees who select two or three annuallump sum payments and who later wish toaccelerate the remaining payments may doso by notifying TRS and making an electionon a form prescribed by TRS.

Retirees are permitted to roll over theeligible portion of any lump sum paymentsto another eligible retirement plan. For moreinformation, members should refer to theincome tax information form, “Special TaxNotice Regarding TRS Payments,” whichwill be included with their retirement forms.TRS encourages members to consult with aprofessional tax adviser if they have anyquestions.

The selection of a partial lump sumoption reduces a retiree’s annuity. Thereduced annuity plus the partial lump sumare the actuarial equivalent of theunreduced standard annuity benefit.

Post-retirement benefit increases, whenauthorized by the legislature, are based onthe amount of the retiree’s reduced annuity.Consequently, any future increases thatmay be approved by the legislature wouldbe calculated on the reduced annuity andresult in a lower net monthly increase.

Members may estimate their PLSOamounts through the retirement estimatecalculator on the TRS Web site(www.trs.state.tx.us). This calculator willalso show a member how the monthlyannuity will be reduced, depending onwhich PLSO amount is selected.

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PLSO Beneficiary Designations

A retiree may designate a beneficiaryfor the sole purpose of receiving unpaidPLSO payments at the time of the retiree’sdeath. For this to occur, the retiree mustmake this designation on form TRS 12L,“Designation of Beneficiary for Partial LumpSum Payment(s).” The completed formmust be received by TRS prior to themember’s death to be effective. Thedesignation on form TRS 12L will determinethe beneficiary only for a remaining PLSObalance but will not control the distributionof other TRS death benefits.

Should a retiree die prior to receiving allPLSO payments that are due, TRS will payany remaining PLSO payments in a singlelump sum payment. If a PLSO beneficiaryhas not been designated on form TRS 12L,or if the beneficiary(ies) designated on formTRS 12L predeceases the retiree, thispayment will be made in accordance withthe most current beneficiary designation onfile with TRS for the retiree’s retirementannuity and as provided by law.

A beneficiary may roll over a PLSOdistribution to an IRA or other eligibleretirement plan to the extent permittedunder federal tax law.

Calculating PLSO Reductions to aMember’s Standard Annuity

Eligible members who select a PLSOwill receive an actuarially reduced annuity.The actuarial table shown on page 15 willbe applied to reduce a member’s standardannuity once a decision is made toparticipate in PLSO. The member’s age inwhole years (shown in column one) and thepercentage of standard annuity factor

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(shown in columns two, three and four) willdetermine the reduction in the standardannuity to be paid to a member who selectsPLSO.

Illustration of PLSO for a “Grand-fathered” Member

A member applies to retire at age 60and has 25 years of service. The memberhas verified that she meets the PLSOeligibility criteria for a grandfatheredmember. Her three highest annual salariesare $32,000, $34,000, and $36,000. Ratherthan receive her full standard annuity, she isconsidering whether to select a PLSOdistribution equal to 24 months of herstandard annuity. If she elects a PLSO, sheunderstands that her monthly standardannuity will be actuarially reduced. Todetermine what is best, she will need toknow (1) how much she will receive as herPLSO distribution amount, and (2) howmuch her monthly standard annuity will bereduced as a result of her decision. Then,she will carefully consider whether thereduced amount that she would receive asa monthly annuity will be sufficient to coverher post retirement needs.

The member may use the TRSretirement estimate calculator on the TRSWeb site or may follow the steps in theexample below and the PLSO Work Sheetto estimate what her PLSO benefit and herreduced monthly annuity will be.

Steps One through Five - Preliminaryinformation

Step OneList the member’s three highestsalaries.$32,000 + $34,000 + $36,000 =Combined total of $102,000

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Step TwoCalculate the member’s highestaverage salary by dividing the figureby three.$102,000 ÷ by 3 = $34,000

Step ThreeMultiply the member’s total years ofservice credit by 2.3 percent (currentmultiplier established by law).25 years x .023 = .575 (total percent)

Step FourMultiply the total percent by themember’s highest average salary..575 x $34,000 = $19,550(This is the member’s estimated annualstandard annuity.)

Step FiveDivide by 12 to convert the member’sestimated annual standard annuity toa monthly amount.$19,550 ÷ by 12 = $1,629.17

This is the amount of the member’sstandard annuity for purposes of calculatingPLSO distributions. (This standard annuityamount will be actuarially reduced when amember elects to receive a PLSOdistribution.) To determine the reducedmonthly annuity payment, see Step 7.

Step Six – The PLSO amount

Multiply the member’s estimatedmonthly standard annuity from Step 5times the number of months (12, 24, or36) the member wants the PLSOpayments to equal. The result is thetotal amount to be paid as PLSOpayments. Since this member is

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considering a PLSO paymentequivalent to 24 months of herstandard annuity, her PLSO total is:$1,629.17 x 24 (months) = $39,100.08

Step Seven – The Reduced MonthlyStandard AnnuityRefer to the Reduced Standard AnnuityTable, page 15, to determine how muchthe member will also receive inmonthly standard annuity payments,actuarially reduced due to the receiptof PLSO payments. According to thetable, this member will receive anactuarially reduced standard monthlyannuity for life in the amount of$1,318.16 ($1,629.17 x 80.91%). Thereduction factor of 80.91% is based onher age at retirement (60) and herselection of a PLSO equivalent to 24months of a standard annuity.

Work Sheet for Estimating PLSOBenefits for a “Grandfathered” Member

If you are “grandfathered,” you mayestimate your own PLSO benefits andresulting reduction to your standard monthlyannuity by using the following work sheet:

Preliminary Information

1. List your three highest annual salariesand then add them together.Year 1 - $ __________Year 2 - $ __________Year 3 - $ __________TOTAL - $ __________

2. Divide this total by 3.$_______ ÷ 3 = $__________(your highest average salary)

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3. Multiply your total years of service creditby 2.3 percent (.023)._______ x .023 = ____________

4. Multiply your total percent by yourhighest average salary. (This is yourestimated annual standard annuity beforeany reduction for PLSO.)________ x $_________ = $__________

5. Divide by 12 to convert your estimatedannual standard annuity to a monthlyamount. This is your unreduced monthlystandard annuity, before any reduction forPLSO.$__________ ÷ 12 = $__________

The PLSO Amount6. Multiply your estimated (unreduced)monthly standard annuity by the number ofmonths (12, 24, or 36) that you want yourPLSO payments to be based on. The resultis the total amount to be paid as PLSO.$_______ x ______= $__________

The Reduced Monthly Standard Annuity7. Refer to the Reduced Standard AnnuityTable to determine how much you will alsoreceive in monthly standard annuity pay-ments, actuarially reduced to reflect theamount of your PLSO payments. To deter-mine the amount of your reduced monthlystandard annuity, multiply your unreducedmonthly standard annuity by the appropriatereduction factor shown on page 15.$_______ x _____% = $__________

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(total percent)

Illustration of PLSO for a “Non-grandfathered” Member

A member applies to retire at age 60and has 35 years of service. Because of hisage and years of service credit, thismember is eligible for normal age serviceretirement benefits. The member hasverified that he meets the PLSO eligibilitycriteria for a member who is notgrandfathered. His five highest annualsalaries are $40,000, $42,000, $44,000,$46,000, and $48,000. Rather than receivehis full standard annuity, he is consideringwhether to select a PLSO distribution equalto 36 months of his standard annuity. If heselects a PLSO, he understands that hisstandard annuity will be actuarially reduced.To determine what is best, he will need toknow (1) how much he will receive in hisPLSO distribution, and (2) how much hismonthly standard annuity will be reduced asa result of his decision. Then, he willcarefully consider whether the reducedamount that he would receive as a monthlyannuity will be sufficient to cover his postretirement needs.

The member may use the TRSretirement estimate calculator on the TRSWeb site or may follow the steps in theexample below and the PLSO Work Sheet onpage 12 to estimate what his PLSO benefitand his reduced monthly annuity will be.

Steps One through Five – PreliminaryInformation

Step OneList the member’s five highestsalaries.$40,000 + $42,000 + $44,000 + $46,000+ $48,000 = Combined total of $220,000

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Step TwoCalculate the member’s highestaverage salary by dividing the figureby five.$220,000 ÷ by 5 = $44,000

Step ThreeMultiply the member’s total years ofservice credit by 2.3 percent (currentmultiplier established by law).35 years x .023 = .805 (total percent)

Step FourMultiply the total percent by themember’s highest average salary..805 x $44,000 = $35,420(This is the member’s estimated annualstandard annuity.)

Step FiveDivide by 12 to convert the member’sestimated annual standard annuity toa monthly amount.$35,420 ÷ by 12 = $2,951.67

This is the amount of the member’sstandard annuity for purposes of calculatingPLSO distributions. (This standard annuityamount will be actuarially reduced when amember elects to receive a PLSOdistribution. To determine the reducedmonthly annuity payment, see Step 7.)

Step Six – The PLSO AmountMultiply the member’s estimatedmonthly standard annuity by thenumber of months (12, 24, or 36) themember wants the PLSO payments toequal. The result is the total amount tobe paid as PLSO payments. Since thismember is considering a PLSO

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payment equivalent to 36 months ofhis standard annuity, his PLSO total is:$2,951.67 x 36 (months) = $106,260.12

Step Seven – The Reduced MonthlyStandard AnnuityRefer to the Reduced Standard AnnuityTable, page __, to determine howmuch the member will also receive inmonthly standard annuity payments,actuarially reduced due to the receiptof PLSO payments. According to thetable, this member will receive anactuarially reduced standard monthlyannuity for life in the amount of$2,106.61 ($2,951.67 x 71.37%). Thereduction factor of 71.37% is based onhis age at retirement (60) and hisselection of a PLSO equivalent to 36months of a standard annuity.

Work Sheet for Estimating PLSOBenefits for a “Non-grandfathered”Member

If you are NOT “grandfathered,” youmay estimate your own PLSO benefits andresulting reduction to your standard monthlyannuity by using the following work sheet:

Preliminary Information1. List your five highest annual salaries andthen add them together.Year 1 - $ __________Year 2 - $ __________Year 3 - $ __________Year 4 - $ __________Year 5 - $ __________TOTAL - $ __________

2. Divide this total by 5.$_______ ÷ 5 = $__________ (your highest average salary)12

3. Multiply your total years of service creditby 2.3 percent (.023)._______ x .023 = ____________

(total percent)

4. Multiply your total percent by yourhighest average salary. (This is yourestimated annual standard annuity beforeany reduction for PLSO.)________ x $ __________ = $__________

5. Divide by 12 to convert your estimatedannual standard annuity to a monthlyannuity. This is your unreduced monthlystandard annuity, before any reduction forPLSO.$__________ ÷ 12 = $_____________

The PLSO Amount6. Multiply your estimated (unreduced)monthly standard annuity by the number ofmonths (12, 24, or 36) that you want yourPLSO payments to be based on. The resultis the total amount to be paid as PLSO.$_______ x ______= $__________

The Reduced Monthly Standard Annuity7. Refer to the Reduced Standard AnnuityTable to determine how much you will alsoreceive in monthly standard annuitypayments, actuarially reduced due to thereceipt of PLSO payments. To determinethe amount of your reduced monthlystandard annuity, multiply your unreducedmonthly standard annuity by the appropriatereduction factor shown on page 15.$_______ x _____% = $__________

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Reduced Standard Annuity Table forThose Participating in PLSO

Percentages shown in the followingtable will be applied to reduce a member’sstandard annuity when he or she elects apartial lump sum distribution. For example,a member who is eligible to retire at age 60with an unreduced standard annuity of$2,000 per month but who selects a partiallump sum distribution equal to 12 months ofhis unreduced standard annuity wouldreceive

� $24,000 as his PLSO distributiion$2,000 x 12) plus

� $1,809.20 per month as his reducedstandard annuity ($2,000 x 90.46%).

If a member then also selects anoptional retirement annuity (TRS Option 1,2, 3, 4, or 5) instead of the standardannuity, the option factor will be applied tofurther reduce the reduced standardannuity.

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Age 12 Months 24 Months 36 Months

Percentages for ages not shown above maybe found on the TRS Web site

(www.trs.state.tx.us).

Reduced Standard Annity TablePercentage of Standard Annuity

50 91.40 82.79 74.19

51 91.33 82.66 73.99

52 91.26 82.52 73.78

53 91.18 82.37 73.55

54 91.10 82.20 73.31

55 91.01 82.03 73.04

56 90.92 81.84 72.75

57 90.81 81.63 72.44

58 90.70 81.41 72.11

59 90.58 81.17 71.75

60 90.46 80.91 71.37

61 90.32 80.64 70.95

62 90.17 80.34 70.51

63 90.01 80.03 70.04

64 89.85 79.69 69.54

65 89.67 79.34 69.01

66 89.48 78.96 68.44

67 89.28 78.56 67.84

68 89.06 78.13 67.19

69 88.84 77.67 66.51

70 88.59 77.18 65.77

71 88.32 76.65 64.97

72 88.03 76.07 64.10

73 87.72 75.43 63.15

74 87.37 74.74 62.12

Frequently Asked Questions

How can members determine ifparticipation in PLSO would bestmeet their needs?

Members may want to seek assistancefrom a financial advisor. Members shouldcarefully consider their projected expensesand income over their life expectancy,which could be 30 years or more afterretirement. Many money or financial Websites provide calculators that can show theeffect of inflation on household expenses.In a monthly or annual budget, always planfor costs that are not easy for an individualto control, such as rising health care costs,health and property insurance costs, andtaxes (including local property taxes).Please note that selection of a PLSOdistribution results in a permanentreduction to a retiree’s monthly annuity, soretirees should be sure their reducedannuity would cover their projectedexpenses. If the reduced annuity thatresults from taking a PLSO is not sufficient,a member should carefully considerwhether taking a PLSO is advisable.

Additionally, members should considerhow they would use any lump sumpayments. First, they should consider if theyhave a plan to invest the money to generatemore retirement income. Taking PLSOwithout a savings or investment plan mayresult in spending the money on non-income producing assets, like a car, or onlifestyle expenses, like costly vacations.Then, as the cost of living rises over theyears, a member may have depleted thePLSO lump sum so much that neither theremaining lump sum nor earnings on theremaining lump sum are sufficient tosupplement their reduced annuity. Second,

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even if they have an investment plan, dothey have the knowledge and desire tomonitor their investments and makeadjustments as needed? Can they weatherinvestment losses, if their choice ofinvestment does not perform well? Do theyknow what fees will be charged to theirinvestment and how that will affect howtheir money grows? These are basicquestions that individuals should askthemselves when choosing between

� a fixed, higher monthly annuity butno lump sum, or

� a lump sum payment but with apermanently reduced monthlyannuity.

Members seeking assistance from afinancial advisor in deciding whether to selecta PLSO should also be circumspect in theirselection of an advisor. Careful considerationshould be given to advice from a financialadvisor who encourages a member to selecta PLSO distribution so that the advisor caninvest the money and enhance the retiree’sretirement income. Members should considerseeking financial advice from an advisor whowill not have a financial stake in the type ofretirement plan selected.

Will a member’s standard annuitybe reduced if he or she participates inPLSO?

Yes. Their monthly lifetime annuitypayments will be actuarially reduced due tothe election of PLSO. An additional reductionwill be made if they select an optionalretirement plan.

How will a member’s PLSO dis-tribution(s) be taxed?

PLSO distributions generally are taxedas ordinary pension income in the tax year in

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which the distribution is received. A largePLSO distribution in a tax year may move aretiree into a higher federal income taxbracket, with a higher tax rate than to whichthe retiree may be accustomed.

To defer paying taxes on PLSOdistributions, a retiree may roll over all or aportion of the eligible amount to anothereligible retirement plan, including atraditional Individual Retirement Account(IRA). At retirement, the member willreceive a “Special Tax Notice RegardingTRS Payments” explaining more about theopportunity to roll over his or her lump sumdistribution. For additional information onthis topic, please contact a tax consultant orthe Internal Revenue Service at 1-800-829-1040.

If a member does not elect to roll overhis or her entire PLSO distribution, anyamount paid directly to the member issubject to federal income tax withholding byTRS. Since PLSO payments are rollover-eligible distributions, federal tax lawrequires TRS to withhold 20 percent forfederal income tax of any PLSO amountthat is not rolled over into an eligible plan.This is the amount TRS is required towithhold but the actual tax liability may begreater or lesser than 20 percent.

If a member is less than 59½ years ofage, an additional 10 percent penalty maybe imposed by the Internal RevenueService and be due at the end of the taxyear. Please see the “Special Tax NoticeRegarding TRS Payments” and the March2006 TRS News, available on thePublications page of the TRS Web site,www.trs.state.tx.us, for more informationabout when this penalty applies.

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I’d like to obtain the largestpossible PLSO distribution availableto me. I understand that PLSOdistributions enable me to receiveadvance payment of some of mymonthly annuities. How many monthsworth of payments may I receive?

Members may select a partial lump sumdistribution equal to 12, 24, or 36 months oftheir standard annuity amount. The amountequivalent to 36 months of a standardservice retirement annuity is the largestpossible PLSO distribution. When membersapply for a distribution, their annuity will beactuarially reduced to reflect that distri-bution and will be computed so that noactuarial loss results to TRS. Selecting thelargest PLSO distribution results in thelargest reduction to your monthly annuity.

If I select a lump sum amountequal to 24 or 36 months of mystandard annuity, would it be betterfor me to take a payout in two or threeannual payments, or immediatelyrollover the entire lump sum amountinto another tax-deferred account,such as an IRA?

If a member chooses to have their PLSOamount distributed over two or three annualpayments, TRS does not pay interest onPLSO balances waiting to be distributed.Therefore, the balance of a PLSO amountpaid over two or three years will not increasein value while held by TRS. Members whohave the financial knowledge and desire tomanage their account (or a source oftrustworthy advice) may want to considerrolling over the entire PLSO amount to an

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IRA investment that could potentially earninterest or increase in value over time. TRSdoes not make investmentrecommendations, so members shouldconsult with their own tax and financialadvisors on investment options.

How will the selection of PLSOimpact future annuity increases forretirees, should they be provided?

The selection of PLSO permanentlyreduces a retiree’s annuity as comparedwith the annuity that would have beenreceived if the retiree had not selectedPLSO. Post-retirement increases normallyare based on the amount of a retiree’sannuity. Consequently, any future increasesthat may be approved would be smallerthan they otherwise would be since theywould be calculated on a reduced annuity.Given the longer life span of retirees today,this factor should be considered whendeciding whether to select PLSO.

Is all this information available onTRS’s Web site (www.trs.state.tx.us)?

Yes, and the Web site’s RetirementEstimate Calculator is interactive somembers can evaluate as many options asthey wish before deciding whether toparticipate in PLSO.

For a complete statement of the state lawsand TRS administrative rules that pertain toPLSO, please consult the TRS Laws andRules (Texas Government Code, Chapter824, and TRS Rules, 34 TexasAdministrative Code Chapter 29).

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Teacher Retirement System of Texas1000 Red River Street

Austin, Texas 78701-2698(512) 542-6400 or 1-800-223-8778

www.trs.state.tx.us