1. (a) General Rule. The Teacher Retirement System of Texas (TRS) will exclude from annual compensation any amounts converted into salary and wages from noncreditable compensation during the last five creditable school years of employment before retirement or the last five creditable school years of employment before entering the Deferred Retirement Option Plan (DROP). No amounts will be excluded under this section for school years before 1981-1982.
2. (b) Definition of Noncreditable Compensation. Noncreditable compensation consists of the payments and benefits provided to a contributing TRS member for service as an employee or a consultant with a Texas public educational institution for which no TRS member contributions have been or should have been made.
3. (c) Certification required of employers. After a member applies for retirement or for entry in DROP, each employer of the member during any of the member's best three years' average compensation will, upon request by TRS, certify the amount, if any, of the member's noncreditable compensation previously provided by the employer which was converted into TRS creditable salary and wages paid by the employer during each of the last five creditable school years of the member's employment immediately before the member's anticipated retirement date or entry into DROP.
4. (d) Conversion. A conversion of noncreditable compensation to creditable salary and wages occurs when noncreditable compensation is reduced or eliminated and is replaced by creditable salary and wages.
5. (e) Factors leading to a presumption of conversion. A conversion should normally be presumed when noncreditable compensation provided to a member in a school year is not provided in the immediately following school year and the member's creditable salary and wages for the subsequent year exceeds that of the previous year in which the noncreditable compensation was provided. The conversion should normally be presumed to have occurred in each of the years following the year of the initial conversion.
6. (f) Amount of presumed conversion. The amount of the conversion is normally the amount by which the member's salary and wages after the conversion exceeds the salary and wages before the conversion, but not to exceed the amount of the noncreditable compensation reduced or eliminated.

7. (g) Factors overcoming a presumption of conversion. Factors which may overcome the presumption of conversion include:

   1. (1) if the member's creditable salary increase in a subsequent year is not greater than a general salary increase given to a substantial number of the employer's employees who did not have a reduction or elimination of noncreditable compensation;
   2. (2) if the amount of the creditable salary increase is based on additional work performed;
   3. (3) if the amount of the creditable salary increase is based on a promotion;
   4. (4) if the amount of the salary increase is a bona fide merit increase;
   5. (5) if the amount of the creditable salary increase is de minimis. For purposes of this rule a de minimis increase shall be an amount not to exceed $85 per month; and
   6. (6) if other circumstances clearly and convincingly prove that the increase in creditable compensation was not derived from the reduction in noncreditable compensation.

8. (h) Exclusions from conversion determinations. For the purposes of determining amounts converted to creditable compensation the following will be disregarded:

   1. (1) amounts withheld from salaries for cafeteria plans or deferred compensation plans under the United States Internal Revenue Code, §125 or §401(k), even if received prior to the date such amounts became a part of creditable compensation for TRS purposes;
   2. (2) noncreditable compensation paid in only one school year; or
   3. (3) tax exempt benefits which have subsequently lost tax exempt status and which, for all employees receiving such benefit, were converted into creditable compensation.
9. (i) Review by TRS. The retirement system may rely upon employer certifications or may conduct an investigation to determine whether any conversion has occurred. Employers will provide the retirement system upon request with copies of and access to contracts, board minutes, memoranda, payroll records, and other materials which will assist the system in making these determinations.
10. (j) Exclusion of conversion amounts from benefit computations. The retirement system will exclude from a member's average compensation used to compute benefits any amounts converted from noncreditable compensation to creditable compensation that are reported by an employer or determined by the retirement system.
11. (k) Refund of contributions on conversion amounts. After the effective date of retirement TRS will refund to the member any deposits made on the amounts excluded from annual compensation under this section.

Source Note:The provisions of this §25.30 adopted to be effective October 9, 1981, 6 TexReg 3598; amended to be effective December 4, 1985, 10 TexReg 4536; amended to be effective July 13, 1988, 13 TexReg 3339; amended to be effective December 1, 1994, 19 TexReg 9183; amended to be effective September 17, 1997, 22 TexReg 9255.