In order for a payment to be subject to retirement system contributions and included in the calculation of a member's retirement benefit, the payment must meet the definition of compensation earnable in RCW 41.35.010(6) . "Reportable compensation" is defined in rule as "compensation earnable." The term "reportable compensation" was coined by DRS to use the same term when discussing compensation in different retirement systems.
Reportable Compensation is Based upon the Nature of the Payment
DRS determines reportable compensation based upon the nature of the payment you make to an employee, not the name given to it. To determine if a payment is reportable compensation, consider the following:
- what the payment is for; and
- whether the reason for the payment brings it within the statutory definition of compensation earnable.
A payment conditioned upon retirement is not reportable compensation. Attaching the label "longevity" to the payment does not change the fact that the payment is conditioned on retirement. Such a payment is not for services rendered and will not be counted as reportable compensation despite being identified by the employer as a longevity payment.
What Payments Qualify as Reportable Compensation?
The basic statutory standard for determining whether a payment qualifies as reportable compensation is if the payment is for services rendered. To determine whether a payment meets this definition and is to be reported, ask the following questions:
- Was the payment earned as a salary or wage for services rendered?
Was the payment paid by the employer to an employee?
- If the answer is no, the payment is not reportable.
- If the answer is yes, ask the next question.
- If the answer is no, the payment is not reportable.
- If the answer is yes, the payment is reportable.
If you are in a third party employer/employee situation or have an employee contracting services, contact SERS Retirement Services for assistance in determining if the compensation needs to be reported.
Payments considered to be for services rendered
Base salary or wages you pay to your employees for services rendered is reportable compensation.
Compensatory time is treated as regular paid service with status code ‘A’. If the compensatory time is used, report the actual hours when they were used. If the compensatory time is cashed out, report compensatory time when it was earned.
Overtime is treated as regular paid service, reported as earned, and with status code 'A'. Overtime does not have to be identified separately from regular compensation on the transmittal, but report the actual hours worked, not time and a half.
Sick and annual leave is accumulated over time and paid to a person during a period of excused absence. The paid leave is deferred compensation for services previously rendered and is reportable.
Bonuses that are based upon meeting certain performance goals are for services rendered and are reportable.
An employer pays each employee in a work group an additional $100 if the work group had no work related accidents in the preceding year. Remaining accident free is a performance goal. Therefore, the payment is reportable. The bonus should be prorated over each of the preceding twelve months during which it was earned.
A retroactive salary increase paid to an employee who worked during the period covered by the retroactive payment increase is a salary or wage for services rendered and is reportable.
Longevity or educational attainment -A member who receives a salary increase based upon longevity or educational attainment receives a higher salary without working more hours. The higher salary indicates a higher level of service due to greater experience or more education. The payment is a payment for service and is reportable compensation.
Cafeteria plans -Compensation received in any form under the provisions of a "cafeteria plan," "flexible benefits plan," or similar arrangement according to the provisions of section 125 of the United States Internal Revenue Code is reportable compensation if the employee has an absolute right to receive cash or deferred cash payments in lieu of the fringe benefits offered. In such an instance, the fringe benefit is provided instead of cash and is considered reportable compensation the same as cash. If there is no cash option, the value of the fringe benefit is not a salary or wage and is not reportable.
Deferred wages (payments earned by, but not paid to, an employee)-Payments earned by an employee for services rendered but deducted from his or her salary rather than paid are reportable.
- Tax withholding
- Retirement contributions
- Voluntary deductions; i.e., 403b contributions or other authorized deductions.
Reportable compensation not for services rendered
In general, payments cannot be considered reportable compensation unless they are for services rendered. Some payments are reportable that are not for services rendered. A description of these payments is included in WAC 415-110 through 488.
The following are payments not for services rendered that may be reportable.
Paid leave not earned over time -may be reportable if:
- The payment is equal to the salary for the position from which the employee is on leave; and
- The payment is actually from the employer.
Union leave -salary may be reportable if:
- The leave of absence is authorized by a collective bargaining agreement that provides the member shall retain seniority rights with the employer during the period of leave; and
- The compensation reported does not exceed the salary paid to the highest paid job class covered by the collective bargaining agreement.
Note: Refer to DRS Notice 93-014 for more information about reporting an employee who takes a leave of absence to serve as an elected official of a labor organization.
Legislative leave --salary foregone may be reportable if:
- The employee chooses between:
- Option 1: The reportable compensation he or she would have earned had the member not served in the legislature; or
- Option 2: The actual reportable compensation for nonlegislative public employment and the legislative service combined.
Note: If the employee selects Option 1, he or she is responsible for paying the additional employer and employee contributions on any difference between the Option 1 and Option 2 amounts.
Compensation authorized by statute for periods of absence due to sickness or injury-Certain types of payments for periods of absence due to illness or injury have been identified by statute as reportable compensation. These payments are:
- The regular salary an employee would have received had he or she not been absent due to an injury that occurred on the job. In order for this to be reportable compensation, the employee must be receiving benefits under Title 51 RCW (Industrial Insurance) or a similar federal workers' compensation program. Refer to RCW 41.35.070 for the rules about reporting this payment type.
Note: Whether this salary is reported on the monthly transmittal or the service credit is purchased retroactively, no more than 12 consecutive months of service credit will be granted. If a member returns to work for at least one month, he or she may be eligible for another 12 consecutive months of service credit regardless of whether the disability leave is due to a flare-up of the original injury.
Refer to DRS Notice 94-006 for more information about reporting employees who are on a leave of absence due to a temporary duty disability.
Standby pay is excluded from the definition of service
(see RCW 41.35.010(7)); however, it is specifically identified as reportable compensation in WAC 415-110-469.
Reinstatement or payment in lieu of reinstatement -if an employer makes payments to an employee for periods the employee was not employed and those payments are made upon reinstatement or in lieu of reinstatement, the payments are reportable. RCW 41.35.010(6) specifically designates these payments are only reportable to the extent that they are equivalent to the salary the employee would have earned had he or she been working. The payment will be prorated over the entire period that the employee was suspended, terminated, or otherwise absent from work. (WAC 415-110-467)
Sick, Annual and Personal Leave Usage
Sick leave, annual leave and personal leave are typically accumulated over time and paid to a person during a period of excused absence. Leave accrues at a prescribed rate, usually a certain number of hours per month. The employee earns a leave day by rendering service during the month the leave was accumulated. When the employee uses his or her accrued leave to take a paid day off, the payment is deferred compensation for services previously rendered. The payment is a salary or wage earned for services rendered and is reportable.
Cash out payments for sick, annual and personal leave
If an employee receives payment instead of using accrued leave, he or she receives a "cash out" for the accrued leave. Cash outs are not reportable for SERS members. Cash outs are excluded by statute from the definition of reportable compensation for SERS Plan 2 and Plan 3 members. (See WAC 415-110-456 concerning leave cash outs.)
Cash out of Compensatory Time
If compensatory time is cashed out, report the time as regular compensation with status code 'A'. Report the compensation when it was earned as regular paid service, but report the actual number of hours, not time and a half. However, if the compensatory time is used, treat it as regular paid service with status code 'A', but report as used, not earned.
Payments not Considered Reportable Compensation
The following payments are not for services rendered and are not reportable.
Annual leave cash out - If an employee receives payment instead of using accrued leave, the payment is a cash out and is not reportable.
Fringe Benefits -payments made by an employer to a third party to provide benefits for an employee are not part of the employee's salary or wage and are not reportable. Examples of these payment types are insurance premiums and employer retirement contributions.
Disability Insurance -payments for disability insurance are not for services rendered and are not reportable. These payments are made to an employee because he or she is not able to render services due to a disability.
Workers' Compensation -payments to a member are not payments for services rendered and are not reportable. This is true whether the payments come from the Department of Labor and Industries or from a self-insured employer.
Note: Some employers have an employee on unpaid disability leave submit his or her worker's compensation payments to the employer and then issue the employee a check through their payroll system. This exchange does not change the nature of the worker's compensation payments and does not make the payments reportable. An employee may elect to make contributions and receive service credit for periods of disability covered by industrial insurance (see RCW 41.35.070)
Illegal Payments -made by an employer in excess of the employer's legal authority are not reportable.
School districts are prohibited from increasing an employee's salary to include a payment in lieu of a fringe benefit, per RCW 28A.400.220. If a district increased a person's salary instead of providing a fringe benefit, the payment would be illegal and should not be reported.
Optional Payments -if an employee can receive an additional payment only on the condition of taking an action other than providing service, the payment is not for services rendered and is not reportable.
Example: — An employer offers to make a contribution to a deferred compensation plan on behalf of an employee only if the employee agrees to defer a portion of his or her salary. Because the employee does not have an absolute right to receive the contribution based solely on the rendering of service, the payment is not reportable compensation.
Reimbursements for Expenses -incurred while performing services for an employer are not wages for services rendered and are not reportable. Examples of reimbursement expenses include mileage reimbursements for use of a private car on employer business or meal and lodging reimbursements for business trips.
Retirement Bonus or Incentive -a payment made to an employee as a bonus or incentive to retire or terminate is not a payment for services rendered and is not reportable.
Serverence Pay earned overtime or otherwise -is not reportable (WAC 415-110-458)
Car Allowance -some employers pay car allowances instead of reimbursing for actual miles driven in the employee's car for the employer's business. These payments are not for services rendered and are not reportable.
Disability Retirees-SERS Plan 2 and Plan 3 -payments are not reportable until they meet the "comparable compensation" requirements under RCW 41.35.440 for Plan 2 and 41.35.690 for Plan 3 even though the employee may be in an eligible position. Contact SERS Retirement Services for a determination of "comparable compensation."
Personal leave cash out - If an employee receives payment instead of using accrued leave, the payment is a cash out and is not reportable.
Sick leave cash out - If an employee receives payment instead of using accrued leave, the payment is a cash out and is not reportable.
See the SERS Reportable Compensation Table for additional information.