retirement-covered compensation: what schools need to know about retirement incentives

Pennsylvania Association of School Business Officials2012 Annual Conference & Exhibits

Retirement-Covered Compensation:

What Schools Need to Know About Retirement Incentives

Charles K. SerineDeputy Chief Counsel, PSERS

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WEBCAST PARTICIPANTS: Listen to audio over your computer speakers. (If you prefer to listen by phone, you may dial-in using the numbers provided in your invitation . Phone lines will be available 10 minutes prior to the event start.)


Retirement-Covered Compensation

• FAS impacts benefit – spikes in FAS result in cost shifting to other employers

• PSERS is Defined Benefit Plan – pension based on a fixed formula

• Code excludes payments that artificially inflate FAS

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Retirement-Covered Compensation• Code limits what PSERS can

recognize

• BUT - Code does not limit what employers can pay

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Retirement-Covered CompensationCompensation is all regular remuneration

excluding:1. expenses incidental to employment;2. bonus;3. severance payment;4. payments not based on the standard salary schedule;5. unused vacation and sick leave; 6. attending seminars and conventions; and7. any payment made to enhance FAS.

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Exclusions–Bonus

• Generally, one time payment not added to base salary

• Longevity payments - not allowed if not added to base salary

• Incentive pay is allowed – Beardsley

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– Incentive under Beardsley IF:• Payment tied to actual work

performance• Performance standards agreed ahead of

time• Objective means of calculating payment• Employer contractually obligated to

make payment if standards are met

Exclusions

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Retirement-Covered Compensation• Hypothetical:

– Employees shall be eligible for a performance bonus if agreed-upon management objectives are met. Prior to school year, each employee will meet with supervisor to develop objectives. Performance bonus will not be part of annual salary. If objectives are met, bonus will be paid.

RCC?

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Retirement-Covered Compensation

• Yes– Meets Beardsley standards– One-time nature of payment will not disqualify

it– Use of word “bonus” not significant – look at

substance– Similarly, Calling a bonus an “incentive” will

not make it so

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What is Work?

• School Employee is a person “engaged in work” relating to a public school

• Work = Person performing some service of value to an employer for which the employer agrees to pay compensation

• Agreement under which an employer pays an employee, but where employee has no obligation to perform any service, while lawful, is not RCC

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What is Work?

• Paid administrative leave – not RCC (Hoerner)

• Contract buyouts – not RCC

• Cannot buy service credit by paying a salary – must perform work

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Approved Leave of Absence

• Statutory Exceptions to “work”–Activated military service–Sabbatical–Service as exchange teacher–Service with a collective bargaining

organization–Professional study

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Severance Payment

Any payment, other than professional salary, made in connection with agreement to retire or terminate school service by a certain date

Analyzed on case by case basis

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Severance - Hypotheticals

1. Employee receives $20,000 for unused vacation and sick leave, in lieu of annual raise, made as part of agreement to retire. (Wyland)

2. Salary increase of 31% and 15%, made with agreement to retire. Previous high was 9% (Hoerner)

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Standard Salary Schedule–Refers to the schedule, usually

established in CBAs, whereby employees are compensated on a fixed scale that varies by seniority, experience and/or education.

–For superintendents or others not covered by CBAs, refers to the employee's position, whether the same individual or predecessors. (Christiana)

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Other Exclusions

–Unused Vacation and Sick Leave payments

–Attending seminars and conventions

–Other payments designed to enhance FAS – catchall provision

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EXAMPLES• School District will reimburse employee for

required PSERS contributions in the amount of $5,000, to be reimbursed in equal installments over a 12 month basis.

• Employee shall receive a salary of $120,000. In addition, District shall pay a supplement equal to the annual dollar limit set forth in IRC §402(g).

NOTES:No - reimbursement of an expense - not based on standard salary schedule - tax laws – employer cannot pay the employee contributions No – payment of non salary reduction TSA excluded - Hoerner

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EXAMPLES• Employee shall receive salary of $120,000,

based upon a 220 work days. Employee can work additional days beyond 220, and will be paid for each day worked above 220 at his then current rate of compensation. (Baillie)

NOTES:No – under contact for the entire year. Additional days are

merely unused vacation days.In effect vacation days were built into agreement.

Compensation = payment of unused vacation days. If he had not worked beyond 220 days, still receive entire salary. Baillie

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EXAMPLES• Any teacher who shall have been employed for 15

years as of July 1, 2012 shall be paid the sum of $2400, to be paid in the month of July, and shall not become part of the salary of the teacher.

NOTES:No – Longevity payment - one time payment not added to base

salary = bonus or payment not based on standard salary schedule Incentive – have to work 15 years to get – no - showing up for work is not the type of incentive contemplated under Beardsley

If the payment were added to the base salary, then is RCCProvides flexibility – can make it RCC or not

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EXAMPLES• Employee will be evaluated by the

Superintendent at such times as the Superintendent deems appropriate. The Superintendent may, in his sole discretion, grant Employee a merit payment not to exceed $2,500.

NOTES:NO - no objective performance standards

- no contractual obligation to make the payment even if the standards are met.

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EXAMPLES• Professional employees can earn credit pay at the

rate of $70 per pre-approved credit, not to exceed 12 credits in any one school year. The professional must earn a grade of "B" or higher.

• Employees will forego their raise for the 2011-2012 school year, except for those who agree to retire by the end of the school year. Those who agree to retire shall receive their normal raise as provided for in the CBA.

NOTES:Yes - program meets the Beardsley test: (1) an agreement reached

ahead of time on the performance standards; (2) an objective means of measuring the performance; and (3) an obligation to pay if the performance standards are met.

No – payment in exchange to retire by certain date = severance

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EXAMPLES• Employees agree to forego raises for the 2011-

2012 school year, but those who agree to retire at the end of the school year will accept the raises but then donate the raise back to the school district.

NOTES:No – no constructive receipt of the funds – must work and receive pay for

that work. Also, payment clearly designed to artificially inflate FASCompensation is “remuneration received as a school employee…”

School employee is “person engaged in work relating to a public school …and for which work he is receiving regular remuneration…” If the agreement is to return a portion of funds received, then those funds would not be paid as part of the regular remuneration of the employee.

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EXAMPLES• Employees who agree to retire at the end of

the 2011-2012 school year will receive their raises during the school year. Those employees who are not retiring will receive their raise at then end of the school year in a lump sum.

NOTES:OK – everyone getting the raise – just a cash flow issue

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Time for Questions!CONFERENCE ATTENDEES: Please come to a microphone to ask your questions.

WEBCAST PARTICIPANTS: Send text questions using the “Chat” function at the left side of your screen. Type message in box and click the arrow to send.

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Thank you for your participation!

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CONFERENCE ATTENDEES: If you are requesting CPE credit, return the CPE form to the moderator before leaving the room

WEBCAST PARTICIPANTS: Attendance Forms are required to receive either PASBO CEU or CPE credit. Webcast sites are asked to collect Attendance Forms from each participants and return to the PASBO office by March 16.

retirement-covered compensation: what schools need to know about retirement incentives

Documents

school employee

annual salary

school year

time payment

performance bonus

ituse of word bonus

base salary incentive

fas result