(a) Unless otherwise provided by this subtitle, compensation subject to report and deduction for member contributions and to credit in benefit computations is:
(1) beginning with the 1981-82 school year, only a member’s salary and wages for service, less any amounts excluded by rules of the board of trustees adopted pursuant to Section 825.110; and
(2) in school years before the 1981-82 school year, all compensation for service that was or should have been reported under laws and rules governing the retirement system when the compensation was paid but excluding compensation greater than $25,000 for a school year beginning after August 31, 1969, but before September 1, 1979, and compensation greater than $8,400 for a school year beginning before September 1, 1969.
(b) “Salary and wages” as used in Subsection (a) means:
(1) normal periodic payments of money for service the right to which accrues on a regular basis in proportion to the service performed;
(2) amounts by which the member’s salary is reduced under a salary reduction agreement authorized by Chapter 610;
(3) amounts that would otherwise qualify as salary and wages under Subdivision (1) but are not received directly by the member pursuant to a good faith, voluntary written salary reduction agreement in order to finance payments to a deferred compensation or tax sheltered annuity program specifically authorized by state law or to finance benefit options under a cafeteria plan qualifying under Section 125 of the Internal Revenue Code of 1986, if:
(A) the program or benefit options are made available to all employees of the employer; and
(B) the benefit options in the cafeteria plan are limited to one or more options that provide deferred compensation, group health and disability insurance, group term life insurance, dependent care assistance programs, or group legal services plans;
(4) performance pay awarded to an employee by a school district as part of a total compensation plan approved by the board of trustees of the district and meeting the requirements of Subsection (e);
(5) the benefit replacement pay a person earns under Subchapter H, Chapter 659, except as provided by Subsection (c);
(6) stipends paid to teachers in accordance with former Section 21.410, 21.411, 21.412, or 21.413, Education Code;
(7) amounts by which the member’s salary is reduced or that are deducted from the member’s salary as authorized by Subchapter J, Chapter 659;
(8) a merit salary increase made under Section 51.962, Education Code;
(9) amounts received under the relevant parts of the educator excellence awards program under Subchapter O, Chapter 21, Education Code, or a mentoring program under Section 21.458, Education Code, that authorize compensation for service;
(10) salary amounts designated as health care supplementation by an employee under Subchapter D, Chapter 22, Education Code;
(11) to the extent required by Sections 3401(h) and 414(u)(12), Internal Revenue Code of 1986, differential wage payments received by an individual from an employer on or after January 1, 2009, while the individual is performing qualified military service as defined by Section 414(u), Internal Revenue Code of 1986; and
(12) increased compensation paid to a teacher by a school district using funds received by the district under the teacher incentive allotment under Section 48.112, Education Code.

(b-1) An individual receiving wages to which Subsection (b)(11) applies is considered employed by the employer for purposes of this section, and the differential wage payment is considered earned compensation. The retirement system shall determine how contributions attributable to differential wage payments are made.
(c) Excluded from salary and wages are:
(1) expense payments;
(2) allowances;
(3) payments for unused vacation or sick leave;
(4) maintenance or other nonmonetary compensation;
(5) fringe benefits;
(6) deferred compensation other than as provided by Subsection (b)(3);
(7) compensation that is not made pursuant to a valid employment agreement;
(8) payments received by an employee in a school year that exceed $5,000 for teaching a driver education and traffic safety course that is conducted outside regular classroom hours;
(9) the benefit replacement pay a person earns as a result of a payment made under Subchapter B or C, Chapter 661;
(10) any amount received by an employee under:
(A) former Article 3.50-8, Insurance Code;
(B) former Chapter 1580, Insurance Code;
(C) Subchapter D, Chapter 22, Education Code, as that subchapter existed January 1, 2006; or
(D) Rider 9, Page III-39, Chapter 1330, Acts of the 78th Legislature, Regular Session, 2003 (the General Appropriations Act); and
(11) any compensation not described in Subsection (b).
(d) For a person who first becomes a member of the retirement system after August 31, 1996, the person’s annual compensation for purposes of the retirement system may not exceed the limit imposed by Section 401(a)(17) of the Internal Revenue Code of 1986 (26 U.S.C. § 401(a)(17)), as adjusted by the commissioner of internal revenue for cost-of-living increases in accordance with that provision. This limit does not apply to a person who first became a member of the retirement system before September 1, 1996.
(e) For purposes of Subsection (b)(4), a total compensation plan must:
(1) describe all elements of compensation received by or available to all employees of the employer;
(2) provide for the availability of at least one type of performance pay to classroom teachers employed by the employer;
(3) identify each type of performance pay, the performance criteria for each type of performance pay, and the classes of employees eligible for each type of performance pay;
(4) contain sufficient information concerning the plan to ascertain the amount of each qualifying employee’s pay under the plan;
(5) contain performance criteria for earning performance pay that preclude the exercise of discretion for awarding the pay on any basis other than an evaluation of employee or group performance or availability of funding; and
(6) satisfy any other requirements adopted by the retirement system.