5.10 F. Income Taxes on Refund of IMRF Member Contributions

1. Illinois Income Tax (Illinois Residents only)

The Illinois Income Tax Act exempts IMRF separation refunds from Illinois income tax. Because the federally taxable portion of the separation refund A member can receive a separation refund-a return of all his/her member contributions without interest-under certain conditions. If a member takes a refund, the member forfeits all of the service credit he/she earned. is included in federal adjusted gross income, the federally taxable portion will also be entered on Line 1 of the Illinois IL-1040.

In order to claim the exemption on Illinois Income Tax Return, IL-1040, it is necessary to follow the specific instructions provided with the IL-1040 concerning subtractions to arrive at Illinois taxable income.

2. Federal Income Tax

a. Previously Taxed Member Contributions
b. 414(h) Tax Deferred Member Contributions
c. Tax Withholding and Reporting
d. Direct Rollovers
e. Taxes on Lump Sum Distributions

1. Previously Taxed Member Contributions Members who participate in the Regular Plan contribute 4.50% of salary toward a future IMRF pension: 3.75% for the member and 0.75% for a surviving spouse pension. Members who participate in the SLEP plan contribute 7.50% of salary (on and after June 1, 2006) toward a future SLEP pension: 6.75% for the member and 0.75% for a surviving spouse pension. Before June 1, 2006, SLEP members contributed 6.50 percent of salary; 5.75 percent for the member and 0.75 percent for a surviving spouse pension. Members in the ECO plan contribute 7.50 of salary toward a future ECO pension: 6.75% for the member and 0.75% for a surviving spouse pension.

All IMRF member contributions prior to 1982 were paid by the member who was taxed on the amount.

After January 1, 1982, IMRF member contributions continued to be member paid ”after-tax” contributions, unless the employer A unit of government that joins IMRF. had adopted a 414(h) Under Section 414(h) of the Internal Revenue Code, members make their contributions to IMRF on a tax-deferred basis. The member does not pay either federal or Illinois income tax on the money used to pay the contributions. A member’s contributions will be subject to federal income tax, but not to Illinois income tax, when he or she receives them as a refund or as a pension or when the member’s beneficiary(ies) receives them as a death benefit. This tax treatment is provided under the 414(h) tax deferral plan effective July 1, 1984, for all IMRF employers and adopted earlier by some employers. If a member made contributions before his or her employer adopted a 414(h) plan, those contributions were taxed at the time the member made them. They are not taxable when the member receives them as a refund or pension or when the member’s beneficiary(ies) receives them as a death benefit. tax deferral plan (see 4.16 Section 414(h) Tax Deferral of IMRF Member Contributions). Effective July 1, 1984, all IMRF member contributions have been made under a 414(h) tax deferral plan.

Refunds of IMRF member contributions which were made before a 414(h) plan was in effect are not subject to federal income tax because they have already been taxed.

2. 414(h) Tax Deferred Member Contributions

Under the 414(h) plan (see 4.16 Section 414(h) Tax Deferral of IMRF Member Contributions), member contributions are not subject to federal income tax when withheld and reported to IMRF. The refund is taxable in the year paid as explained in e. Taxes on Lump Sum Distributions below.

3. Tax Withholding and Reporting

IMRF is required by federal law to withhold 20% of the taxable portion of a separation refund. The member can avoid the 20% withholding by having the taxable portion directly rolled over to a traditional IRA, Roth IRA, or other qualified retirement plan, or a 457 or 403(b) plan A retirement plan that functions like a defined contribution plan and is similar to a 401(k) plan, but is offered by non-profit organizations, such as universities and some charitable organizations, rather than corporations. If you work for a school district or a public hospital, you may be familiar with an Internal Revenue Code Section 403(b) tax-deferred annuity.. A rollover to a Roth IRA will be taxable but not subject to any additional taxes.

IMRF issues Internal Revenue Service Form 1099-R reporting the amount of the taxable refund and the amount withheld or the amount directly rolled over. The member is mailed a copy in January of the year following the year of payment and a copy is filed with the Internal Revenue Service.

4. Direct Rollovers

At the member’s request, IMRF will roll over all (or any portion) of the taxable separation refund directly to a traditional IRA, Roth IRA, or other qualified retirement plan, or 457 or 403(b) plan. A rollover to a Roth IRA will be taxable but not subject to any additional taxes.

The refund will be mailed to the member, but the check will be made payable to the custodian of the account or plan. No withholding is taken from the portion of the refund directly rolled over.

The non-taxable portion of the refund may be rolled over to a traditional IRA or another qualified retirement plan that accepts such rollovers, provided the receiving financial institution agrees to separate accounting.

Also, a member who does not ask for a direct rollover of a separation refund may decide to roll it over into a traditional IRA, Roth IRA, a qualified pension Also known as an annuity. An IMRF pension is paid as long as the member lives. It is increased by 3% of the original amount each year. A member must have at least eight years of service credit and be age 55 to apply for an IMRF pension under the Regular and ECO plans. A member must be age 50 and have at least 20 years of SLEP service credit to apply for a SLEP pension. plan, a 457 or 403(b) plan, as provided by Section 402(c) of the Internal Revenue Code. A rollover to a Roth IRA will be taxable but not subject to any additional taxes.

5. Taxes on Lump Sum Distributions

Note: Regular Tier 1 members who are age 55 or older with eight or more years of service or Regular Tier 2 members who are age 62 or older with 10 or more years of service, are not eligible for a refund if they have earned a monthly pension of $100 a month or more unless the member rolls the refund over into another defined benefit retirement plan to purchase qualifying service credit Service credit is a member's total time under IMRF, stated in years and fractions. Service is credited monthly while a member is working, receiving IMRF disability benefits or while he or she is on IMRF's Benefit Protection Leave. A member earns one month of service credit for each month he or she: (1) works in a qualified position and makes a member contribution. (2) worked in a qualified position prior to his or her employer joining IMRF. (3) receives an IMRF disability benefit. (4) is on an IMRF Benefit Protection Leave (limited to 12 months). (5) purchases a month of past service credit. A member cannot earn more than one month of service credit for any given calendar month..

The age of a member as well as the length of the member’s IMRF service can affect the income tax status of the taxable portion of the refund. The categories are:

1. Under age 55 when employment with IMRF employer terminated

The part of the refund representing 414(h) tax deferral plan contributions is taxable at the member’s tax rate plus an additional 10% tax on the taxable amount. (Unless the member is age 59-1/2 or more in the year the refund is paid.) The additional 10% tax applies, even though the member may not have sufficient income to be liable for income tax. The member may defer the tax and avoid the additional 10% tax by a rollover into a traditional IRA or qualified pension plan, or 457 or 403(b) plan.

The penalty applies, even though the member may not have sufficient income to be liable for income tax. The member may defer the tax and avoid the 10% penalty by a rollover into a traditional IRA or qualified pension plan, or 457 or 403(b) plan.

2. Age 55 or more (50 or older if a former police officer, firefighter or emergency medical personnel)  when employment with IMRF employer terminated or age 59-1/2 at time of refund

The part of the refund representing 414(h) tax deferral plan contributions is taxable at the member’s tax rate. The additional 10% tax is not applicable. The member may defer the tax by a rollover of the taxable amount into a traditional IRA or qualified pension plan, or 457 or 403(b) plan.

The member may defer the tax by a rollover of the taxable amount into a traditional IRA or qualified pension plan, or 457 or 403(b) plan.

3. Special Tax Treatment available to members born before January 1, 1936 and participating in IMRF for five or more years prior to the year the refund is paid

The part of the refund representing 414(h) tax deferral plan contributions is taxable income. It is taxed at the member’s regular rate.

The member may defer the tax by rolling over the taxable amount into a traditional IRA or qualified pension plan, or 457 or 403(b) plan.

Alternatively, the member may report the taxable portion under 10-year averaging at 1986 tax rates.

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