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  • Be Sure to Consider Effects of Chapter 221 When Filing for Retirement Benefits

     
    (One of the most ignored laws relating to retirement is Chapter 221, P.L. 1995, a law that provides protection to applicants during the time between the filing of the application and the effective date of retirement. Because it is not mentioned in any publication by the retirement system, although it may have a significant impact in many retirement situations, it is the subject of this column on a regular basis).   

    As we approach the time of the year when many educators are contemplating retirement at the end of the current school year, it is time to revisit Chapter 221, P.L.1995. Chapter 221, P.L. 1995 was signed into law on August 15, 1995. It amends Title 18A:66-47 for members of the Teachers' Pension and Annuity Fund (TPAF) and Title 43:15A-50 for members of the Public Employees' Retirement System (PERS).

    Under the legislation, an educator who is eligible to retire and receive a benefit (age 60 or 25 years of credit in the system, whichever comes first) and whose application is ON FILE with the retirement system CAN be considered to have retired on the effective date of retirement chosen on the application, even  if the individual dies before the date the actual retirement takes effect; OR  that educator can be considered to have died while still an active employee. The choice of which status will be utilized by the retirement system will be determined by the beneficiary listed on the retirement application.

    The following is an example of how the law works:

    Jane Doe, superintendent of MY District, files for a July 1, 2015 retirement. She has 27 years of credit in the retirement system. Her salary for the 2014-15 school year is $150,000. Her Application for Retirement Allowance, indicating a choice of Option A for her spouse, is received by the Division of Pensions on January 29, 2015.  (Under Option A, Jane would have received $3,500 per month for her lifetime and her husband would have received the same amount after Jane's death.) Unfortunately, Jane suffers a fatal heart attack on May 8, 2015, several months prior to the date she would have retired.     
     
    Because her formal application was on file with the retirement system prior to her death, her spouse is offered two choices by the retirement system:

    #  He can receive the Option A benefit - as if Jane had retired effective July 1, 2015.

    If he chooses the Option A benefit:

    ...he will receive a monthly retirement check of $3,500 for his life starting with the July, 2015 check;
    ...he will receive a life insurance payment of $65,625 (7/16ths of Jane's highest salary), which is the post-retirement life insurance provided without cost by the retirement system;

    Note that in addition to the $65,625, Jane’s husband could collect the difference ($) between the $65,625 and Jane’s full active life insurance of $525,000, if Jane takes advantage of the conversion (*)  of life insurance privilege found in the statutes relating to retirement and separation from service. In order for Jane to keep the full life insurance in effect, she will have to contact Prudential Insurance Company (the life insurance carrier) at the time she files her application with the retirement system and convert the $459,375.  

    When she contacts Prudential and arranges to convert the life insurance she is losing, she will pay the first month’s premium for the $459,375 converted insurance.  Jane will then have $525,000 worth of life insurance from the time she pays the first month’s conversion premium to the end of her first month of retirement. The $525,000 total insurance will be a combination of her converted $459,375 and her $65,625 retirement life insurance.
     
    ...he will be offered group health insurance coverage for the remainder of his lifetime through the State Health Benefits Plan because Jane had qualified for the post-retirement State-paid health insurance benefits by virtue of her having accrued more than 25 years of pension credit prior to her expected retirement date. Since, theoretically, under Chapter 221, Jane retired on July 1, 2015 with the coverage provided by the 25 year health benefit law, and then died, he is entitled to continue her group health benefits for his lifetime  by paying for them. The cost to him will be the annual group rate.

         
     OR

    # He could receive the full life insurance benefit of $525,000, without any payment on his part, as well as a refund of the $75,000 that Jane had contributed to the pension system during her career. The total amount of the payments would be $600,000.


    If he chose the life insurance and refund of contributions, he would not receive a monthly check and he would not be eligible for the health benefits beyond the period provided by the federal law known as COBRA (36 months).

    It, therefore, becomes extremely important to file an Application for Retirement Allowance as soon as the decision to retire is made and the employer has been notified.  The earlier the filing is made, the greater the choices and protections for the beneficiary(s).

    Previous to the passage of Chapter 221, the law required that, in order for a retirement to be considered official, an applicant for retirement had to live (1) at least 30 days after the application was received by the Division of Pensions and (2) beyond the effective date of retirement. If both of these criteria were not met at the time of the death of the active employee, the individual was considered to have died in active service, and the beneficiary was entitled only to the active life insurance amount and the refund of the pension contributions. Thus, under the previous law, Jane’s spouse, in the above example, would have been entitled to receive only the payment of $525,000.

    Chapter 221 is particularly important to employees who are filing for a Disability Retirement and are ill at the time of filing. Regardless of what occurs and when it occurs after the Application for Retirement Allowance is received by the Division of Pensions and the first month’s premium is paid to Prudential, the Option chosen by the applicant will be honored by the retirement system and the total active life insurance will be paid by the combination of the retirement system’s post-retirement benefit and the converted amount through Prudential, if the beneficiary so desires.

    On the other hand, if the applicant for retirement has not converted the life insurance, the beneficiary will have to choose between receiving the monthly check provided under the choice of Option, the smaller life insurance benefit and the opportunity to continue health insurance coverage for life (paid by the beneficiary) or the full active life insurance amount and the refund of pension contributions.

    It should be noted that a retiree may decide to terminate the converted insurance amount after the initial month of retirement.  If that decision is made, the retiree should make no further premium payments.

    However, those who suffer from severe health problems or are faced with a terminal illness at the time of retirement may decide to continue the converted insurance. In that case, premium payments should continue to be made to the Prudential Insurance Company.

    (*)    The concept of conversion of life insurance, as it applies to retirement, allows someone who is losing some portion of the active life insurance amount because of  retirement to continue all or a portion of the amount being lost by paying for the continued coverage. If the conversion arrangements are made within a proper time frame, the insurance carrier may not reject anyone's request because of the individual's health. As long as the premium is paid, the retiree's converted insurance remains in effect.