Interest on Pension Loan From Teachers’ Pension and Annuity Fund That Was Not Charged When Due Cannot be Waived

Zilberberg v. Board of Trustees, Teachers’ Pension & Annuity Fund, ___ N.J. Siper. ___ (App. Div. 2021). Barbara Zilberg, a former school psychologist, got a pension loan in 2004 from the Teachers’ Pension and Annuity Fund (“TPAF”). Judge Whipple’s opinion for the Appellate Division today explained that “TPAF is a tax-qualified governmental plan under the Internal Revenue Code (IRC), which regulates how members may borrow and repay money from TPAF. Pension loans through TPAF are repaid by active employees through payroll deductions, or by retirees through pension check deductions; IRC and statutory requirements for repayment maintain TPAF’s tax-qualified status.”

Zilberberg was to repay the loan in 49 equal deduction payments, with a 4% interest rate. She retired three months after receiving the initial loan payout. As of that date, she had made two payments via payroll deductions. Once she retired, however, the Division of Pension and Benefits (“the Division”) mistakenly failed to deduct her loan payments from her pension. As a result, for thirteen years, through September 2017, Zilberberg got what Judge Whipple ultimately labeled “an interest-free loan.”

In September 2017, the Division notified Zilberberg that an audit had revealed the Division’s error, and that the Division would begin deducting amounts from her pension checks to cover not only the principal but interest that had accrued over the thirteen years. The interest amounted to nearly as much as the loan.

Zilberberg claimed that TPAF was not entitled to interest since it had erred in its billing. Later, she asked the Board of TPAF to waive the interest. The Board declined to waive the interest. Its “decision noted that the State had entered into a closing agreement with the Internal Revenue Service (IRS) under which outstanding pension loans, plus interest, would be repaid to State-administered retirement systems, including TPAF, to protect their tax-qualified status.”

Zilberberg appealed, and today the Appellate Division affirmed. Judge Whipple, applying the “arbitrary and capricious” standard of review applicable to review of agency actions, concluded that “[t]he I.R.C., § 72(p),” and New Jersey statutes “controlled the interest obligation, even though it was the Division’s fault the payments were not deducted from Zilberberg’s pension checks.” Under that statutory regime, “TPAF has a statutory duty to collect interest on distributions.”

Moreover, Judge Whipple said, “[r]epayment of interest to TPAF is crucial to maintain the pension plan’s tax-qualified status. If Zilberberg were to fail to pay the interest associated with the loan, the pension system and its members could face challenges to their status.” She concluded by saying that ” Zilberberg received more from the retirement system than she was entitled to receive, and she is not permitted to benefit from the Board’s billing mistake. The statutes are clear that the Board must correct its error and adjust Zilberberg’s deductions to include the interest that will maintain TPAF’s tax-qualified status.”

Zilberberg argued that ruling for the Board violated the six-year contract statute of limitations. But Judge Whipple noted that the Board had not instituted an action at law, so the statute did not apply. She was equally unpersuaded by Zilberberg’s assertion of laches.

Lastly, Zilberg appealed to the equities, citing Sellers v. Board of Trustees of the Police & Firemens’ Retirement System, 399 N.J. Super. 51 (App. Div. 2008). That case recognized that the Board can apply equitable principles where justice so requires. But Sellers also noted that “the power is used rarely and sparingly, and [when it] does no harm to the overall pension scheme” (emphasis by Judge Whipple). Here, allowing Zilberberg not to pay the interest would harm the pension scheme.