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Retirement Plan

For ERS Tier 5 Members

(Article 15)

Borrowing Against Your Contributions

If you meet eligibility requirements, you may take a loan from the Retirement System. To apply, you must file a Loan Application (RS5025-A) Adobe pdf with us.

Before you apply, you should be aware of the federal tax laws pertaining to Retirement System loans. Your loan will be taxable if:

  • The loan amount exceeds federal limits.
  • You have a loan with a deferred compensation (457) or tax-sheltered annuity (403-b) plan through your current employer that causes your loan to exceed the federal limits for nontaxable loans. Exceeding these limits could result in significant tax consequences for you.
  • You do not make the required payments on your loan at least once every three months or do not complete payment within five years from the date the loan was issued.
  • You retire or withdraw from the Retirement System and have one or more outstanding loan balances.

If your loan is taxable, or becomes taxable as described above, you must include it on your federal income tax return for the year the loan is granted or becomes taxable. If you are under 59½ at the time, you may be required to pay a 10 percent penalty tax in addition to any ordinary federal income tax you owe. Please consider consulting a tax advisor before applying for a taxable loan from the Retirement System.

The following rules apply when borrowing against your contributions:

  • You must be in active service and have one year of member service credit.
  • Each loan must be for a minimum of $1,000, so you must have an account balance of at least $1,334. The total of all your loans may not be more than 75 percent of your contribution balance.
  • You repay each outstanding loan through payroll deductions in an amount sufficient to repay the loan, interest and insurance premium within five years. The minimum deduction to repay your outstanding loan balances must be at least 2 percent of your salary.
  • You may borrow only once in any 12-month period.
  • Prior to retirement, and 30 days after issuance, loans are fully insured in case you die before repaying them.

If you retire with an outstanding balance, your retirement benefit will be permanently reduced. You cannot pay off your loan once you retire. The amount of your pension reduction will be based on your age, the loan balance at retirement, and type of retirement (regular service or disability).

These are examples of how your service retirement benefit will be permanently reduced by an outstanding loan balance at retirement. The approximate reductions are for calendar year 2013.1 The amount of the reduction changes annually.

At Age Outstanding Loan Balance Annual Pension Reduction
55 $5,000 $273
$10,000 $546
62 $5,000 $319
$10,000 $637

If you already have an outstanding loan with us and want to take a new loan, please contact our Call Center and connect with our automated information line to determine if refinancing your current loan or carrying multiple loans would be better for you. Although the repayment amount may be larger if you choose multiple loans, the taxable amount of a refinanced loan is always higher, unless the entire refinanced loan is nontaxable.

Example:

Contribution Balance: $18,630

Previous Loan Balance: $8,760

New Loan Requested: $3,000

  Refinanced Loans Multiple Loans
Taxable Amount $5,190 $0
Minimum Payroll Deduction (Repayment Amount) $112 $236

In this example, if the member chooses to refinance, the taxable amount of the loan is greater than the loan requested. But, if the member chooses multiple loans, the new loan is not taxable.

1 Updated as of 3/13