PERA-Includable Salary Changes: Information for Employers
October 20, 2020
At the September 11, 2020, Board meeting, Colorado PERA’s Board of Trustees held a rules hearing to discuss changes to its rules, which govern much of PERA’s day-to-day operations. These changes involve removing criteria for determining whether certain payments are considered PERA-includable salary and will be effective January 1, 2021. The following questions and answers are intended to help PERA employers understand these changes.
What do the rule changes mean for PERA-includable salary?
The general intent of the rules remains the same—that compensation for services rendered to an employer is included in PERA’s definition of salary. The removal of criteria in the rules simplifies administrative responsibilities on PERA employers and PERA’s determination on employer policies for cash-in-lieu payments, performance/merit payments, and one-time payments. Payments intended to be compensation for services rendered, but that may be missing one or more of the specific criteria in the prior rules, are now likely includable under the revised rules.
Are bonuses still excluded from PERA-includable salary?
Yes. The statutory definition of salary still excludes “bonuses for services not actually rendered, including, but not limited to, early retirement inducements, Christmas bonuses, cash awards, honorariums and severance pay, damages...or payments beyond the date of a member's death.” This is why submission of employer policies or payment structures to PERA for review is always highly recommended. And as always, PERA must determine that payments meet the statutory definition of salary and must determine that payments are not intended to manipulate a member’s Highest Average Salary (HAS).
What rules were changed?
PERA Rule 1.20F(2), 1.20F(3), and 1.20F(7) were all revised. Below are more details of the rules and examples of the revisions.
Cash-in-Lieu Payments (PERA Rule 1.20F(2))
Under the revised rule, if the employer intends for a cash payment made in lieu of a fringe benefit to be part of the compensation for services rendered, and PERA determines that it is includable and not intended to manipulate HAS, the payment will be includable. The employer must still practice and demonstrate a procedure for making these payments.
A monthly allowance of $50 for a cell phone will be considered PERA-includable as long as the employer intends for that $50 to be cash in lieu of an employer-provided cell phone (the fringe benefit), and the payment is not a reimbursement for cell phone charges (reimbursement). Note that reimbursements for expenses incurred are still explicitly excluded from the statutory definition of salary.
Performance or Merit Payments (PERA Rule 1.20F(3))
Under the revised rule, if the employer intends for a performance or merit payment to be compensation for services rendered, and PERA determines that it is includable and is not intended to manipulate HAS, the payment will be includable. By removing the specific criteria from the prior rule, the employer has additional latitude to demonstrate whether the intent is for the payment to be an includable performance or merit payment or to be a non-includable bonus. The employer must still practice and demonstrate a structured procedure for making these payments.
A performance or merit payment of 2% of salary paid in a lump-sum to an employee that is intended to be a recognition of sustained performance over an evaluation period will be considered PERA-includable salary.
One-time Payments (PERA Rule 1.20F(7))
Under the revised rule, if the employer intends for a one-time payment to be compensation for services rendered, and PERA determines that the payments are includable and not intended to manipulate HAS, the employer will no longer be required to meet the criteria of the prior one-time payment rule. This will again allow the employer to demonstrate whether the intent is for the payment to be an includable one-time payment or to be a non-includable bonus.
A one-time payment of $200 for all staff paid in lieu of a base-building salary increase will still be considered PERA-includable as long as the employer intends these payments to be compensation for services rendered. This determination will be true even if the employer does not formally pre-approve the payment prior to the fiscal year. For example, a Board resolution or formal notification to staff that payment will be made and the intention for that payment to be salary.
If there is extra money in the employer’s budget and the intention is for that payment to be a bonus, such as a thank you paid around the holidays, then the payment would not be PERA-includable. Bonuses remain explicitly excluded from the statutory definition of salary. This would also be true if only a select few employees were chosen to receive a one-time payment from a budget surplus, if it is intended to be a bonus rather than payment for services rendered.
When will the new rules be in effect?
The new rules will go into effect on January 1, 2021, and will apply to payments made on or after that date.
What if an employer received a determination on a policy or payment prior to January 1, 2021, does the policy need to be resubmitted to PERA for review?
If you received a determination from PERA that payments made under an ongoing policy such as a cash-in-lieu or a performance/merit plan are PERA-includable, and the policy is still being applied in the same manner, there is no reason to resubmit to PERA for another determination. If there has been a change to the policy that may change the previous determination or if you feel the determination could be viewed differently based on the new rule, you can resubmit the policy for review. Any new PERA determinations will apply prospectively to payments made on or after January 1, 2021.
If you had a previous payment reviewed, PERA’s determination will stand as it was made under the rules in effect at the time the payment was made. Only payments made on or after January 1, 2021 should be submitted for review.