NOTE: This Section is excerpted from Retirement Income for Illinois Fire and Police: Pensions, Social Security and Deferred Compensation, by Daniel W. Ryan. All rights reserved. Used with permission by the IPPFA.
SERVICE RETIREMENT BENEFITS—TIER 2
A Tier 2 firefighter is eligible for retirement benefits at age 55 upon attainment of 10 years of service. The pension is equal to 2.5% of his or her “final average salary” for each year of service. The “final average salary” is your average monthly salary during the last eight years of service (technically, the highest 96 consecutive months within your last 120 months of service). The highest allowable pension is 75% of your final average salary. So, for example, if a firefighter has 30 years of service and an eight-year final average salary of $75,000 annually, the monthly pension would be $4,687. If a firefighter with sufficient credit wishes to draw his or her pension prior to age 55, the pension may be started any time after age 50, but with a resulting decrease in the monthly amount. The decrease is 6% annually for each year that the firefighter receives pension prior to age 55 (proportioned monthly).
NOTE: The Tier 2 law set the highest salary that can be used for calculation of the final average salary at $106,800. This amount is then indexed for inflation in the future but not more than 3% per year (or one-half of the Consumer Price Index if that amount is lower than 3%). As of 2018, this cap had been indexed up to $113,645.
TIER 2—INCREASES IN PENSIONS AFTER RETIREMENT
Upon reaching the latter of January after the retiree turns age 60 or January after he or she has been retired for one year, a retired firefighter will receive an increase in pension in the amount of one-half of the annual increase in the Consumer Price Index, but not more than 3%. Then, on each subsequent January 1, the firefighter will receive an additional increase calculated in the same manner on the original amount of his or her pension. In other words, the annual increases in pension do not “compound;” they are simple increases on the original amount of pension. A firefighter who is already age 60 or older at the time of retirement will receive the first pension increase after one year of retirement and each January 1 thereafter.
TIER 2 -PENSIONS PAID TO SURVIVORS
Pensions are payable to the surviving spouse of a Tier 2 retiree or active employee (unless the marriage occurred less than 12 months after retirement, in which case no survivor benefits are paid to a spouse). Although benefits are described below as Surviving Spouse benefits, survivor benefits may be payable to natural or legally adopted (and unwed) children up to age 18, handicapped children regardless of age, or legally dependent parents when there is no surviving spouse. Note that there is no minimum age requirement for a survivor pension. Also, there is no continuing requirement that a surviving spouse remain single in order to receive a pension.
TIER 2—SPOUSE SURVIVING A SERVICE OR DISABILITY PENSION RECIPIENT
When a firefighter who is receiving a pension dies, the surviving spouse is entitled to receive survivor benefits in the amount of 66.67% of the pension the firefighter was receiving at the time of his or her death.
TAXATION OF PENSION BENEFITS
Service and survivor pensions are taxed under the federal tax law. Retirees may elect to have federal tax withheld from their pension checks. Taxation of pensions by state governments is governed by state law and Illinois does not currently tax pension payments. If you retire in another state that does tax pensions, it is probable that your Illinois pension fund will not provide for tax withholding for another state. You will have to make other arrangements to pay non-Illinois state tax, such as making quarterly payments. Line-of-duty disability pensions are not taxed at the federal level, nor are benefits paid to survivors of line-of-duty disability pensioners. Line-of-duty death pensions are not taxed.
DISCLAIMER:
Please remember that pensions, Social Security, deferred compensation and similar programs are created and governed by laws. Such laws are subject to change and interpretation. The material presented here is solely for educational purposes. We are not offering legal or tax advice or any other professional service. Please do not make any decision that effects your retirement benefits without consulting a pension board, the Social Security Administration, a deferred compensation company’s credentialed agent, an attorney, a certified public accountant or similarly qualified professional.