When estimating future financial impact of the proposed rules, what are key considerations?
How are earnings defined under Section 40 ILCS 5/15-111?
If a liability is calculated, does it apply only to employer contributions?
How will terminal vacation and sick leave payments be treated in regard to the calculation?
Does the 6% rule apply to all employees?
What is the impact of the 20% rule on the 6% calculation?
For highly paid staff, do all earnings count toward the benefit increase calculation?
What time period is used in calculating the final rate of earnings for an employee?
How can I best estimate potential future liabilities?
When estimating future financial impact of the proposed rules, what are key considerations?
Key considerations include the following:
- The rule will only be applied when the monthly benefit is calculated from the participant's final rate of earnings (FRE). Thus, it will only apply to participants who retire under general formula under the SURS Traditional or Portable Benefit plans. The calculation will not be performed for participants retiring under the "money purchase" option. Nor will it be performed for participants in the Retirement Savings Plan.
- The "base amount" used for calculating benefit increases is "earnings" as defined under
- 40 ILCS 5/15-111 of the Pension Code.
Specifically, the Pension Code provides a global definition of "earnings" as "an amount paid for personal services equal to the sum of the basic compensation plus extra compensation for summer teaching, overtime or other extra service." (40 ILCS 5/15-111) In the new provisions of Public Acts 094-0004 and 094-1057, the operative section refers to comparisons of the "final rate of earnings". Exclusions from the final rate of earnings calculation are delineated as below:
"The following are not considered as earnings in determining the final rate of earnings: (1) severance or separation pay, (2) retirement pay, (3) payment for unused sick leave, and (4) payments from an employer for the period used in determining final rate of earnings for any purpose other than (i) services rendered, (ii) leave of absence or vacation granted during that period, and (iii) vacation of up to 56 work days allowed upon termination of employment; except that, if the benefit has been collectively bargained between the employer and the recognized collective bargaining agent pursuant to the Illinois Educational Labor Relations Act, payment received during a period of up to 2 academic years for unused sick leave may be considered as earnings in accordance with the applicable collective bargaining agreement, subject to the 20% increase limitation of this Section" (40 ILCS 5/15 112)
Notes: Although terminal vacation pay of up to 56 days is included in the final rate of earnings, it is excluded from the definition of earnings under 40 ILCS 5/15-111. Therefore, under JCAR rules, it will not be included in the 6% calculation. Exclusions provided for in Public Acts 094-0004 and 094-1057 will also be excluded.
If a liability is calculated, does it apply only to employer contributions?
Yes, the law requires an assessment on the employer for increased benefit costs. There will be no assessment to employees.
How will terminal vacation and sick leave payments be treated in regard to the calculation?
- Payment for compensable sick leave days will be excluded from the calculation.
- Payment for terminal vacation pay will be excluded from the calculation.
Does the 6% rule apply to all employees?
Public Acts 094-0004 and 094-1057 exclude earnings increases paid to a participant at a time when the participant is 10 or more years from retirement eligibility as defined under Section 40 ILCS 5/15-135.
Sec. 15-135 Definition of Eligibility:
- Age 55 with 8 or more years of service
- Age 62 with 5 or more years of service
- Any age with 30 or more years of service
- 25 years of service in this system as a police officer or firefighter on or after the attainment of age 50
What is the impact of the 20% rule on the 6% calculation?
Current state statute (40 ILCS 5/15-112) provides:
".... In the determination of the final rate of earnings for an employee, that part of an employee's earnings for any academic year beginning after June 30, 1997, which exceeds the employee's earnings with that employer for the preceding year by more than 20 percent shall be excluded; in the event that an employee has more than one employer this limitation shall be calculated separately for the earnings with each employer. In making such calculation, only the basic compensation of employees shall be considered, without regard to vacation or overtime or to contracts for summer employment."
Subject to confirmation by SURS, the 20% statute represents a maximum liability or assessment which the University would be subject to in a given year. For example, if an employee is given a 30% increase, SURS would expect the employer to pay liabilities associated with the amount above 6% but less than 20% (as earnings above 20% are not included in the final rate of earnings).
For highly paid staff, do all earnings count toward the benefit increase calculation?
For highly paid staff, federal contribution limits will impact liability amounts. Specifically, participants in SURS hired after 7/1/96 are subject to the 401a(17) earnings limit which is set by the IRS. For employees subject to the limit, contributions to SURS are limited to earnings up to the 401a(17) limit.
What time period is used in calculating the final rate of earnings for an employee?
The time period used in determining final rate of earnings is defined in statute (40 ILCS 5/15-112):
This applies only to a Tier 1 member.
- For an employee who is paid on an hourly basis or who receives an annual salary in installments during 12 months of each academic year, it is the average annual earnings during the 48 consecutive calendar month period ending with the last day of final termination of employment or the 4 consecutive academic years of service in which the employee’s earnings were the highest, whichever is greater.
- For any other employee, it is the average annual earnings during the 4 consecutive academic years of service in which his or her earnings were the highest. The academic year is the 12–month period starting on the first day of the employer’s fall term.
This applies only to a Tier 2 member.
- For an employee who is paid on an hourly basis or who receives an annual salary in installments during 12 months of each academic year, it is the average annual earnings during the 48 consecutive calendar month period ending with the last day of final termination of employment or the 4 consecutive academic years of service in which the employee’s earnings were the highest, whichever is greater.
- For any other employee, it is the average annual earnings during the 4 consecutive academic years of service in which his or her earnings were the highest. The academic year is the 12–month period starting on the first day of the employer’s fall term.
How can I best estimate potential future liabilities?
For many employees, it is difficult to estimate with accuracy future potential liabilities created via the legislation. However, as a general rule, potential liabilities can be incurred for any employee participating in the SURS Traditional and Portable plans who meets retirement eligibility criteria (now or the next 10 year period). Care should therefore be taken when considering salary increases above the 6% limit. Units should manage appropriately to prevent larger than 6% increases in any given year.