Chapter 6: Contributions

Summary

This chapter provides information on member and employer contributions to the Washington State retirement systems. Refer to this chapter for:

  • General information about retirement contributions
  • Information about nontaxed and taxed contributions
  • Instructions on how to become a nontaxed employer
  • Procedures for calculating, reporting, and paying employer and member contributions
  • Contribution rate tables for the following retirement systems:
    • Public Employees' Retirement System (PERS)
    • Public Safety Employees' Retirement System (PSERS)
    • School Employees' Retirement System (SERS)
    • Teachers' Retirement System (TRS)
    • Law Enforcement Officers' and Fire Fighters' Retirement System (LEOFF)
    • Washington State Patrol Retirement System (WSPRS)
    • Judicial Retirement System (JRS)
    • Judges' Retirement Fund (JRF)

Refer to Chapter 7 and Chapter 8 for instructions on how to report on the monthly transmittal.

Refer to Chapter 10 for instructions on how to complete a Payment Advice form.

Contributions and Federal Income Tax

Retirement contributions are always calculated on the member's reportable compensation. The amount on which federal withholding tax is calculated will vary according to whether contributions are taxed or nontaxed. Prior to September 1, 1984, retirement contributions were subject to withholding tax (except for JRS and JRF that have always been nontaxed). After August 31, 1984, retirement contributions are not subject to withholding tax if the employer participates in tax-deferral (nontaxed), or "pick up" (see RCW 41.04.440-455) of employee contributions. For more information on tax-deferred contributions, see the section in this chapter, "Nontaxed Contributions and Members."

The following examples show how contributions, which are taxed or nontaxed, affect a member's federal taxable income.

  • If the member contributions are taxed, both federal withholding tax and retirement contributions are calculated on the reportable compensation.

    Example:

    a. Reportable compensation $2000.00
    Multiplied by member rate x .06
    = Member Contribution $120.00
    b. Reportable compensation
    = Income subject to withholding tax $ 2000.00
  • If the member contributions are nontaxed, the member contributions are calculated on the reportable compensation and the contributions are subtracted before the federal withholding tax is calculated.

    Example:

    a. Reportable compensation $2000.00
    Multiplied by member rate x .06
    = Member Contribution $120.00
    b. Reportable compensation $2000.00
    Minus member contribution -120.00
    = Income subject to withholding tax $1880.00

Contributions and Federal Withholding Tax in Prior Periods

If you are an employer for whom participation in tax-deferral is optional, remember contributions may or may not have been taxed in prior periods. Be conscious of this issue when reporting contributions for periods between September 1, 1984, and the current period.

Nontaxed Contributions and Employers

Employers have been allowed to defer member retirement contributions from federal income tax since September 1, 1984 (See RCW 41.04.440-455). The taxes can be deferred because participating employers pay (or "pick up") the member's contributions to the retirement system and then recover the amount by deducting it from the member's gross pay.

Mandatory versus Optional Participation

Deferral of federal income taxes on member contributions is mandatory for some employers, optional for others. The following employers are required by state law to participate in tax deferral:

  • State agencies
  • School districts
  • Community and technical colleges
  • Universities
  • Educational service districts
  • The Office of the Administrator for the Courts

All other employers may choose to participate in the deferral of taxes on member contributions. Though participation is optional, you must notify DRS of your intent to begin deferral. For information about the required notification to DRS, see Establishing Nontaxed Status below.

Employer Liability

Deferring federal income taxes on member contributions entails additional financial responsibility for employers. Because contributions are based on the reported compensation, the employer must "pick up" the required member and employer contributions and pay this amount to DRS. If retroactive contributions are due, the employer is responsible for forwarding the contributions on behalf of the employee and having the employee reimburse the employer for the picked up contributions.

Establishing Nontaxed Status

If you are an employer for whom tax deferral is optional and you decide to participate, you must comply with the following requirements:

  • You must treat contributions the same way for all members of a specific retirement system-deducting contributions from gross income before calculating the federal income tax liability. (An individual member may not choose to make required contributions on after-tax dollars.)
  • If you have members enrolled in several retirement systems, you may treat contributions differently for each system. If you employ PERS members and LEOFF members, the PERS members may participate while the LEOFF members may not, or vice versa.
  • You must notify DRS in writing of your intent to participate. The letter should reach DRS 45 days before the first day of the calendar month in which you wish to implement tax-deferred contributions. Your letter should include:
    • the name and reporting group number of all systems affected;
    • the name of the person in your organization whom DRS should contact if more information is necessary;
    • the month and year that the deferred status is to begin; and
    • the signature of an authorized representative of your agency or organization.

Mail your letter of notification to:

Employer Support Services
Department of Retirement Systems
P.O. Box 48380
Olympia, WA 98504-8380

DRS will send you a letter of confirmation and instructions for transmittal reporting.

Before implementation, as a courtesy to your members, you should provide them with a complete explanation of the effects of the change. DRS will enclose explanatory material with your letter of confirmation. If you need more information, DRS suggests you contact a tax advisor.

Your payroll department should be notified the taxes will be deferred on member retirement contributions; i.e., contributions will be deducted from gross pay before federal income taxes are calculated. You should ensure the information is properly reported to the Internal Revenue Service (IRS) and W-2 forms reflect the tax-deferred status.

Once you have started tax-deferred contributions, you may choose to end your tax-deferred status at any time. You may begin or end only once in a 12-month period, and you must provide at least 45 days notice to DRS prior to the change in status.

Nontaxed Contributions and Members

Deferring taxes on member contributions affects a member in several ways:

  • A member's take home pay may be increased by the amount of tax that would have been withheld on his or her contributions.
  • A member's gross pay is reduced for federal income tax purposes only. The gross pay for Social Security, retirement compensation reporting, retirement benefit calculations and all other purposes will be the full gross pay including the retirement contributions.

Example:

a. Gross pay/reportable compensation $2000.00
Multiplied by member rate x .06
= Member Contribution $120.00
b. Gross pay/reportable compensation $2000.00
Minus member contribution -120.00
= Member's gross federal taxable income $1880.00
c. Gross pay for all purposes other than federal income tax $2000.00

For each member, DRS maintains a record of contribution amounts on which taxes have been paid and amounts on which taxes have not been paid. This information is reported to the IRS when the member separates from service and withdraws contributions, or when the member retires.

Since income tax is deferred, the contributions are subject to taxation in the year in which the member receives them from the retirement system. This affects members requesting a refund and retiring members differently. (See publications Withdrawal of Retirement Contributions for Plan 1 or Plan 2. For Plan 3 members, withdrawal forms are available in the Plan 3 forms and publications.)

Plan 3 Member Contribution Rates

PERS, SERS and TRS Plan 3 members select their member contribution rate from six contribution rate options. Review Contribution Rate Options for contribution rate option rules.

All member contributions in Plan 3 must be calculated on the rate in effect at the time the compensation is paid. If you need to adjust contributions previously paid, base your corrections on the contribution rate in effect when the original compensation was paid.

Plan 3 Employer Contribution Rates

The employer contribution rates for Plan 3 are the same as for Plan 2. All employer contributions in Plan 3 must be calculated on the rate in effect at the time the compensation is earned.

Plan 3 PERS JBM Contribution Rates

Plan 3 members who participate in the Judicial Benefit Multiplier program and their employers pay an additional contribution rate above the regular PERS rate. The additional amount is set in statute [RCW 41.40.124, RCW 41.40.127].

  • Member contribution rate must be at least 7.5%. If the member’s current contribution rate is 7.5% or higher, there is no change in their contribution rate option.
  • If the member contribution rate is less than 7.5%, you must report a higher rate.
  • Plan 3 members can't choose the following rate options:
    • At all ages, 'A' or 'D'
    • If less than 35, 'C'
    • If less than 45, 'B'

Find all Plan 3 rates by system and plan in the Contribution Rate Tables Index.

Procedures for Reporting & Paying Contributions

The following pages describe procedures for calculating and reporting member and employer contributions and for paying the total contributions due. If you have questions about calculating and reporting member and employer contributions, please contact ESS. If you have questions about paying the contributions due, please contact your DRS Account Manager.

Calculating Member Contributions

For each retirement system member, you must calculate the member contributions due. To calculate member contributions:

  • Confirm the correct plan for the member. (Contribution rates may be different for each plan.)
  • Determine the appropriate contribution rate for the earning period being reported. (If the calculation is for a Plan 3 member who transferred from Plan 2, use the member's selected Plan 3 rate option.)

    Note: New Plan 3 members and Plan 3 members who change employers have 90 days to choose a contribution rate option. If a rate option is not chosen within 90 days, Option A should be used as the default rate option.

  • Using the contribution rate tables, multiply each member's reportable compensation by the appropriate rate for each reported earning period–does not apply to Plan 3. Use the current Plan 3 member rate for all earnings being paid. Carry the calculation to four decimal places.

    Example:

    Reportable compensation $3022.2200
    Multiplied by member rate x .0600
    = Member Contribution $ 181.3332
  • Round the calculated amount to the nearest two decimal places for each transaction line on the transmittal.
    Member contribution $181.3332
    Rounded to two places $181.33

Reporting Member Contributions

Your method of reporting member contributions will vary depending on whether you report by automated means or by prelist (manual).

If you report by automated means:

  • Report the member contributions on each transaction line on your transmittal.
  • In the summary record, provide a grand total of the member contributions.

If you report by prelist:

  • Use a pen to enter the calculated member contributions for each member in the MEMBER CONTRIBUTIONS field.

    Note: If the calculated amount is the same as the amount already preprinted on the report, do not enter a corrected amount.

  • Adjust the page, plan and system totals as necessary.

Calculating Employer Contributions

In addition to calculating member contributions, you must calculate employer contributions on each member's compensation. To calculate employer contributions:

  • Confirm the correct plan for the member. (Contribution rates may be different for each plan.)
  • Determine whether calculations should be made using the current rate or a rate for a prior earning period.
  • Using the contribution rate tables, multiply each member's reportable compensation by the appropriate rate for each reported earning period. Carry the calculation to four decimal places.

    Example:

    Reportable compensation $3011.0000
    Multiplied by employer rate x .1193
    = Employer Contribution $359.2123
  • Round the calculated amount to the nearest two decimal places for each transaction line on the transmittal.
    Employer contribution $359.2123
    Rounded to two places $359.21

Reporting Employer Contributions

Your method of reporting employer contributions will vary depending on whether you report by automated means or by prelist.

If you report by automated means:

  • Report the employer contributions on each transaction line on your transmittal.
  • In the summary record, provide a grand total of the employer contributions.

If you report by prelist:

  • Use a pen to enter the calculated employer contributions for each member in the EMPLOYER CONTRIBUTIONS field.

    Note: If the calculated amount is the same as the amount already preprinted on the report, do not enter a corrected amount.

  • Adjust the page, plan and system totals as necessary.

Paying the Total Contributions

In addition to calculating and reporting the member and employer contributions on the transmittal, you must submit payment of the total amount to DRS. A Payment Advice form must accompany any money sent to DRS.

Note: A Plan 3 Payment Advice form must be used for Plan 3 payments.

To submit your contribution payment to DRS:

  • Add together the total employer contributions and the total member contributions for each plan to determine the grand total of contributions to be paid to DRS.
  • Prepare the check(s), warrant(s) or other payment document(s), payable to DRS for the correct amount.
  • Complete a Payment Advice form(s) to enclose with your check or other payment document(s). You must identify the invoice number the payment is for and the portion of the payment designated for each plan.
  • Complete a Plan 3 Payment Advice to report payment for Plan 3. You must identify the portion attributable to each investment manager (WSIB or SELF) for the defined contributions (member) portion of the payment.
  • See Chapter 10 for instructions on how to fill out the form. (Agencies that use electronic fund transfers do not normally use Payment Advice forms.)
  • Mail your payment and Payment Advice forms to DRS separately from your transmittal report. Payments only are mailed to:

    Department of Retirement Systems
    P.O. Box 9018
    Olympia, WA 98507-9018

Remember that payments for employer and member contributions are due at DRS on the 15th of the month following the current reporting period. Payments made by journal voucher should be posted by the State Treasurer's office no later than the 15th of the month following the reporting period. Payments received by mail more than three business days after the 15th will be considered late and may be subject to interest.

Reportable Compensation

Contributions are calculated only on reportable compensation. In general, a member's gross pay earned during a payroll period is reportable compensation. The specific compensation that can be reported to DRS is defined differently by each system and plan. See Chapter 4 for information on the reportable compensation within each system and plan.

Retirement Contributions

How Contributions Fund the Retirement System

Each member and employer is required to contribute a set percentage of the member's monthly compensation to the retirement fund. Plan 3 members must select one of six rate options available. Contribution rates are listed on the contribution rate tables.

Except for Plan 3, member and employer contributions and their investment earnings fund the current and future retirement benefits of members of the retirement systems. A small percentage of the employer contribution rate pays the administrative expenses of DRS. For Plan 3, the employer contributions and their investment earnings fund the defined benefit component of the retirement benefit; the defined contribution component is financed by the member's contributions and provides a tax-deferred investment program for the member.

How Contribution Rates Are Established

Member contribution rates for PERS Plan 1, TRS Plan 1, LEOFF Plan 1, and WSPRS Plan 1 and Plan 2 are set in statute and will not change unless changed by law. Employer contribution rates for all plans and member rates for PERS Plan 2, PSERS Plan 2, TRS Plan 2, SERS Plan 2, and LEOFF Plan 2 are established by the Pension Funding Council. Council members are the chair and ranking minority members of the House Appropriations and the Senate Ways and Means Committees, and the directors of DRS and OFM. Contribution rates vary for the different systems and plans.

Plan 3 member rates are established by the Employee Retirement Benefits Board (ERBB). The ERBB is chaired by the Director of DRS and is composed of eight members. The eight members are appointed by the Governor as follows:

  • three members representing PERS: one retired, two active;
  • three members representing TRS: one retired, two active; and
  • two members with experience in defined contribution plan administration.

PERS Plan 1, 2 and 3 members and TRS Plan 1 members who participate in the Judicial Benefit Multiplier program and their employers pay an additional contribution rate above the regular PERS rate. The additional amount is set in statute.

Contributions and Retirement Benefits

All DRS plans are defined benefit plans. Vested members will receive a benefit based on their accumulated service credit and final average salary (compensation) at time of retirement.

Plan 3 also includes a defined contribution component which is funded by member contributions. These contributions and the associated investment earnings (both gains and losses) will determine the amount a member receives, in addition to their defined benefit. Member contributions have no impact to the defined benefit component of a Plan 3 retirement benefit.

Member contributions and benefits are explained more fully in the member handbooks. If you have additional questions about contributions and retirement benefits, contact the appropriate retirement services unit at DRS.

Chapters

Contact Us

Other Links

Close