The excess compensation statute, Revised Code of Washington (RCW) 41.50.150, was amended by House Bill 1102 (Chapter 221, Laws of 1997) effective July 27, 1997. Changes regarding excess compensation apply to members of Public Employees' Retirement System (PERS), Teachers' Retirement System (TRS), Law Enforcement Officers' and Fire Fighters' Retirement System (LEOFF) and the Washington State Patrol Retirement System (WSPRS).
The amendment narrowed the scope of the law by limiting excess compensation to the types of payments specifically listed in the statute. The information in this notice supersedes Department of Retirement Systems (DRS) Notice 95-010, which described 1995 changes to excess compensation under RCW 41.50.150.
Excess compensation consists of specific types of reportable compensation, when the payment increases the members retirement allowance. If payment included in a retiree's retirement allowance calculation qualifies as excess compensation, then the applicable employer is responsible for the resulting trust fund liability. The employer is liable for the total estimated cost of all present and future retirement benefits attributable to the excess compensation. For further information regarding how a retirement allowance is calculated, refer to the appropriate member handbooks.
Excess compensation includes the following payments, when used in the calculation of the member's retirement allowance:
Refer to RCW 41.50.150 for specific language. These payment types are discussed in more detail below.
A leave cashout is any compensation added to wages or salary that is paid along with a reduction of the employee's leave balance. Annual leave cashouts are reportable only for members of PERS Plan 1, TRS Plan 1 and WSPRS.
The following leave cashouts will result in an excess compensation invoice to the applicable employer if the cashouts increase a member's retirement allowance:
Following is an example in which a payment for additional time qualifies as excess compensation:
Example: A one month project is assigned to a current employee and the rate of pay is three times the employee's regular rate of pay. The amount of pay that exceeds twice the regular rate of pay would be considered excess compensation if used to increase the member's retirement allowance.
Following is an example in which a payment for additional time does not qualify as excess compensation:
Example: An employer's policy grants Presidents' Day as a paid holiday for all employees. Due to an emergency, an employee is called to work on Presidents' Day and works a full shift. The employee receives two and one-half times the regular rate for working on that day; e.g., one day's pay for the holiday, and time and one-half for the overtime hours worked. Because the pay for the holiday is for regularly scheduled time, that portion of the day's compensation is not overtime; the employee's actual overtime rate is time and one-half. In this example, none of the pay received by the employee for working on Presidents' Day would be excess compensation.
If the employee's regular salary is not expressed in terms of a daily or hourly rate, DRS will divide the employee's regular annual or monthly salary by the number of regularly scheduled work days or hours in the work year or month. In calculating the number of regularly scheduled work days or hours in a work year, DRS will include all paid holidays and paid leave days, excluding days cashed out.
Generally, a vehicle allowance is not reportable compensation. A vehicle allowance is sometimes paid to an employee in place of mileage reimbursements for using a personal vehicle while providing services to an employer. Because the payment is a reimbursement rather than salary, it is not a payment for services rendered and is not reportable.
However, if the employer keeps records that demonstrate that the vehicle allowance exceeded the employee's actual expenses, the portion of the allowance that exceeds actual expenses is reportable. The reportable expense would be excess compensation if it was paid during the compensation period used to calculate the retirement benefit. Refer to WAC 415-108-480 for PERS and WAC 415-112-41301 for TRS.
Severance pay may or may not qualify as reportable compensation, depending on whether it was earned for services rendered. Severance pay is reportable only for members of PERS Plan 1, TRS Plan 1 and WSPRS. If severance pay qualifies as reportable compensation, and the member's retirement allowance is increased, it will result in an excess compensation invoice to the applicable employer.
Severance pay must be earned over time in the same manner as annual leave or sick leave in order to be reportable compensation for services previously rendered. Severance pay is earned over time if the employment contract(s) entered into at the beginning of the period of employment specifies the amount of severance pay to be earned in the coming year in consideration for services rendered.
Example: Mr. Jones is a school administrator. Since the beginning of his term of employment with the district, his contract has specified that he will earn one week of severance pay for every year of his employment. The earned severance pay will be paid at the time of his separation. His severance pay is reportable compensation. When Mr. Jones retires, the two weeks severance pay he earned during his two highest paid years (i.e., one week per year for two years) will be included in his retirement calculation and considered excess compensation.
Severance pay that is not earned over time is not earned for services rendered and is not reportable. Because such payments are not reportable compensation, they are not excess compensation. An example of severance pay not earned over time is a payment negotiated as part of a termination agreement.
When a PERS or TRS employer proposes to enter into a contract with an employee or group of employees that may result in an excess compensation billing, the employer must identify the compensation provision and the potential cost for excess compensation at an open public meeting. This notification may be part of the approval process for adopting a contract in whole and need not take place in separate or additional open public meetings. This requirement became effective July 23, 1995; refer to RCW 41.50.152.
At the public meeting, the employer must provide the following information:
When DRS bills the employer for the excess compensation, the employer must notify DRS of its compliance with the public notice requirement.
If you have additional questions about excess compensation or the public notice requirement, contact Jack Bryant, PERS Administrator, Leah Wilson, LEOFF and WSPRS Administrator at (360) 709-4700 or Margaret Wimmer, TRS Administrator. To use the toll free menu selection system to reach a DRS staff member, call 1-800-547-6657.
John Charles
Director
Want to communicate with us? See Contacting DRS
This page was updated October 21, 1998
http://www.wa.gov/DRS/employer/drsn/98-001.htm