Proposed Rules Title 34

TITLE 34. PUBLIC FINANCE

PART 6. TEXAS MUNICIPAL RETIREMENT SYSTEM

The Board of Trustees (Board) of the Texas Municipal Retirement System (TMRS or the System) proposes the repeal of current 34 TAC Chapter 127 (Chapter 127), relating to miscellaneous rules. TMRS is also proposing to replace current Chapter 127 with proposed new Chapter 127, also relating to miscellaneous rules.

REPEAL OF CURRENT CHAPTER 127

TMRS proposes the repeal of current 34 TAC Chapter 127, which includes the following sections: 34 TAC §127.1, Procedures for Release of Board Records; 34 TAC §127.2, Payment to Beneficiaries of Decedents; 34 TAC §127.3, Conformity with Internal Revenue Code: Preservation of Benefits; 34 TAC §127.4, Credited Service under the Uniformed Services Employment and Reemployment Rights Act; 34 TAC §127.6, Acceptance of Rollovers and Transfers; 34 TAC §127.7, Rollovers of Plan Distributions; 34 TAC §127.8, Plan Limitations; 34 TAC §127.9, Authorization of Certain Payments in Accordance with the Pension Protection Act of 2006; and 34 TAC §127.10, Conformity with Internal Revenue Code: Additional Provisions.

PROPOSAL OF NEW CHAPTER 127

As proposed, the new Chapter 127 will address: 34 TAC §127.1, Procedures for Release of Board Records; 34 TAC §127.3, Conformity with Internal Revenue Code: Preservation of Benefits; 34 TAC §127.4, Credited Service under the Uniformed Services Employment and Reemployment Rights Act; 34 TAC §127.5, Prorating of Contributions Based on Compensation Limited by Internal Revenue Code §401(a)(17); 34 TAC §127.6, Acceptance of Rollovers and Transfers; 34 TAC §127.7, Rollovers of Plan Distributions; 34 TAC §127.8, Plan Limitations; 34 TAC §127.9, Authorization of Certain Payments in Accordance with the Pension Protection Act of 2006; 34 TAC §127.10, Conformity with Internal Revenue Code: Additional Provisions; 34 TAC §127.11, Required Minimum Distributions: General Rule, Forfeiture and Reinstatement; 34 TAC §127.12, Refund of Unrecovered Contributions; and 34 TAC §127.13, Late Contributions Sent Electronically.

BACKGROUND AND PURPOSE

TMRS proposes to repeal and replace Chapter 127 to update, modernize, and provide clarification to its rules relating to miscellaneous subjects. Statutes specific to TMRS are found in Title 8, Subtitle G, Chapters 851 through 855, Texas Government Code (the "TMRS Act"). TMRS may promulgate rules it deems necessary to implement the TMRS Act. In addition, the repeal and replacement of Chapter 127 is being proposed as a result of TMRS' rule review, which was conducted pursuant to Texas Government Code §2001.039.

Six provisions of the proposed new Chapter 127 rules are unchanged from existing rules; these six rules are found in new 34 TAC §127.3, Conformity with Internal Revenue Code: Preservation of Benefits; 34 TAC §127.4, Credited Service under the Uniformed Services Employment and Reemployment Rights Act; 34 TAC §127.6, Acceptance of Rollovers and Transfers; 34 TAC §127.7, Rollovers of Plan Distributions; 34 TAC §127.8, Plan Limitations; and 34 TAC §127.9, Authorization of Certain Payments in Accordance with the Pension Protection Act of 2006. Two proposed new rules are amendments to the current rules to better clarify how the System interprets and administers benefits and to update references to laws or other TMRS rules that have been amended; these are 34 TAC §127.1, Procedures for Release of Board Record and 34 TAC §127.10, Conformity with Internal Revenue Code: Additional Provisions. Two proposed new rules are new clarifications of internal procedures: 34 TAC §127.12, Refund of Unrecovered Contributions and 34 TAC §127.13, Late Contributions Sent Electronically. Substantive changes, however, are proposed in the two remaining proposed new rules, which changes are described as follows: adds a provision clarifying current practice for the proration of contributions subject to the compensation limit in Internal Revenue Code §401(a)(17) (in §127.5, Prorating of Contributions Based on Compensation Limited by Internal Revenue Code §401(a)(17)); and adds new procedures to comply with Internal Revenue Code §401(a)(9) and related regulations regarding required minimum distributions (in §127.11, Required Minimum Distributions: General Rule, Forfeiture and Reinstatement).

Current rule §127.2, Payment to Beneficiaries of Decedents, is being repealed as it is no longer necessary for the administration of the System.

At a Board meeting on March 23, 2023, the TMRS Board approved the publication for comment of the proposed repeal of current Chapter 127 and the proposed replacement of current Chapter 127 with the new Chapter 127 rules.

FISCAL NOTE

Debbie Munoz, TMRS Chief Services Officer, has determined that for the first five-year period the proposed new rules are in effect there will be no foreseeable fiscal implications to state or local governments as a result of enforcing or administering the proposed rules.

PUBLIC COST/BENEFIT

Christine Sweeney, TMRS Chief Legal Officer, has determined that for each year of the first five years the proposed new rules are in effect, the public benefit of Chapter 127 will be: (i) a clearer and more accurate statement of the administrative rules of TMRS regarding applicable Internal Revenue Code provisions and miscellaneous subjects under the TMRS Act; and, (ii) to modernize and conform these administrative rules with the System's interpretation and administration of the TMRS Act and Internal Revenue Code provisions.

LOCAL EMPLOYMENT IMPACT STATEMENT

TMRS has determined that there will be no adverse economic effects on local economies or local employment because of the proposed new rules, which are proposed for the modernization, clarification and implementation of provisions relating to applicable Internal Revenue Code provisions and miscellaneous subjects under the TMRS Act. Therefore, no local employment impact statement is required under Texas Government Code §2001.022.

ECONOMIC IMPACT STATEMENT AND REGULATORY FLEXIBILITY ANALYSIS

TMRS has determined that there will be no adverse economic effects on small businesses, micro-businesses, or rural communities because the proposed new rules are proposed for modernization, clarification and implementation of provisions relating to applicable Internal Revenue Code provisions and miscellaneous subjects under the TMRS Act. Rural communities include municipalities under a certain population, but the proposed rules do not differentiate between municipalities on the basis of population, and the proposed rules relate to miscellaneous subjects involved in the administration of the System. Therefore, neither an economic impact statement nor a regulatory flexibility analysis is required under Texas Government Code §2006.002.

GOVERNMENT GROWTH IMPACT STATEMENT

TMRS has determined that for each year of the first five years the proposed new rules are in effect, the proposed rules: will not create or eliminate any TMRS programs; will not require either the creation of or elimination of employee positions; will not require an increase or decrease in future legislative appropriations to TMRS (TMRS does not receive any legislative appropriations); will not require an increase or decrease in fees paid to TMRS; will not create a new regulation (because new Chapter 127 updates and replaces existing Chapter 127); do not expand, limit or repeal an existing regulation (because new Chapter 127 updates and replaces existing Chapter 127); do not increase or decrease the number of individuals subject to the rules' applicability; and, do not affect this state's economy.

TAKINGS IMPACT ASSESSMENT

TMRS has determined that there are no private real property interests affected by the proposed new rules, therefore a takings impact assessment is not required under Texas Government Code §2007.043.

COSTS TO REGULATED PERSONS

TMRS has determined that Texas Government Code §2001.0045(b) does not apply to the proposed new rules because they do not impose a cost on regulated persons (including another state agency, a special district, or a local government).

ENVIRONMENTAL RULE ANALYSIS

The proposed new rules are not a "major environmental rule" as defined by Texas Government Code §2001.0225. The proposed rules are not specifically intended to protect the environment or to reduce risks to human health from environmental exposure. Therefore, a regulatory environmental analysis is not required.

COMMENTS

Written comments on the proposed rules may be submitted to Christine Sweeney, Chief Legal Officer, TMRS, P.O. Box 149153, Austin, Texas 78714-9153, faxed to (512) 225-3786, or submitted electronically to csweeney@tmrs.com. Written comments must be received by TMRS no later than 30 days after publication of this notice in the Texas Register.

34 TAC §§127.1 - 127.4, 127.6 - 127.10

STATUTORY AUTHORITY

The repeal of existing Chapter 127 is proposed and implements the authority granted under the following provisions of the TMRS Act or the Texas Government Code: (i) Government Code §851.006, which allows the Board to adopt rules to allow the System to make payments in accordance with Section 845 of the Pension Protection Act of 2006; (ii) Government Code §852.103, which allows the Board to adopt rules to implement withdrawals of contributions and rollover distributions; (iii) Government Code §853.004, which allows the Board to adopt rules necessary or desirable to implement Chapter 853; (iv) Government Code §853.506, which allows the Board to adopt rules to comply with the Uniformed Services Employment and Reemployment Rights Act; (v) Government Code §854.003, which allows the Board to adopt rules to comply with the distribution requirements of Section 401(a)(9) of the Internal Revenue Code of 1986; and (vi) Government Code §855.102, which allows the Board to adopt rules it finds necessary or desirable for the efficient administration of the System. In addition, the rule changes are proposed as a result of TMRS' rule review, which was conducted pursuant to Texas Government Code §2001.039.

CROSS-REFERENCE TO STATUTES

The proposed rules implement the following sections of the Texas Government Code:

Chapter 552, concerning the Public Information Act; §851.001, concerning the definition of compensation and employee; §851.002, concerning the purpose of the subtitle; §851.006, concerning exemption from execution and making payments in accordance with Section 845 of the Pension Protection Act of 2006; §852.103, concerning withdrawal of contributions and rollover of distributions; §853.003, concerning buyback of credited service previously cancelled; §853.506, concerning current service for reemployed veterans; §854.002, concerning composition of retirement annuity; §854.003 concerning effective date of retirement; §854.004, concerning when an annuity is payable and changes before first payment; §854.007, concerning limitation on payment of benefits; §854.008, concerning partial lump-sum distribution on retirement; §854.103, concerning standard service retirement annuity; §854.502, concerning the refund of unrecovered contributions; §855.103, concerning administering system assets; §855.112, concerning records of the Board; §855.115 concerning the confidentiality of information about members, retirees, annuitants, or beneficiaries; §855.306, concerning member's individual accounts; §855.402, concerning collection of member contributions; and §855.410, concerning interest on late contributions.

§127.1.Procedures for Release of Board Records.

§127.2.Payment to Beneficiaries of Decedents.

§127.3.Conformity with Internal Revenue Code: Preservation of Benefits.

§127.4.Credited Service under the Uniformed Services Employment and Reemployment Rights Act.

§127.6.Acceptance of Rollovers and Transfers.

§127.7.Rollovers of Plan Distributions.

§127.8.Plan Limitations.

§127.9.Authorization of Certain Payments in Accordance with the Pension Protection Act of 2006.

§127.10.Conformity with Internal Revenue Code: Additional Provisions.

The agency certifies that legal counsel has reviewed the proposal and found it to be within the state agency's legal authority to adopt.

Filed with the Office of the Secretary of State on May 5, 2023.

TRD-202301644

Christine M. Sweeney

Chief Legal Officer

Texas Municipal Retirement System

Earliest possible date of adoption: June 18, 2023

For further information, please call: (512) 225-3710

34 TAC §§127.1, 127.3 - 127.13

STATUTORY AUTHORITY

The new Chapter 127 rules are proposed and implement the authority granted under the following provisions of the TMRS Act or the Texas Government Code: (i) Government Code §851.006, which allows the Board to adopt rules to allow the System to make payments in accordance with Section 845 of the Pension Protection Act of 2006; (ii) Government Code §852.103, which allows the Board to adopt rules to implement withdrawals of contributions and rollover distributions; (iii) Government Code §853.004, which allows the Board to adopt rules necessary or desirable to implement Chapter 853; (iv) Government Code §853.506, which allows the Board to adopt rules to comply with the Uniformed Services Employment and Reemployment Rights Act; (v) Government Code §854.003, which allows the Board to adopt rules to comply with the distribution requirements of Section 401(a)(9) of the Internal Revenue Code of 1986; (vi) Government Code §855.102, which allows the Board to adopt rules it finds necessary or desirable for the efficient administration of the System; and (vii) Government Code 855.201, which allows the Board to delegate to the executive director powers and duties provided to the Board by the TMRS Act. In addition, the rule changes are proposed as a result of TMRS' rule review, which was conducted pursuant to Texas Government Code §2001.039.

CROSS-REFERENCE TO STATUTES

The proposed rules implement the following sections of the Texas Government Code: Chapter 522, concerning the Public Information Act; §851.001, concerning the definition of compensation and employee; §851.002, concerning the purpose of the subtitle; §851.006, concerning exemption from execution and making payments in accordance with Section 845 of the Pension Protection Act of 2006; §852.103, concerning withdrawal of contributions and rollover of distributions; §853.003, concerning buyback of credited service previously cancelled; §853.506, concerning current service for reemployed veterans; §854.002, concerning composition of retirement annuity; §854.003 concerning effective date of retirement; §854.004, concerning when an annuity is payable and changes before first payment; §854.007, concerning limitation on payment of benefits; §854.008, concerning partial lump-sum distribution on retirement; §854.103, concerning standard service retirement annuity; §854.502, concerning the refund of unrecovered contributions; §855.103, concerning administering system assets; §855.112, concerning records of the Board; §855.115 concerning the confidentiality of information about members, retirees, annuitants, or beneficiaries; §855.306, concerning member's individual accounts; §855.402, concerning collection of member contributions; and §855.410, concerning interest on late contributions.

§127.1.Procedures for Release of Board Records.

(a) The director is the custodian of records of the Texas Municipal Retirement System and may delegate responsibilities as custodian to one or more employees of the system. The custodian shall coordinate release of system records for purposes allowed by law, including but not limited to Government Code Chapter 552 and §855.115, or as allowed by court or administrative rules. The custodian will certify to the authenticity of copies of system records.

(b) Information regarding release of these records will be prominently posted and will contain basic information regarding the rights of the requester, the responsibilities of a governmental body and the procedures for inspecting or obtaining copies of public information.

(c) Each request for information must be made in writing. The system may specify an email address to which requests under Chapter 552, Government Code, must be submitted.

(d) Charges for providing copies of public information shall be the same as those provided by the Office of the Attorney General in the Texas Administrative Code, Title 1, Part 3, §70.3.

(e) Any member of the legislature shall not be charged for one copy of a record while performing his/her duties. Additionally, if it is determined by the director that providing certain records benefits the general public, fees will not be required for these records.

(f) All funds collected from releasing copies of records shall be credited to the expense fund under the administration of the board.

§127.3.Conformity with Internal Revenue Code: Preservation of Benefits.

(a) Pursuant to the authority of the board of trustees to act under the Act, and in accordance with the amendments to §415 of the Internal Revenue Code as set forth in Public Law 104-188, the annual benefit payable under the Act shall not be reduced under §854.007 of the Act except in conformity with those limitations on the payment of benefits set forth in the Internal Revenue Code as that Code applies from time to time to the Texas Municipal Retirement System.

(b) Effective for limitation years beginning on or after January 1, 2010, the following paragraphs (1) - (5) of this subsection shall apply:

(1) The defined benefit payable to a member of the system shall not exceed the applicable limits under Internal Revenue Code §415(b), as periodically adjusted by the Secretary of the Treasury pursuant to Internal Revenue Code §415(d). This limit adjustment shall also apply to a member who has had a severance from employment or, if earlier, an annuity starting date. Benefits that are subject to Internal Revenue Code §415(b) shall comply with the foregoing limit in each year during which payments are made. The foregoing limit shall be adjusted pursuant to the requirements of Internal Revenue Code §415(b)(2)(C) and (D) relating to the commencement of benefits at a date prior to age 62 or after age 65, subject to other applicable rules under Internal Revenue Code §415.

(2) No adjustment shall be required to a benefit subject to an automatic benefit increase feature described in Treasury Regulation §1.415(b)-1(c)(5).

(3) To the extent that Internal Revenue Code §415 and the Treasury Regulations thereunder require that an interest rate under Internal Revenue Code §417(e) apply, the applicable stability period shall be one calendar year beginning January 1, and the look-back month shall be the fourth full calendar month preceding the first day of the stability period (September).

(4) If a member is, or has ever been, a participant in another qualified defined benefit plan (without regard to whether the plan has been terminated) maintained by the member's employer, as determined pursuant to Internal Revenue Code §§414(b), 414(c), and 415, the sum of the participant's benefits payable annually in the form of a straight life annuity from all such plans may not exceed the limit described in paragraph (1) of this subsection. Where the member's employer-provided benefits under all such defined benefit plans (determined as of the same age) would exceed the limit described in paragraph (1) of this subsection applicable at that age, the benefits accrued under all such other plans shall be reduced first in order to avoid exceeding the limit and shall be reduced under the system only to the extent that the reduction under such other plans is insufficient to avoid exceeding the limit.

(5) The defined benefit payable to a member of the system plan shall be determined in accordance with the requirements of Internal Revenue Code §415(b) and the Treasury Regulations thereunder. The limitation year is the calendar year.

§127.4.Credited Service under the Uniformed Services Employment and Reemployment Rights Act.

(a) Definitions.

(1) Eligible Member--An employee of a participating municipality who is or would be considered to be employed in a position eligible for membership but who leaves employment with that municipality to perform service in the uniformed services; whose employer was notified of the obligation or intention of the employee to perform service in the uniformed services; who is released or discharged from such service on or after December 12, 1994, under honorable conditions; whose cumulative period of service in the uniformed services with respect to that participating municipality does not exceed five years not including periods excluded under 38 USC §4312(c); who applies for reemployment with that participating municipality within 90 days of release or discharge from the uniformed services, or after recovery from an illness or injury incurred in, or aggravated during, the performance of service in the uniformed services (but such recovery period does not exceed two years); and who is reemployed by the participating municipality.

(2) Uniformed Services--The Armed Forces of the United States of America; the Army National Guard and the Air National Guard when engaged in active duty for training, inactive duty training, or full-time National Guard duty; the commissioned corps of the Public Health Service; and any other category of persons designated by the President in time of war or national emergency.

(3) Service in the Uniformed Services--The performance of duty on a voluntary or involuntary basis in a uniformed service under competent authority and includes active duty, active duty for training, inactive duty for training, National Guard duty under Federal statute, and a period for which an employee is absent from a position of employment for the purpose of an examination of to determine the fitness of the employee to perform such duty.

(4) Participating Municipality--A municipality as defined in §851.001(9) of the Act (including entities having the status of a municipality under Government Code, §852.005 of the Act) that is participating in the Texas Municipal Retirement System at the time the eligible member leaves employment with the municipality to perform service in the uniformed services; or a municipality that is not participating in the System at the time the employee leaves employment with the municipality to perform service in the uniformed services but commences participating during the period of the employee's performance of duty in a uniformed service.

(b) Certification of Eligibility by Participating Municipality. An eligible member will be credited with current service in accordance with the Uniformed Services Employment and Reemployment Rights Act (the USERRA) (38 USC §4301 et seq.) upon certification by the participating municipality on forms provided by the system:

(1) that the eligible member's reemployment application is timely;

(2) that the eligible member has not exceeded the service limitations set forth in the USERRA;

(3) that the eligible member was not released or discharged from the uniformed service under other than honorable conditions;

(4) the period in which the eligible member performed service in the uniformed services;

(5) that the eligible member did not receive service credit for the period of uniformed service;

(6) the estimated compensation that the eligible member would have received from the municipality but for the period of service in the uniformed services; and

(7) the eligible member's date of reemployment with the participating municipality.

(1) An eligible member shall be credited with one month of current service credit for each month or part of a month in which:

(A) the eligible member performed service in the uniformed services; and

(B) a person who begins military service prior to the 16th day of a calendar month, or terminates military service after the 15th day of a calendar month is considered to have served a full month; and

(2) An eligible member may, but is not required to, deposit with the system any or all employee contributions that would have been deposited to his/her individual account for each period during which he/she performed service in the uniformed services if the eligible member had been employed with the participating municipality during the period of uniformed service. Deposits under this provision are subject to the following rules:

(A) The total deposits may not exceed the amount the eligible member would have been required to contribute had the eligible member remained continuously employed by the participating municipality throughout the period of service in the uniformed services.

(B) The compensation upon which allowable deposits will be calculated is the estimated compensation that the eligible member would have received from the participating municipality but for the period of service in the uniformed services.

(C) For purposes of determining the amount of current service credit and allowable monetary deposits, months of uniformed service and estimated compensation shall be calculated from the later of the date the eligible member entered service in the uniformed services or the date the participating municipality commenced participation in the system.

(D) Within the allowable period for making deposits and subject to the maximum total amount of deposits, an eligible member may make deposits at any time and in any amount.

(E) Deposits must be paid directly to the system by the eligible member or by the rollover or transfer of funds in accordance with the provisions of §127.6 of this title (relating to the Acceptance of Rollovers and Transfers). Optional deposits made under this section shall retain the same after-tax or pre-tax characterization that the funds have when deposited and may not be returned until the member terminates from all covered employment in this system.

(F) Deposits will be allocated prospective interest only, and in the same manner as interest is allocated on member contributions to individual accounts.

(G) Deposits, when received by the system, shall be credited to the eligible person's individual account and shall be considered to be contributions attributable to the months of uniformed service performed beginning with the earliest month of uniformed service.

(H) For vesting and funding purposes, current service credit, and any monetary credit arising from voluntary deposits, shall be considered as having been earned through service with the reemploying municipality and as having been credited during the period of uniformed service.

(I) An eligible member receiving service credit for a specific month pursuant to §853.506 may not receive service credit for the same month under any other provision of the Act.

(J) Deposits must be made during a time period starting with the date of an eligible member's reemployment with the participating municipality and continuing for up to three (3) times the length of the member's immediate past period of uniformed service, with the repayment period not to exceed five (5) years. Deposits may be made only during this period and while the member is employed with the post-service reemploying municipality.

(d) Death While on Military Leave. Effective for deaths occurring on or after January 1, 2007, if a member dies while performing qualified military service, the beneficiaries of the member are entitled to any additional benefits (other than benefit accruals relating to the period of qualified military service) provided under the Texas Municipal Retirement System tax-qualified pension plan as if the member had resumed employment and then died, in accordance with §401(a)(37) of the Internal Revenue Code. "Qualified military service" means any service in the uniformed service (as defined in Chapter 43 of Title 38 of the United States Code) by any individual if such individual is entitled to reemployment rights under such Chapter with respect to such service.

(e) Military Differential Pay. For purposes of the Texas Municipal Retirement System, prior to and on and after January 1, 2009, compensation as defined in §851.001(6) of the Act includes payments to an individual by a participating municipality who does not currently perform services for the participating municipality by reason of qualified military service as defined in subsection (d) of this section made in accordance with the participating municipality's current policy with regard to such qualified military service (hereafter referred to as "military differential pay"). For purposes of the Internal Revenue Code as it applies to the Texas Municipal Retirement System tax-qualified pension plan, effective January 1, 2009, a member receiving military differential pay shall be treated as an employee of the employer making the payment and the military differential pay shall be treated as compensation.

(f) Construction. This section is intended to comply with USERRA and Internal Revenue Code §401(a)(37) and §414(u) and shall be construed in a manner consistent with those provisions.

§127.5.Prorating of Contributions Based on Compensation Limited by Internal Revenue Code §401(a)(17).

(a) The system may require participating municipalities to prorate contributions for an employee whose compensation is subject to and exceeds the compensation limit set pursuant to 26 U.S.C. §401(a)(17) ("Compensation Limit") by calculating the employee's contributions based on the Compensation Limit prorated equally over the remaining months in the calendar year.

(b) If an employee for which a municipality is making prorated contributions pursuant to subsection (a) of this section separates from service with the municipality prior to the end of the calendar year, the municipality shall make additional contributions to the system based on the actual compensation paid to the employee, up to the amount of the Compensation Limit, prior to separation from service by the employee.

§127.6.Acceptance of Rollovers and Transfers.

(a) The system may accept the funds described in subsections (b) and (c) of this section, subject to the restrictions of this section.

(b) If permitted under and subject to the provisions of federal law, the system may accept an eligible rollover distribution from another eligible retirement plan in payment of all or a portion of any deposit a member is permitted under applicable law to make with the system for service credit.

(1) An "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the member from an eligible retirement plan. An eligible rollover distribution does not include the following:

(A) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the member or the joint lives (or joint life expectancies) of the member and the member's designated beneficiary, or for a specified period of ten years or more;

(B) any distribution to the extent such distribution is required under Internal Revenue Code §401(a)(9);

(D) the portion of any distribution that is not includible in gross income.

(2) An "eligible retirement plan" is any program defined in Internal Revenue Code §401(a)(31) and §402(c)(8)(B), from which the member has a right to an eligible rollover distribution, as follows:

(A) an individual retirement account under Internal Revenue Code §408(a);

(B) an individual retirement annuity under Internal Revenue Code §408(b) (other than an endowment contract);

(D) an annuity plan under Internal Revenue Code §403(a);

(E) an eligible deferred compensation plan under Internal Revenue Code §457(b) which is maintained by an eligible employer under Internal Revenue Code §457(e)(1)(A); and

(F) an annuity contract under Internal Revenue Code §403(b).

(c) If permitted under and subject to the provisions of federal law, the system may accept a direct trustee-to-trustee transfer of funds from a plan described under §403(b) or §457(b) of the Internal Revenue Code in payment of all or a portion of any deposit a member is permitted to make with the system for service credit.

(d) In order to authorize the rollover or transfer of funds described in this section, a member shall provide or cause to be provided to the system information sufficient for the system to reasonably conclude that the contribution is a valid rollover or direct trustee-to-trustee transfer as permitted under federal tax law. If the system later determines that a contribution was an invalid rollover or direct trustee-to-trustee transfer or otherwise not permitted under federal tax law, the system may take any action appropriate or required by the Internal Revenue Code or regulations issued thereunder, including return of the invalid contribution and, if applicable, any earnings attributed thereto to the member within a reasonable time after the determination and cancellation of any credit purchased with the returned amounts.

(e) The system shall construe and administer this section in a manner such that the plan will be considered a qualified plan under §401(a) of the Internal Revenue Code of 1986, (United States Code, Title 26, §401).

§127.7.Rollovers of Plan Distributions.

(a) A distributee may elect, at the time and in the manner prescribed by the Board of Trustees, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover.

(b) The terms "eligible rollover distribution" and "eligible retirement plan" are defined as follows:

(1) An "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include the following:

(A) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten (10) years or more;

(B) any distribution to the extent such distribution is required under §401(a)(9) of the Internal Revenue Code of 1986, as amended from time to time (the "Internal Revenue Code"); or

(2) An "eligible retirement plan" includes:

(A) an individual retirement account described in Internal Revenue Code §408(a);

(B) an individual retirement annuity described in Internal Revenue Code §408(b);

(D) a qualified trust described in Internal Revenue Code §401(a) that accepts the distributee's eligible rollover distribution;

(E) an annuity contract described in Internal Revenue Code §403(b);

(F) an eligible plan under Internal Revenue Code §457(b), which is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees to separately account for amounts transferred into such plan from this plan; or

(G) for distributions made after December 31, 2007, a Roth IRA as described in Internal Revenue Code §408A(b).

(3) The definition of eligible retirement plan also shall apply in the case of a distribution to a surviving spouse, or to a spouse or former spouse who is the alternate payee under a qualified domestic relations order as defined in Internal Revenue Code §414(p).

(4) A "distributee" includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Internal Revenue Code §414(p), are distributees with regard to the interest of the spouse or former spouse.

(5) A "direct rollover" is a payment by the plan to the eligible retirement plan specified by the distributee.

(c) Notwithstanding anything in this section to the contrary, a portion of a distribution shall not fail to be an eligible rollover distribution merely because the portion consists of after-tax contributions which are not includible in gross income. However, such portion may be paid only in a direct trustee-to-trustee transfer to an individual retirement account or annuity described in Internal Revenue Code §§408(a) or (b), or to a qualified defined contribution plan described in Internal Revenue Code §401(a) or an Internal Revenue Code §403(b) annuity contract that, in each case, agrees to separately account for amounts so transferred, and the earnings on these amounts, including separate accounting for the portion of such distribution which was includible in gross income (if not for the rollover exclusion) and the portion of such distribution which was not includible in income (determined without regard to the rollover exclusion). Without limiting the foregoing, for distributions made after December 31, 2006, such portion may be also be paid in a direct trustee-to-trustee transfer to any type of qualified plan described in Internal Revenue Code §401(a) (whether or not a defined contribution plan) that agrees to separately account for amounts so transferred, and the earnings on these amounts, including separate accounting for the portion of such distribution which was includible in gross income (if not for the rollover exclusion) and the portion of such distribution which was not includible in income (determined without regard to the rollover exclusion). Without limiting the foregoing, for distributions made after December 31, 2007, a portion of a distribution shall not fail to be an eligible rollover distribution merely because it is paid in a direct trustee-to-trustee transfer to a Roth IRA as described in Internal Revenue Code §408A(b).

(d) Rollovers by Nonspouse Beneficiaries. Effective for distributions on or after January 1, 2010, a member's beneficiary who is not the surviving spouse of the deceased member may elect to have an eligible rollover distribution paid directly to an eligible retirement plan that is an inherited individual retirement account described in Internal Revenue Code §408(d)(3)(C) to the extent permitted by Internal Revenue Code §402(c)(11).

(e) The Board, the system and its employees and agents are not responsible for assuring that the distributee is eligible to make a rollover or for the tax consequences of any such rollover.

§127.8.Plan Limitations.

Effective January 1, 1996, for individuals who first became members of the system on or after January 1, 1996, the amount of compensation used to determine the retirement benefit of a member must not exceed the amount of compensation permitted to be taken into account under the plan and Internal Revenue Code §401(a)(17) as then in effect and as amended, indexed in the same manner and for the same periods as provided by that section. The limits under Internal Revenue Code §401(a)(17) shall not apply to individuals who first became members of the system before January 1, 1996.

§127.9.Authorization of Certain Payments in Accordance with the Pension Protection Act of 2006.

(a) Effective with annuity payments that become due January 2008, the retirement system is authorized to make disbursements in accordance with Section 845 of the Pension Protection Act of 2006, Pub. L. 109-280 and related regulations.

(b) The director is authorized to adopt reasonable policies and procedures to implement and administer this section.

§127.10.Conformity with Internal Revenue Code: Additional Provisions.

(a) The system is a governmental plan within the meaning of §414(d) of the Internal Revenue Code of 1986, as amended from time to time (the "Internal Revenue Code").

(b) The rights of members to benefits accrued, to the extent funded, will become vested to the extent required by, and upon the events set forth in, Treasury Regulation §1.401-6(a)(1).

(c) The term "employee," as defined in §851.001(8) of the Act, shall be limited to common law employees of a municipality, and shall exclude leased employees within the meaning of Internal Revenue Code §414(n).

(d) With respect to §851.002 of the Act, and notwithstanding any provision of the system to the contrary, reversions will be permitted only to the extent allowed under the Internal Revenue Code and any related guidance thereunder, including, but not limited to, a contribution made because of a good faith mistake of fact that is returned within one year of the date the contribution was made as permitted under Revenue Ruling 91-4, or as permitted by subsequent guidance.

(e) Repayments of previously paid out benefits, including the reestablishment of credit under §853.003 of the Act, shall comply with Internal Revenue Code §415(k)(3) and any Treasury Regulations thereunder. For purchases of permissive service credit that are described in Internal Revenue Code §415(n), including any such purchases under Chapter 853 of the Act, the provisions of Internal Revenue Code §415(n) and any Treasury Regulations thereunder shall apply, including the provisions of Internal Revenue Code §415(n)(3)(B) that, except as provided in Internal Revenue Code §415(n)(3)(D):

(1) no more than five years of nonqualified service credit within the meaning of Internal Revenue Code §415(n)(3)(C) may be taken into account under Internal Revenue Code §415(n); and

(2) no nonqualified service credit within the meaning of Internal Revenue Code §415(n)(3)(C) may be taken into account under Internal Revenue Code §415(n) before a member has at least five years of participation in the system.

(f) Notwithstanding any provision of the system to the contrary, the system shall comply with Internal Revenue Code §401(a)(31)(B) and applicable Treasury Regulations thereunder.

§127.11.Required Minimum Distributions: General Rule, Forfeiture and Reinstatement.

(a) "Required beginning date" means that April 1 of the calendar year following the later of (i) the calendar year in which the member attains the applicable age, or (ii) the calendar year in which the member terminates employment with all participating municipalities. For purposes of this section, "applicable age" means the following ages, unless otherwise provided under Section 401(a)(9)(c) of the Internal Revenue Code, as amended from time to time:

(1) age 70 1/2 if born before July 1, 1949;

(2) age 72 if born after June 30, 1949 and before January 1, 1951;

(3) age 73, if born on or after January 1, 1951.

(b) General Rules.

(1) In accordance with Internal Revenue Code Section 401(a)(9), a member must withdraw (refund) or rollover all accumulated contributions credited to that member's individual account pursuant to § 852.103 or retire from TMRS on or before the member's required beginning date.

(2) With respect to §854.003(d) and §854.104(f) of the Act, and notwithstanding any provision of the system to the contrary, the system shall comply with Internal Revenue Code §401(a)(9), including the minimum distribution incidental benefits rule of Internal Revenue Code §401(a)(9)(G), Treasury Regulations §§1.401(a)(9)-2 through 1.401(a)(9)-9 and all additional provisions prescribed in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletins, pursuant to a reasonable and good faith interpretation of Internal Revenue Code §401(a)(9).

(3) The system may establish and revise, from time to time, procedures to locate any member whose information is missing, inaccurate or incomplete.

(c) Forfeiture of Benefits. Pursuant to §854.104(f) of the Act and subject to subsections (b)(2), (b)(3), and (d) of this section, if, after the system has made a reasonable effort to locate a member and obtain a completed application, a member has not refunded or rolled over their individual account or begun to receive payment of a service retirement annuity or disability retirement annuity before their required beginning date, then effective as of the member's required beginning date:

(1) no further interest credits will be applied to the member's individual account pursuant to §855.306(b) of the Act, and

(2) the member's accumulated contributions and eligibility to receive a service retirement annuity or disability retirement annuity under the Act shall be forfeited in accordance with Treasury Regulation §1.411(a)-4(b)(6).

(d) Reinstatement of Benefits. If a member (or a beneficiary of any such member) whose benefits have been forfeited pursuant to subsection (c) of this section, files a complete application for withdrawal (refund) or for retirement from TMRS, the system will reinstate the member's account and right to receive retirement benefits under the Act, without interest or adjustment for earnings after the date of such forfeiture and, as applicable:

(1) refund the amount of accumulated contributions credited to the member's individual account as of the required beginning date in accordance with §852.103 of the Act; or

(2) pay an annuity, pursuant to §§854.103, 854.104 or 854.105 of the Act, calculated in accordance with subsection (e) of this section; provided however, that any annuity payments attributable to the period of time between the required beginning date and the last day the first month following the date that a complete retirement application is received ("delayed beginning date"), shall be permanently forfeited and shall not be restored.

(e) To comply with Internal Revenue Code §401(a)(9), the calculation of the retirement annuity payable pursuant to subsection (d) of this section shall modify §§854.002(b) and (c) of the Act to calculate the prior and current service annuity amounts using the member's age and the member's individual account balance as of the member's required beginning date.

(f) An annuity payable pursuant to subsection (d) of this section in accordance with §854.004 of the Act shall become payable as of the delayed beginning date and no payments shall be paid for the period of time from the member's required beginning date to the delayed beginning date.

(g) This section shall apply to any member who is eligible to retire from TMRS and has terminated employment with all participating municipalities, without regard to whether that member is contributing to a system that participates in the Proportionate Retirement Program set forth in Chapter 803 of the Texas Government Code.

(h) The beneficiary of a member who dies after the member's required beginning date but before a member's delayed beginning date may apply for benefits pursuant to §854.105 of the Act, however such benefits shall be calculated in accordance with subsections (e) and (f) of this section.

§127.12.Refund of Unrecovered Contributions.

A lump-sum benefit payment made pursuant to §854.502 of the Act, regarding refund of unrecovered contributions, from an account of a member who had service with more than one participating municipality shall be calculated on a municipality-by-municipality basis for payment from the benefit accumulation fund.

§127.13.Late Contributions Sent Electronically.

Contributions sent electronically to the system's depository shall be considered timely remitted under §855.410 of the Act if the contributions are received by the system's depository by the 15th day of the month.