PROPOSED RULES
RETIREMENT SYSTEMS
Original Notice.
Preproposal statement of inquiry was filed as WSR 02-16-085.
Title of Rule: Excess compensation.
Purpose: This rule explains how the Department of Retirement Systems (DRS) makes excess compensation determinations under RCW 41.50.150.
Statutory Authority for Adoption: RCW 41.50.050(5).
Statute Being Implemented: RCW 41.50.150.
Summary: This rule explains how DRS makes excess compensation determinations under RCW 41.50.150.
Reasons Supporting Proposal: This rule is intended to explain to employers how DRS calculates excess compensation. The rule will also codify a long-standing internal DRS process/procedure.
Name of Agency Personnel Responsible for Drafting: Merry A. Kogut, P.O. Box 48380, Olympia, WA 98504-8380, (360) 664-7291; Implementation and Enforcement: Lucille Christenson, P.O. Box 48380, Olympia, WA 98504-8380, (360) 664-7069.
Name of Proponent: Department of Retirement Systems, governmental.
Rule is not necessitated by federal law, federal or state court decision.
Explanation of Rule, its Purpose, and Anticipated Effects: This rule is intended to explain to employers how DRS calculates excess compensation. The rule will also codify a long-standing internal DRS process/procedure.
Proposal does not change existing rules.
No small business economic impact statement has been prepared under chapter 19.85 RCW. These amendments have no effect on businesses.
RCW 34.05.328 does not apply to this rule adoption. The Department of Retirement Systems is not one of the named departments in RCW 34.05.328.
Hearing Location: Department of Retirement Systems, 6835 Capitol Boulevard, Boardroom 3rd Floor, Tumwater, WA, on February 26, 2003, at 10:00 a.m.
Assistance for Persons with Disabilities: Contact the rules coordinator by seven days before the hearing, if possible, phone (360) 664-7291, TTY (360) 586-5450, e-mail merryk@drs.wa.gov.
Submit Written Comments to: Identify WAC Numbers, Merry A. Kogut, Rules Coordinator, Department of Retirement Systems, P.O. Box 43830, Olympia, WA 98504-8380, e-mail Merryk@drs.wa.gov, fax (360) 753-3166, by 5:00 p.m. on February 26, 2003.
Date of Intended Adoption: No sooner than February 27, 2003.
December 6, 2002
Merry A. Kogut
Rules Coordinator
OTS-6092.1
NEW SECTION
WAC 415-02-140
What is excess compensation and how is it
calculated?
(1) What is excess compensation? Excess
compensation refers to certain payments from an employer to an
employee, if the payment is used in the calculation of the
employee's retirement allowance. If used in the calculation
of an employee's retirement allowance, the following payments
are excess compensation:
(a) A cash out of unused annual leave in excess of two hundred forty hours;
(b) A cash out of other forms of leave, including sick leave and holiday leave;
(c) A payment for a personal expense, if the payment qualifies as reportable compensation in the employee's own retirement system;
(d) That portion of any payment, such as an overtime or incentive payment, that exceeds twice the employee's regular rate of pay for the period of time that the overtime or incentive payment applies; and
(e) Any termination or severance payment.
(2) How is the amount of excess compensation calculated? The department:
(a) Determines the increased amount of retirement benefits related to the excess compensation;
(b) Obtains the actuarial factor based on age for the monthly benefit per one dollar of accumulation to defined benefit plan (see WAC 415-02-340);
(c) Divides the benefit increase due to excess compensation by the actuarial factor; and
(d) Uses the result for the excess compensation billing.
(3) How does the payment of excess compensation affect employers? The department will bill an employer for any increase in an employee's retirement benefit resulting from the excess compensation. The employer must pay the present value of the amount by which the employee's pension is increased.
(4) Examples:
(a) Example 1: Excess compensation arising from cash out of sick leave (PERS Plan 1):
| Denise is a 59 year old public employees' retirement system Plan 1 member and retires with thirty years of service. She will be cashing out $8,000 in sick leave. Denise earned her two highest years of pay during her last two years of employment; therefore, the department will use these years to compute her average final compensation (AFC). |
| Year 1 | - | $59,000 Salary |
| Year 2 | - | $61,000 Salary + $8,000 sick leave cash out |
| Q: Did Denise receive excess compensation? | |
| A: Yes. Under subsection (1)(b) of this section, the
$8,000 sick leave cash out is excess compensation. |
|
| Q: Does the excess compensation increase Denise's retirement allowance? | |
| A: Yes. Denise's retirement allowance increases by $200/month as shown: |
| Without the excess compensation (cash out): | ||
| AFC | = | ($59,000 + $61,000)/2 = $60,000 |
| Retirement allowance | = | 2% x $60,000 x 30 years = $36,000/year ($3,000/month) |
| With the excess compensation (cash out): | ||
| AFC | = | ($59,000 + $61,000 + $8,000)/2 =$64,000 |
| Retirement allowance | = | 2% x $64,000 x 30 years = $38,400/year ($3,200/month) |
| Difference in retirement allowances: | ||
| $3,200/month - $3,000/month = $200/month | ||
| Q: How much must the employer pay to fund the additional retirement costs? | |
| A: The employer must pay $24,565.50, as shown: |
| Using an annuity factor of 0.00814151: | ||
| $200/month | = | $24,565.50 |
| 0.0081415 | ||
| 1Based on Denise's age of 59. The factor can be found in the table in WAC 415-02-340. | ||
| George is a teachers' retirement system Plan 1 member who has 28 years of service and is retiring at age 55 from a school district. The collective bargaining agreement provides two days of personal holiday leave per year and allows for the cash out at retirement of any unused balance of personal holiday leave. Personal leave days are defined as "other forms of leave" under subsection (1)(b) of this section. The following example shows the computation of excess compensation: |
| Year 1 | - | $52,500 Salary |
| Year 2 | - | $54,000 Salary + $900 for four days of personal leave cash out |
| Q: Did George receive excess compensation? | |
| A: Yes. Under subsection (1)(b) of this section, the
$900 leave cash out is excess compensation. |
|
| Q: Does the excess compensation increase George's retirement allowance? | |
| A: Yes. George's retirement allowance increases by $21/month as shown: |
| Without the excess compensation (cash out): | ||
| AFC | = | ($52,500 + $54,000)/2 = $53,250 |
| Retirement allowance | = | 2% x $53,250 x 28 years = $29,820 ($2,485/month) |
| With the excess compensation (cash out): | ||
| AFC | = | ($52,500 + $54,000 + $900)/2 =$53,700 |
| Retirement allowance | = | 2% x $53,700 x 28 years = $30,072 ($2,506/month) |
| Difference in retirement allowances: | ||
| $2,506/month - $2,485/month = $21/month | ||
| Q: How much must the employer pay to fund the additional retirement costs? | |
| A: The employer must pay $2,802.28, as shown: |
| Using an annuity factor of 0.00749392: | ||
| $21/month | = | $2,802.28 |
| 0.0074939 | ||
| 2Based on George's age of 55. The factor can be found in the table in WAC 415-02-340. | ||
| Susan is retiring at age 65 in PERS Plan 2. She worked on a special project in February. Her employer awarded Susan with a bonus for February of $15,083.33. The department will compute Susan's excess compensation as follows: |
| Year 1 | - | $59,000 Salary |
| Year 2 | - | $61,000 Salary + $15,083.33 bonus for services provided in the month of February. |
| Q: Is there excess compensation? | |
| A: Yes. There is $4,916.67 in excess compensation, as shown: |
| Regular monthly rate: | $61,000/12 = $5,083.33/month |
| Twice February's monthly rate: | 2 x $5,083.33 = $10,166.66 |
| Excess compensation: | $15,083.33 - $10,166.66 = $4,916.67 |
| Q: Does the excess compensation increase Susan's retirement allowance? | |
| A: Yes. It increases by $122.91/month, as shown: |
| Without excess compensation (portion of bonus): | ||
| AFC | = | ($59,000 + $61,000 + $15,083.33 -$4,916.67)/2 = $65,083.33 |
| Retirement allowance | = | 2% x $65,083.33 x 30 years =$39,050/year ($3,254.17/month) |
| With the excess compensation (portion of bonus): | ||
| AFC | = | ($59,000 + $61,000 + $15,083.33)/2 =$67,541.67 |
| Retirement allowance | = | 2% x $67,541.67 x 30 years =$40,525/year ($3,377.08/month) |
| Difference in retirement allowances: | ||
| $3,377.08/month - $3,254.17/month = $122.91/month | ||
| Q: How much must the employer pay to fund the additional retirement costs? | |
| A: The employer must pay $16,962.93, as shown: |
| Using an annuity factor of 0.0072458: | ||
| $122.91/month | = | $16,962.93 |
| 0.0072458 | ||
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