MIDDLESEX RETIREMENT SYSTEM

 REGULAR COMPENSATION GUIDELINES

 Introduction

Recent amendments to 840 CMR 15.03, further regulating “Regular Compensation,” as defined by G.L. c. 32 s. 1, and the recent decision of the Supreme Judicial Court in the matter of William Bulger v. Contributory Retirement Appeal Board, 447 Mass. 651 (2006), have presented issues for employers and members regarding retirement applicability of certain payments made by employers to members.

Generally, salary, wages and certain non-salary payments representing Regular Compensation are subject to retirement deductions being withheld, and are included in retirement calculations.  Certain other employer payments made to members, such as bonus, overtime, severance pay for any and all unused sick leave, early retirement incentives, or any payments made as a result of a member giving notice of retirement, are excluded from Regular Compensation. 

Amendment of 840 CMR 15.03

The Public Employee Retirement Administration Commission (PERAC) is the statutory overseer and technical advisor of the 106 Massachusetts Retirement Systems.  PERAC promulgates regulations which are subject to legislative approval and have the force of law.  840 CMR 15.03 is the PERAC Regulation which further regulates Regular Compensation.  It is attached at the end of these Regular Compensation Guidelines, and can be found at:
http://www.middlesexretirement.org/maxdocs/regular_compensation_sections1503.pdf

When conducting statutory audits of various retirement systems over the past few years, PERAC discovered that retirement calculations were being performed which included salary augmentation plans and salary enhancement programs deemed by PERAC to be inconsistent with the law.  PERAC then submitted regulations amending 840 CMR 15.03, which became effective on April 7, 2006.

The Characteristics of Payments Which are Included as Regular Compensation.

In order to be considered to be Regular Compensation, payments from an employer to a member of the Middlesex Retirement System must have the following characteristics:

     •     Actually paid to or on behalf of a member     

     •     For employment services actually rendered

•     Recurring payments for accrued sick leave

•     Injured on duty payments to police officers and fire fighters under 
      G.L. c. 41, s. 111F

•     Ordinary, normal, recurrent, repeated, and of indefinite duration

•     Paid pursuant to an employer’s official written policy or collective
       bargaining agreement

•     Non-discriminatory and generally available for employees who

       are similarly situated relative to the purpose of the payment

•     Lump-sum or retroactive payments that satisfy the criteria are 
       attributed to the period in which the services were
       actually rendered,not the time of receipt.

 In accordance with the above criteria, Regular Compensation generally includes:

     •     The annual rate of compensation in an approved salary schedule

     •     Non-cash maintenance allowances in the form of full or partial
            boarding and housing

     •     Premiums paid by a governmental unit to purchase an individual or group
           annuity contract but only as specifically  authorized under
              G. L. c. 15, s. 18A, or G. L. c. 71, s. 37B

      •     Educational incentives

     •     Payments for length of service (longevity), with limitations discussed
           further below

     •     Premiums for shift differentials

     •     Cost-of-living pay adjustments

     •     Payments for compensatory time granted in lieu of overtime pay 

 Payments Excluded from Regular Compensation

 Extraordinary or ad hoc payments are excluded from Regular Compensation.  Examples of these payments include, but are not limited to:

     •     Amounts paid for hours worked beyond the member’s normal work
            schedule (Overtime). 

•     Amounts paid as premiums for working holidays, except as authorized by
       law

•     Amounts paid as bonuses other than cost-of-living bonuses.

      Payments to an employee or group of employees which will not

       recur or which will recur for only a limited or definite term are

       considered to be a bonus

•     Amounts paid in lieu of or for unused vacation, sick leave, or other leave

•     Severance pay

•     Amounts paid as early retirement incentives

•     Any other payments made as a result of a member’s giving notice of

       retirement.

Under certain limited circumstances and for limited durations, as expressly set forth in 840 CMR 15.03, payments made as part of a salary augmentation plan or salary enhancement program under an individual contract or collective bargaining agreement may be considered regular compensation.

What is a Salary Augmentation Plan or Salary Enhancement Program?

In most circumstances, a salary augmentation plan or a salary enhancement program is a temporary increase in salary or compensation which is made available to employees who meet certain eligibility criteria, such as attaining a certain number of years of employment service. Some plans require the member to have accumulated a specified amount of sick leave.  Some plans may limit the number of members who can elect to participate each year.

The salary increase is often a percent of the member’s total salary, and is usually granted for a three-year period.  The increase is not the result of a member’s performance of additional duties.  Some plans require a notice of retirement, or an agreement “to separate from service” at the end of a one, two, or three year period.

The amount of the payments in such plans may vary greatly, from a set dollar amount to a percent of salary, in addition to the usual step increases to which a member may be entitled.

Employers and employees are not precluded from entering into a salary augmentation plan or a salary enhancement program in a contract or employment agreement.  However, such payments will be subject to PERAC’s Regular Compensation restrictions as set forth in 840 CMR 15.03. Regular Compensation must be determined by the Middlesex Retirement Board in a manner consistent with the statutes, regulations and relevant case law.

Under 840 CMR 15.03, as Amended, How Will Payments Made Pursuant to a Salary Augmentation Plan or a Salary Enhancement Program be Treated?

Payments made to a member under a salary enhancement or salary augmentation plan may be included as Regular Compensation for retirement purposes only under the following limited circumstances: 

1.   The member must be covered by a salary augmentation plan or salary enhancement program provided for in an individual contract or collective bargaining agreement in effect on or before January 25, 2006; and, 

2.   The member must begin to receive benefits and make retirement contributions pursuant such plan or program, at any time during the life of an agreement/contract in effect on or before January 25, 2006. 

3.   If the both of the above criteria are met, the member may complete the plan or program under the existing agreement/contract and under a successor agreement/contract that contains a salary augmentation plan or salary enhancement program.  The amount of the salary augmentation plan or salary enhancement program in the successor agreement/contract shall not exceed the amount of the salary augmentation plan or salary enhancement program that was contained in the agreement/contract that was in effect on or before January 25, 2006. 

4.   Any member who has previously retired and is receiving benefits as of April 7, 2006 and whose regular compensation included payments under the provisions of a salary augmentation plan or salary enhancement program shall have that plan deemed in compliance with the provisions of G.L. c. 32. 

Here are some examples which have been provided by PERAC: 

1.   A contract containing a salary enhancement program was in effect on January 25, 2006, expiring on March 1, 2006.  It continued in the same form and amount in the successor contract. The member became eligible and began participating in the program in December 2005, and continued for the remainder of the enhancement period in the successor contract. Are these payments Regular Compensation? 

YES.  The member was participating in a salary enhancement program that was in effect on January 25, 2006 and continued in the same amount in a successor contract. 

2.   A contract containing a salary enhancement program was in effect on January 25, 2006, expiring on March 1. 2006.  It did not continue in the successor contract. The member became eligible and began participating in the program in April 1, 2004 and continued for contract period (until March 1, 2006). Is it Regular Compensation? 

YES.  The payments made pursuant to the enhancement program from April 1, 2004 through February 28, 2006 (the end of the contract) are Regular Compensation. 

3.   A contract containing a salary enhancement program was in effect on January 25, 2006, expiring on March 1, 2006.  It continued in the same form and amount in the successor contract.  The member became eligible and began participating in the program in May 2006 and continued for the remainder of the enhancement period in the successor contract.  Is it Regular Compensation? 

NO.  The member was not participating during the life of a contract in effect on January 25, 2006. 

4.   A contract containing a salary enhancement program was not in effect on January 25, 2006, but was added in a successor contract that went into effect on June 1, 2006.  The member became eligible and began participating in the program in September 2006 and continued for the remainder of the enhancement period in the successor contract.  Is it Regular Compensation? 

NO. The member was not participating during the life of a contract in effect on January 25, 2006. 

5.   A contract containing a salary enhancement program was in effect on January 25, 2006, expiring on March 1, 2006.  It continued in the same form in the successor contract.  The member became eligible to participate in November 2005, but chose not to do so.  The member remained eligible to participate and chose to do so beginning in June 2006 and continued for the remainder of the enhancement period in the successor contract. Is it Regular Compensation? 

NO. The member was not participating during the life of a contract in effect on January 25, 2006.  

840 CMR 15.03: Regular Compensation 

(Effective April 7. 2006) 

(1)  During any period of active service subsequent to the effective date of 840 CMR 15.03(j) the term regular compensation” as defined by M.G.L. c. 32, s. 1, shall be determined subject to the following: 

(a) To be considered regular compensation, any compensation to an employee must: 

i)   have been actually paid to or on behalf of a member:

ii)   be made as remuneration for services actually rendered, for recurring payments for accrued sick leave, or for payments made pursuant to G.L. c. 41, s.111F in the year or part of a year to which the compensation is attributed;

iii)   be ordinary, normal, recurrent, repeated and of indefinite duration:

iv)  be made pursuant to an official written policy of the employer or to a collective bargaining agreement;

v)   be made on a non-discriminatory basis and be generally available for employees who are similarly situated relative to the purpose of the payment (e.g. a longevity payment made recurrently to all employees in a bargaining unit having attained a specific length of service) provided that the ability of a payment to be denied due to merit shall not exclude it for that reason from regular compensation. 

(b) Regular compensation shall include any part of such salary, wages, or other compensation derived from federal grants, except as otherwise provided in M.G.L. c. 32, s. 3(2)(a)(xi); 

(c) Lump-sum or retroactive payments which would have been regular compensation if paid in the periods in which the services remunerated thereby were actually rendered will be allocated to said periods rather than being entirely attributed to the time of receipt for the purpose of determining a member’s regular compensation. 

(d) Provided they meet the general criteria in 840 CMR 15.03(l)(a)-(c), payments to be considered regular compensation shall include: 

i)    a member’s annual rate of compensation as provided in an approved salary schedule;

ii)   any non-cash maintenance allowances in the form of full or partial boarding and housing, as provided in M.G.L. c. 32, § 22( l)(c);

iii)   any premiums paid by any governmental unit for the purchase of an individual or group annuity contract as authorized by M.G.L. c. 15, s. l8A or by M.G.L. c. 71, s. 37B;

iv)  any amounts paid as educational incentives;

v)   any amounts paid for length of service;

vi)  any amounts paid as premiums for shift differentials; and

vii)  any amounts paid as cost-of-living bonuses or cost-of-living pay adjustments. 

(2) Any extraordinary or ad hoc payment amount shall be excluded from regular compensation. Exclusions shall include, but not be limited to: 

(a)  any amounts paid for hours worked beyond the member’s normal work schedule;

(b)  any amounts paid as premiums for working holidays, except as authorized by law;

(c)  any amounts paid as bonuses other than cost-of-living bonuses, provided that any payment to an employee or group of employees which will not recur or which will recur for only a limited or definite term will be considered a bonus, and further provided that any payments to an employee or group of employees as part of a salary augmentation plan or salary enhancement program which is provided for in an individual contract in effect on or before January 25, 2006 or in a collective bargaining agreement in effect on or before January 25, 2006, including payments under such a plan or program which will not recur or which will recur for only a limited or definite term, shall be treated as regular compensation; and further provided, that any employee who is covered by such an agreement or contract on January 25, 2006 and who begins, at any time during the life of a collective bargaining agreement or individual employment contract in effect on or before January 25, 2006, to receive benefits and make retirement contributions pursuant to a salary augmentation plan or salary enhancement program under such a collective bargaining agreement or individual employment contract, may complete the plan or program under that agreement or contract or under a successor collective bargaining agreement or individual employment contract, provided that the successor collective bargaining agreement or individual employment contract contains a salary augmentation plan or salary enhancement program; and further provided that the amount of the salary augmentation plan or salary enhancement program under a successor collective bargaining agreement or individual employment contract which shall be treated as regular compensation shall not exceed the amount of the salary augmentation plan or salary enhancement program provided under the collective bargaining agreement or individual employment contract in effect on or before January 25, 2006, and further provided that any member who has previously retired and is receiving benefits as of April 7, 2006 under the provisions of a salary augmentation plan or salary enhancement program shall have that plan deemed in compliance with the provisions of G.L. c. 32. 

(d)  any amounts paid in lieu of or for unused vacation, sick leave, or other leave;

(e)  severance pay;

(f)   any amounts paid as early retirement incentives; and

(g)  Any other payments made as a result of the member giving notice of retirement.