5 Eligible Earnings. Salary Earned versus Salary Paid

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1 5 IN THIS CHAPTER Salary Earned versus Salary Paid PERA-Eligible Salary Salary not Subject to PERA Closer Look at Some Types of Pay - Workers Compensation Payments - Vacation Leave of Terminating Members - Sick Leave of Terminating Members This chapter will help employers determine which earnings an employee receives are eligible to use when determining pension contributions for the PERA Defined Benefit or Defined Contribution plans. This information is meant to clarify the provisions of Minnesota Statutes that govern PERA-eligible salary and is not a complete description of the law. Every effort has been made to ensure that the information in this chapter is correct; however, in case of any discrepancy, the law will govern. When using this publication, please keep in mind that the related laws, policies, and regulations are subject to change. Determining what does and what does not qualify as eligible salary for PERA purposes is important in that salary determines: 1) whether or not an employee can receive coverage in a PERA retirement plan; 2) the amount that is to be contributed by members and employers; and 3) a Defined Benefit Plan member s high five-year average salary, which is one of the components used to calculate pension benefits. Only compensation subject to PERA withholding is to be used to determine membership eligibility and to determine if a payment qualifies as eligible salary from which retirement deductions can be taken. When an employee s level of earnings qualifies him or her for mandatory membership in a PERA retirement plan, the employer must begin to withhold PERA deductions from the eligible salary (assuming that the employee is not excluded from membership for other reasons). PERA deductions are required from the pay period in which an employee s monthly earnings exceed the eligibility threshold and must continue on all future salary, even if the monthly earnings fall below $425. An employee remains a PERA member until termination of governmental service. For help enrolling new members and remitting contributions, please refer to Chapters 6 and 7. Salary Earned versus Salary Paid When determining monthly earnings for a potential PERA member, employers should include earnings from the first day of the calendar month to the last. This may differ from the dates earnings are paid. When the beginning and ending dates of a pay period lie within the first and last day of the month, it is relatively easy to determine if the individual earned more than $425. However, if pay periods fall into two or more months, it may be necessary to break down earnings by days worked to determine eligibility. 5-1

2 This breakdown of earnings does not need to be reported to PERA. Instead, you may want to retain this information in the employee s personnel file to document your eligibility decisions. PERA-Eligible Salary What is considered eligible salary for PERA purposes is the same for the Defined Contribution Plan and the Defined Benefit Plans (the Coordinated, Correctional and Police and Fire plans). Generally, eligible salary means the wages or salary paid on a recurring basis by the employer to an employee for services rendered as part of the employer-employee relationship. Regular earnings, overtime compensation, and pay for used vacation, sick, or personal hours all fall within the definition of eligible salary. In determining what is and is not salary for retirement purposes, employers and PERA staff must go beyond the name that is given to the payment and consider what the payment is for and the source of the payment. If a payroll officer is uncertain about how to treat a form of compensation for PERA purposes, the individual should contact PERA for a determination before remitting contributions. In certain instances, PERA will ask that this request be in writing and include documentation relating to the compensation such as personnel policies or labor agreements. PERA-eligible earnings are not identical to Social Security-deductible earnings or to state or federal taxable income under the Internal Revenue Service. Below is a list of the types of pay that are considered to be eligible salary that is subject to PERA withholding. The list is not meant to be all-inclusive. If you have questions about a payment type, whether listed below or not, please contact PERA. Gross salary, wages, and overtime pay for services performed in an eligible position during the coverage period being reported. Eligible salary includes the employee s PERA member deductions, which are designated as picked-up contributions under Minnesota Statutes Section (b). Eligible salary includes voluntary employee-elective, tax-sheltered deductions for deferred compensation plans, supplemental retirement plans, or other voluntary reduction programs, such as flexible spending accounts, cafeteria plans, health care expense accounts, day care expenses, etc. Note: Employer-paid amounts to a deferred compensation plan are not subject to PERA withholding. Refer to Salary not Subject to PERA for additional information. NOTE: Employers must calculate federal and state income tax withholdings on the amount that remains after the PERA member deduction and any voluntary tax-deferred employee deductions are subtracted from the employee s gross salary. Refer to Chapter 7 Contribution Reporting for full details. Cash payments from accrued or banked overtime hours when the amount can be attached to an earnings period and is paid routinely to employees in the course of employment. Employers that pay overtime 5-2

3 compensatory pay on an annual or periodic basis must report the amounts separately from any regular earnings being paid to the employees and must indicate a specific earnings period for the pay. Example: An employer makes a lump-sum payment to all clerical employees for accumulated unused overtime hours at the end of the calendar year The payments are subject to PERA deductions because they are for hours that were worked by the employees from January 1, 2012 through December 31, Used vacation, sick and personal leave pay for periods of excused absence from work. This includes sick leave that is used by an employee who receives hours under a sick leave donation program. Please also see section, Paying Accrued Vacation and Sick Leave to Terminating Members, that appears later in this chapter under the subsection Closer Look at Some Types of Pay. Holiday pay when paid as routine earnings for a period of excused absence and lump-sum payments for accrued holidays that are available to a group of employees and made periodically throughout the course of employment. Employers that pay accrued unused holiday pay on an annual or periodic basis must report the amount separately from any regular earnings being paid and must indicate a specific earnings period for the holiday pay. When a contract or agreement governs cash-out payments, employers should provide a copy of the written agreement to PERA for its records. A merit or performance bonus that meets three conditions: 1) it represents a periodic payment available to a group of employees throughout the course of employment, 2) is given in consideration of high achievement or exceptional service, and 3) is associated with a specific performance period. Employers should document their merit or performance bonus programs in personnel policies or in written employment agreements and such documentation must be provided to PERA staff upon request. NOTE: Employers that issue merit or performance bonus pay to employees must report the amounts separate from any regular salary and indicate a specific earnings period for the performance pay. Example: Tom is given a fixed merit payment of $1,150 for having met the goals established for the 12-month period from September 1, 2011 through August 31, This pay is PERA-eligible and must be reported as retroactive pay for the specified 12-month period. Retroactive pay or back pay. These are wages paid to employees or former employees for any period before the current payroll period. Often, retroactive pay is the result of a salary increase negotiated through a management/union contract settlement with a retroactive effective date. Payments for lost wages made either to an employee through a court order or arbitrator s award to remedy a wrongful discharge, or to an employee who receives an amount that represents back wages through an agreement between the employer and the employee. A copy of the Court Order, arbitration document, or agreement must be submitted to PERA for review. Longevity or stability bonus pay when it meets four conditions: 1) it is attached to a specific earnings period, 2) it represents a periodic 5-3

4 payment, whether paid annually or more frequently, 3) it is available to a group of employees throughout the course of employment, and 4) it is based on length of service. Employers paying longevity pay on an annual basis must report the amount separately from any regular earnings and must indicate a specific earnings period for the longevity pay (such as 07/17/ /31/2012). Additional pay for working on a scheduled holiday. Example: A police officer works on July 4 th and has the choice of taking another day off with pay or receiving an extra day s pay. When the employee takes the extra day of pay, the payment is viewed similarly to overtime pay and is PERA-eligible salary. Salary or sick leave paid in addition to Worker s Compensation payments. Also see Workers Compensation payments that appears later in this chapter under the subsection Closer Look at Some Types of Pay. Salary paid to district court reporters Fees paid to employees (excluding court reporters) in addition to salary Short-term disability payments from self-insured governmental subdivisions are generally considered salary; however, employers should provide a copy of the program s provisions to PERA for a determination. As a general rule, PERA considers payments from employers to employees under short-term disability programs as salary when the: o short-term disability program is an extension of a current or previous sick leave benefit provided directly by the employer, o the employer is replacing the full salary of the employee, o the employee continues to accrue sick/vacation/personal leave while on short-term disability, and o the employer continues to pay the cost of medical coverage provided as part of its benefit package. Tips when collected by the employer and paid to employees as wages Jury duty leave paid by employers -- Paid absences of employees excused from work for jury duty Court appearance pay awarded by the employer to its police officer employees. Salary not Subject to PERA Some forms of compensation are not subject to PERA deductions and must not be reported as pension-eligible salary. PERA withholding cannot be made on the following forms of compensation. Again, this list is not allinclusive. If you have any questions, contact PERA. Fees paid to district court reporters Unused annual, sick, vacation, or personal leave payments, in lumpsum or periodic payments; or the value of hours donated under a benevolent vacation and sick leave donation program An employer-paid amount to a deferred compensation plan, including an amount paid by the employer as a supplement to salary 5-4

5 either as a lump-sum amount or a fixed (or matching) amount paid on a recurring basis which is not available to the employee as cash. Lump-sum longevity or stability bonus pay such as a one-time payment issued upon completion of 20 years of service Lump-sum payments made under wellness programs or incentive programs that provide compensation for the preservation of accumulated sick leave. Lump-sum settlements not attached to a specific earnings period Severance pay Court-ordered damages Retirement incentive pay or retirement bonuses Expense payments, including allowances or per diems for, or reimbursement of job-related expenses including but not limited to parking, mileage, meals, travel, moving, education, uniforms, tools, charges assessed for personal use of a company vehicle. These types of payment are excluded from pension-eligible salary regardless of whether the individual uses the full amount for expenses or receives cash for any unused allowance. Workers Compensation payments from a third-party payer. Also see Workers Compensation payments that appears later in this chapter under the subsection Closer Look at Some Types of Pay. Employer-paid fringe benefits, flexible spending accounts, cafeteria plans, health care expense accounts, day care expenses, or any payments instead of any employer-paid insurance coverage, including the difference between single and family rates that may be paid to a member with single coverage Employer-paid amounts paid directly to an employee to be used toward the cost of insurance coverage regardless of whether the individual uses the full amount for insurance coverage or receives cash for any unused allowance. The amount equal to that which the employing unit would otherwise pay toward single or family insurance coverage for a covered employee when, through a contract or agreement with some but not all employees, the employer: o discontinues, or for new hires does not provide payment toward the cost of the employee s selected insurance coverage; o makes the employee solely responsible for all contributions toward the cost of the employee s selected insurance coverage under a group plan offered by the employer, including any amount the employer makes toward other employees selected insurance coverage under a group plan offered by the employer; and o provides increased salary rates for employees who do not have any employer-paid group insurance coverage. Except as provided in section or , compensation of any kind paid to volunteer ambulance service personnel or volunteer firefighters for ambulance or fire fighting services 5-5

6 Referral pay given to employees that help their employer to recruit new workers and signing bonuses awarded to new employees. Long-term or short-term disability insurance payments paid by a thirdparty insurance provider. As a general rule, long-term disability payments from self-insured governmental subdivisions to employees are considered a fringe benefit, rather than salary for PERA purposes. However, employers should provide a copy of the long-term disability program s provisions to PERA for a determination. Jury duty compensation paid to a PERA member by the court, or expense payments to a PERA member paid in addition to regular salary while on jury duty leave. Some county employers add the pay for jury services to their employees wages and issue one payment. When this is done, the pay for jury services is not PERA-eligible salary. Other employers reduce an employee s regular salary by the amount the person receives directly from the court for jury duty. When employers reduce the member s pay by the amount of the jury duty expense, this reduces the compensation from which PERA contributions are made. The net effect of this practice is that the employer does not pay for the full work absence of the employer for jury duty. Amounts paid to a former police officer for a court date appearance that falls after the individual s termination date and thus after the employer/employee relationship has ended. Compensation in excess of the limitations of section Refer to Compensation or Contribution Limits in Chapter 7 Contribution Reporting for details. Closer Look at Some Common Types of Pay PERA receives a number of questions regarding the eligibility of compensation that is paid to employees who are receiving workers compensation benefits and employees who receive severance payments when they terminate employment. Given the number of questions that surface, this section will focus on these employment situations. Workers Compensation Payments Workers Compensation payments issued from a third-party are not considered salary for PERA purposes. When an employee is placed on an extended Workers Compensation leave, the employee generally receives a Workers Compensation benefit payment equal to two-thirds of his or her normal salary. PERA deductions should not be taken from the Workers Compensation benefit payments and should not be reported as part of the employee s salary. On the other hand, PERA deductions are to be taken from salary or wages that are paid in addition to Worker s Compensation benefits. (The compensation is often equal to one-third of the person s usual wage or salary.) If the employee uses accumulated sick or vacation leave to make up for the reduced level of compensation he or she has during the Workers Compensation leave period, then the used sick or vacation leave payment is to be reported as salary and PERA deductions taken from it. 5-6

7 Sometimes employees who are absent from work and drawing Workers Compensation benefits are issued retroactive payments for pay periods in which the employee s full salary and contributions were reported to PERA. If this happens, you must notify PERA so that the employee s salary and contributions can be corrected. PERA will issue a refund of contributions for any salary amounts that have been retroactively replaced by Workers Compensation payments. Vacation Leave of Terminating Members When a PERA member is terminating public service, the individual often times is eligible to receive compensation for accrued vacation hours and severance pay as part of finalizing the employee s separation. Employers may pay a terminating member for accumulated vacation leave in a lump sum or may keep the employee on the payroll until the accrued leave is fully used and paid out. The method of payment selected affects PERA contributions and allowable service credit as noted below. Don t withhold deductions on lump sum payments that represent unused leave hours. Lump-sum payments The effective date of the employee s termination is the last day worked. If accumulated vacation hours are paid in a lump sum when an employee terminates, PERA contributions are not to be deducted. PERA service credit is not earned on lump-sum vacation leave payments made by employers to employees. On payroll in a paid time-off status The effective date of the employee s termination is the last day the employee is in a paid-status. If the PERA member is carried on the payroll by the employer as an employee until all accrued vacation leave is used, PERA contributions are deducted from the amounts that are paid to the employee for each pay period and the employee is given allowable service credit. Sick Leave of Terminating Members When a terminating PERA member receives compensation for accrued sick hours, the payment amount may or may not be PERA-eligible salary as noted below. Lump-sum payments Lump-sum pay for accrued sick leave is not to be reported to PERA as eligible salary under Minnesota law. If accumulated sick leave hours are paid in a lump sum when an employee terminates, PERA contributions are not to be deducted. On payroll in a paid time-off status Pay that is issued to an employee for days or hours in which the person is absent from work due to approved use of sick leave for medical reasons is considered salary and should be reported as regular wages upon which PERA deductions are withheld. The usage of the accrued hours should be 5-7

8 as the same rate that the employee would have worked during the applicable pay period(s). Please note that when a written agreement or contract stipulates the terms of the member s separation of public service, employers must send a copy of the agreement to PERA before making any final determination about PERA withholding. 5-8