Multiyear conversions don’t count toward pensions
Defined benefit pension systems typically use the final average salary of their members when determining the retirement benefit. It’s a common misconception that public employees can use years of unpaid time off to significantly boost their final pension amounts.
That does not happen at the Ohio Public Employees Retirement System, which has substantial measures in place to limit the spiking of retiree benefits.
When our members retire, they must comply with a contribution-based benefit cap that considers the member’s lifetime contributions to ensure they do not artificially inflate their pensions with large salary increases at the end of their working careers. Also, many of our members will receive lower benefits because they’re subject to a five-year final average salary calculation, rather than a three-year calculation.
These requirements were part of pension legislation that the Ohio General Assembly passed in 2012.
Still, some people believe that public employees in Ohio may bank time off for years, even decades, and use it to artificially inflate their earnings, thereby significantly boosting their pensions.
It’s true that Ohio law allows the payment of unpaid leave to be considered earnable salary for the purposed of pension calculation. However, Ohio Revised Code Section 145.01 and Ohio Administrative Code 145-1-26 limit these conversions to sick leave, personal leave and vacation leave accrued but not used during the calendar year as part of a conversion plan. (Holidays are not included.)
Unpaid leave earned in previous calendar years does not qualify as earnable salary. So OPERS members could not, for example, carry over hundreds of hours of unpaid leave for decades, be paid for them at retirement and have the payments count toward their pension benefits.
Employers use these conversions to clear their books of employee time off and avoid large payouts when their employees retire. Allowing employees to bank limited hours of leave increases workplace productivity – they aren’t obligated to take all the days off every year, especially at the end of the year.
In order to make their employees eligible for the conversion of vacation, sick or personal time, employers have to submit detailed plans to OPERS annually, and not all employers do so. Conversion amounts often are capped. Because some employers have more than one conversion plan, it’s important for this information to identify the subset of employees each document covers.
Benefit flexibility is an important recruitment tool in the public sector which, studies have shown, often compensates workers less than in the private sector.
Research conducted in 2011 for OPERS by the independent benefits consultant Aon Hewitt found that OPERS members’ benefits ranked eighth overall in a direct comparison with 15 large, Ohio-based, private employers. A recent study co-sponsored by the Associated Press found that the median salary of corporate CEOs in 2013 was $10 million.
OPERS is vigilant in limiting the effects of pension spiking. The ability of some members to include limited amounts of unpaid leave in their earnable salary for one year does not have a burdensome effect on the pension system.
Michael Pramik
Michael Pramik is communication strategist for the Ohio Public Employees Retirement System and editor of the PERSpective blog. As an experienced business journalist, he clarifies complex pension policies and helps members make smart choices to secure their retirement.
I know this has nothing to do with this article…but I just received a survey/e-mail from OPERS asking for input about health care/plan concerns for non-medicare retirees and toying with the idea of purchasing your own private insurance with a monthly allowance? I was surprised to not see anything on the blog or website in regards to this.
Thanks
John,
Thanks for responding to the survey request. Because our primary population and their premium costs are changing over the next couple of years, we are trying to get a sense of what retirees will expect in the future regarding health care plan types, designs and costs. We’re simply interested in evaluating sustainable, quality health care coverage for the long term.
–Ohio PERS
It’s very encouraging that OPERS is considering alternative plans for health care coverage, since the elimination of benefits for our spouses is forcing us into the ACA arena…and the associated tax and subsidy implications. Thank you and I wish you success in your quest to optimize health care costs for your members with spouses. I too, would like to see the progress of your evaluation addressed on the blog or website.
I recently participated in your non-medicare retiree survey.
Does this survey hint that OPERS is seriously considering
not maintaining coverage with Medical Mutual in the future
for retirees under 65?
Floyd,
Thanks for responding to the survey request. Because our primary population and their premium costs are changing over the next couple of years, we are trying to get a sense of what retirees will expect in the future regarding health care plan types, designs and costs. We’re simply interested in evaluating sustainable, quality health care coverage for the long term.
–Ohio PERS
Prior to the 2012 pension legislation were people able to artificially inflate their pensions with large salary increases at the end of their working careers?
Thanks,
Jeff
Jeff,
We posted a blog in 2011 that stated the following:
“In a recent review of 47,253 public employees eligible to retire, OPERS research found that 2,164 (4.57 percent) had an increase in salary between 20 percent and 50 percent; 501 employees (1.06 percent) had an increase of 50 percent or more.
“In a review of 1,561 law/public safety employees eligible to retire, 83 (5.32 percent) had an increase in salary between 20 percent and 50 percent; only eight employees (.51 percent) had an increase of 50 percent or more.”
The pension legislation sought to curb any spiking in three ways. It raised the period to calculate final average salary for many members from three years to five years; it increased the minimum earnable salary to $1,000 per month from $600 per month; and, it instituted the Contribution-Based Benefit Cap, which will apply to all members when they retire.
–Ohio PERS
I am a 30+ year ODOT employee who currently earns 6 weeks (9.2 hrs/pay) of vacation per year and have built up to the maximum allowed per year of 18 weeks (720 hours). If I maintain the maximum 18 weeks by using 6 weeks of vacation or 9.2 hours every pay in the year prior to my retirement will the six weeks I had earned that year count as earnable salary? Any clarification on this would be appreciated.
Ron,
The leave that you accumulate but do not use during the year you retire is the only amount that can be considered earnable salary.
–Ohio PERS
I understand from this article that only vacation, sick and personal time accrued during your final calendar year of work will be recognized as earnable salary, and not time accrued from years prior. If an employee still has many hundreds of hours accrued at the time of separation, can I assume this time will be converted, but not count as earnable salary? And, will this conversion money be free from the 10% OPERS employee contribution since it is not considered to be earnable salary? Thank You
Jim,
No, conversions are not considered earnable salary, so your employer should not, as a rule, deduct the 10 percent OPERS member contribution from it. And you’re correct that only the vacation, sick and personal time that you accrue in the year that you retire but have not used when you retire can be considered earnable salary.
–Ohio PERS
Are state employees exempt from being able to receive conversions that count toward earnable salary because of this language in 145.01 (R):
(b) Payments made by the employer for the conversion of sick leave, personal leave, and vacation
leave accrued, but not used if the payment is made during the year in which the leave is accrued,
except that payments made pursuant to section 124.383 or 124.386 of the Revised Code are not
earnable salary;
M,
Each employer has its own conversion policies. Some fall within the statutory meaning of earnable salary, and some do not. Conversions can be eligible for OPERS contributions if the employer’s conversion policy is consistent with OPERS’ statute and the employer has an approved conversion plan on file with OPERS.
In the case of state employees, payments made under ORC 124.383 and 124.386 are not included in earnable salary. Please check with your employer’s HR department to inquire if you have a conversion plan on file with us.
–Ohio PERS
This is all good clarification to the article. It does come somewhat as a surprise however. My assumption is that this is not common knowledge because hardly anyone in my agency has heard of avoiding leave usage in one’s final year to be able to take the leave conversion as pay toward final average salary. Even HR folks have vague knowledge of the concept and know of no one who has planned time off accordingly. Is this just not widely publicized?
Michael,
It’s in the law. I’m not sure what more we can say, other than check with your employer to see if you have a conversion plan on file with OPERS.
–Ohio PERS
After inquiring with my HR department, I found out that OPERS recognizes the State of Ohio as one employer, regardless of the individual agency where an employee works. As for this conversion policy, the only time which can be considered earnable salary is comp time since that is time earned for actually “working”. Vacation, personal, and sick leave is considered “benefit” time and cannot be used towards earnable salary for that last year prior to retirement. So for State of Ohio employees anyway, do not try and save up all that time you earn that last year of working thinking it can be counted as earnable salary by OPERS. Granted, you get paid for it in your final paycheck but government will take its share in taxes.
Like Michael notes, this conversion policy is certainly not common knowledge and some statements by OPERS earlier in this blog were misleading in giving the impression that leave time earned during your final year of employment could be counted as earnable salary. Only when this conversion policy language popped up in the conversation did it not become so clear cut. I would be curious as to which public employers have a conversion policy on file with OPERS that allows conversion of all this earned time. Is this list considered public record?
Carolyn,
We do not have that information as a public record.
Thanks,
–Ohio PERS
I am seeking clarification. We are able to cash in unused sick leave and personal leave only accrued during that specific calendar year toward the end of each year. Is the amount of the cash out each year considered earnable salary or only the amount left unused in the final year of employment?
Your reply on March 26 at 1:01 PM seems to indicate only the final year is included, but I would like to be sure.
Mike,
It’s only the vacation, sick and personal time that you accrue in the year that you retire but have not used when you retire that can be considered earnable salary. Not each year. Only the year that you retire.
–Ohio PERS