Subject: DRS Email 11-030, HB 2070 Benefit Calculation Protections

  • Notice No.: 11-030
  • Date: October 04, 2011
  • Applies to: All Employers
  • Subject: DRS Email 11-030, HB 2070 Benefit Calculation Protections

HB 2070, passed in the 2011 legislative session, continues all protections to a member’s benefit calculation allowed in the 2009-2011 biennium. However, it expands the population to cover members of all systems and plans for the 2011 – 2013 biennium. HB 2070 also updates the definition of forgone compensation to include a loss of pay that is not tied to a loss of work hours. This update to the definition is in addition to reduced work hours, mandatory leave without pay, and temporary layoffs as previously granted.

As in the 2009-2011 biennium, the protection allows forgone compensation or reductions to current pay to be included in a member's AFC/FAS/AFS period, if the reductions are an integral part of the employer's expenditure reduction efforts as certified by the employer.

Examples:

  1. As part of the 2011 budget, a 3% pay reduction for the 2011-2013 biennium was instated for all State Agency employees. This pay reduction is not tied to a reduction in work hours. Does this reduction qualify as forgone compensation?

    Yes, the forgone compensation would be included in the calculation if the average compensation period falls within the 2011 – 2013 biennium.
  2. Ben’s employer determines that its expenditure reduction efforts during the 2011-2013 biennium will include reducing Ben’s work hours. Ben is a fulltime employee earning $3,000 and will be subject to two furlough days per month for six months. If this period falls within Ben’s average final compensation period will it qualify under the law?

    Yes.
  3. City of Summerville decides to give all of their employees a 2.5% cost of living increase instead of 5.0% they had hoped to give as a part of their expenditure reduction effort. Would this reduction qualify under the law?

    No, this is not a reduction of salary and hours.

How do these changes impact reporting by employers?

Your method of reporting has not changed from the 09-11 biennium. Employers should report actual hours worked and compensation paid. However, since the population of affected members has now expanded, it will be necessary for you to maintain the appropriate documentation for a larger population of your employees.

Why do I need to maintain documentation?

If DRS determines that the 11-13 biennium could impact a member’s AFC period, the employer will be asked to verify the use of furloughs or forgone compensation as part of an expenditure reduction effort. Also, the employer will be asked for the amount of compensation foregone by an employee, the hours that would have been worked and the period in which the work would have taken place. DRS is not prescribing the documentation employers should keep on the furloughs. This may be done by employer resolution, documentation in an employee’s personnel file, or any other method that will allow an employer to respond to future requests.

Who may be affected?

All members of PERS, SERS, TRS, WSPRS, LEOFF and PSERS. The member must have all or part of the 2011-2013 biennium in their average final compensation (AFC) time period.

How does a furlough affect a member’s retirement benefit?

HB 2070 provides only for lost compensation due to a furlough or forgone compensation, it does not grant service credit.

  • Earnings: In furlough cases, there will be a reduction in earnings reported by the employer. This reduction could be a small amount per month or full months of leave without pay. In applying HB 2070, DRS will confirm the furlough impact on earnings with the employer.
  • Service Credit: Depending on the retirement plan and the length of the furlough, service credit may be affected as the member will be granted service credit (full or partial) based on the hours of service reported each month. In situations where members of Plans 2 and 3 lose service credit due to a furlough, they have the option of purchasing the time as an authorized leave of absence. Plan 1 has no such provision.
  • Retirement Benefit Calculation: The AFC period is determined by consecutive service credit months of a member’s highest earnings. The member must still have sufficient service credit in the months the furlough took place in order for DRS to include it in the AFC.

Key Points

  • Employers should report normally – hours worked and compensation paid
  • Retirement contributions should only be taken on compensation paid
  • Members will only be impacted if their AFC period includes the 2011-2013 biennium
  • A member does not have to retire during the current biennium to benefit from HB 2070
  • Early and mid-career employees are less likely to have a furlough/temporary pay reduction in the current biennium impact their AFC period

Questions

Should you have questions, please reply to this notice or call Employer Support Services at 360-664-7200 (option 2) or 1-800-547-6657 (option 6 then option 2).

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