Pushing the OTRS Limits

By Cory S. Hartsfield

The employment contract is a superintendent’s most important legal and financial document. It can help you plan for and protect your financial future while also providing provisions related to governance and those designed to provide protections in uncertain situations. Maximizing Oklahoma Teacher Retirement System (OTRS) regular annual compensation should always be a priority, especially if approaching OTRS retirement. Understanding the limits and pushing them where possible can help maximize your OTRS retirement.

Knowing the Limits Maximum Compensation

OTRS must satisfy the applicable qualification requirements specified in Sections 401 and 414(d) of the Internal Revenue Code, including the compensation limitations of IRC 401(a)(17). Pursuant to IRC 401(a)(17), the maximum amount of compensation that will be considered for OTRS shall not exceed the limit contained in the Internal Revenue Code §401(a) (17)(A), 26 United States Code §401(a)(17)(A) (currently $345,000). This is in addition to any caps on maximum compensation imposed by OTRS.

Pushing the Limits

Maximizing Regular Annual Compensation

OTRS retirement benefits are calculated using a defined retirement formula: 2% x (service years) x (final average salary) ÷ 12 = monthly benefit.

While the 2% factor is fixed, the benefit amount will vary based on the number of service years and the final average salary (FAS). Regular Annual Compensation is the salary used for calculating the Final Average Salary (FAS). Thus, when structuring the financial terms of the contract, superintendents should focus on OTRS items that qualify as regular annual compensation (salary, group health insurance, etc.) and avoid items that are excluded from regular annual compensation such as cell phone, vehicle, and housing allowances. If limited by the IRS cap, it is wise to maximize OTRS regular annual compensation up to the limit and then put any excess either into employer-paid tax deferred plans that can supplement OTRS retirement or into other provisions that increase cash flow as necessary to meet changing needs (kids in college, etc.).

“Regular annual compensation” means salary plus fringe benefits. For purposes of this definition, regular annual compensation includes:

1. Salary which accrues on a regular basis in proportion to the service performed, including payments for staff development.

2. Amounts that would otherwise qualify as salary under paragraph (a) of this subsection but are not received directly by the member pursuant to a good faith, voluntary written salary reduction agreement in order to finance payments to a deferred compensation or taxsheltered annuity program or to finance benefit options under a cafeteria plan qualifying under the United States Internal Revenue Code, 26 U.S.C., Section 101 et seq.

3. Group health and disability insurance, group term life insurance, annuities, and pension plans, provided on a periodic basis to all qualified employees of the employer, which qualify as fringe benefits under the United States Internal Revenue Code. 70 O.S. § 17-101 (23).

Excluded from regular annual compensation are the following:

■ Expense reimbursement payments

■ Phone, vehicle, housing, or other maintenance allowances

■ The flexible benefit allowance provided pursuant to Section 26-105

■ Payment for unused vacation and sick leave

■ Any payment made for reason of termination or retirement not specifically provided for in subparagraphs (a) through (c) of this subsection

■ Maintenance or other nonmonetary compensation

■ Payment received as an independent contractor or consultant, pursuant to a lawful contract

■ Any benefit payments not made pursuant to a valid employment agreement

■ Compensation for clinical related activity performed in the University of Oklahoma Health Sciences Center (OUHSC) Professional Practice Plan or Oklahoma State University Center for Health Sciences (OSUCHS) Professional Practice Plan

■ Any other compensation not described in subparagraphs (1) through (3).

70 O.S. § 17-101 (23).

The following are examples of compensation and pay that qualifies/does not qualify as regular annual compensation:

Regular Annual Compensation

Salary that accrues on a regular basis

Employer-Paid OTRS Member Contributions

Fringe Benefits 1

Employee Deferred Compensation (salary reduction) 2

Bonus/Stipends paid to all employees

Excluded From Regular Annual Compensation

Payment for unused leave days

Expense Reimbursements/Allowances (car, cell phone, housing, etc.)

One-time incentive, Bonus/Stipend not given to all employees

Severance or pay upon termination

Employer-Paid Deferred Compensation Not Paid to all Qualified members of Employer

1 Fringe Benefits include employer-paid group health (excluding flexible benefits allowance) and disability insurance, group term life insurance, annuities and pension contributions, and IRS Code § 125 cafeteria benefits provided on a periodic basis to all qualified members of the employer.

2 Payments made to a tax-sheltered annuity or other pension plan which is not part of the member’s contracted monthly salary are excluded from regular annual compensation.

Generally, your contract should parallel the evolution of your career. As your needs change, the compensation structure in the contract may need to be revised to meet those needs, whether it be more cash flow or tax deferral. Knowing the limits will provide guidance and instruction regarding the necessary structure of compensation provisions in the contract to maximize OTRS retirement while meeting cash flow/tax deferral needs of the superintendent. The Employee Deferred Compensation (salary reduction) benefit provides significant flexibility related to cash flow and tax deferral, allowing the superintendent to elect (as often as before each payroll) to take more in cash or more as a tax deferral. And if worded properly, it can also qualify as OTRS regular annual compensation.

Having the contract reviewed, at least annually, would significantly help superintendents who wish to maximize their OTRS regular annual compensation while maintaining their goals for cash flow/tax deferral, especially those preparing for retirement.

As a part of this contract review package, a complementary retirement consultation from Richie Collins, Horizon Financial, will help you complete your overall contract goals. These services work hand in hand to provide you with the best advice and plans for your contract. ■

Cory S. Hartsfield serves as General Counsel for the Texas Association of School Administrators and has represented superintendents and administrators from Texas and other states. He also serves as counsel for CCOSA and represents superintendents in the state of Oklahoma. Cory’s practice emphasizes education law, labor and employment, contracts, and executive compensation, and he has represented superintendents and other public sector executives in their employment relationships since 2008. He is proud to serve the interests of public education through his representation of school superintendents throughout Texas, Oklahoma, and the U.S.

* The information in this article is not legal advice. Legal information is not the same as legal advice. The information in this article is not a substitute for, and does not replace the advice or representation of, a licensed attorney