The 1996 General Assembly made a number of changes that affect retirement benefits and how they are administered. The most significant change was the enactment of an annual cost of living provision. These changes are effective July 15, 1996 unless otherwise noted.
The General Assembly amended KRS 61.691 to provide for an annual increase in the benefits of KERS, CERS and SPRS recipients equal to the percent change in the annual Consumer Price Index (CPI) for all urban consumers given for the calendar year preceding the raise. The raise is limited to a maximum of 5%.
The bill provides the first increase August 1, 1996 at 2.8% (1995 CPI). On July 1, 1997 and every July 1 that follows, the raise will be automatically given to retirees unless the General Assembly takes specific action to suspend the raise. The General Assembly reserved the right to amend or suspend the raise in future years if the General Assembly determines that the needs of the Commonwealth required it.
This is a significant change in the way cost of living increases are given to retirees. In the past, action by the General Assembly was required before retirees could receive a raise. Under the provisions of this bill, no action by the General Assembly is required to give a raise. A raise will be given each year the CPI exceeds 0% unless the General Assembly takes action to suspend or alter the raise.
The bill does not require employers to pre-fund this benefit. Employers will pay the actual cost of each raise after it has been given.
Conditions Preexisting Membership. The disability provisions governing both hazardous (KRS 16.582) and nonhazardous employees (KRS 61.600) were amended for "career" employees (employees who have 16 years service credit for employment with participating employers) and who have hereditary illnesses or conditions which existed before their membership in the system. A 16-year employee may now apply for disability on a condition which preexisted employment or membership in the system.
Employees who have less than 16 years service in the system may not receive disability for a condition which preexisted their membership unless they can prove that the condition has been substantially aggravated by an injury or accident on the job.
Reasonable Accommodations under ADA. Employees applying for disability must show evidence that they have requested any reasonable accommodations under ADA(Americans with Disabilities Act) which might allow them to continue to perform their job. Employers are required to show any accommodations made in response to employees' requests.
Early Retirement following Reducton or Discontinuance of Disability Benefits. Members whose disability benefits were stopped may receive early retirement benefits without offset for disability benefits already received. If a member had disability benefits stopped due to improvement in health, that member may now apply for early retirement benefits when eligible and receive the early retirement benefit reduced only for the member's age and service.
Under past law, a member who had previously drawn disability benefits could apply for early retirement. The early retirement benefit was reduced for the total amount of disability benefits received. In many cases this resulted in a very small monthly benefit. Sometimes the offset was so large that the member could not draw early retirement until closer to normal retirement age. The member is not eligible to participate in the medical insurance program unless drawing a retirement check.
School Board Service (Summer Months). The purchase of additional months to complete a school year is limited to a maximum of 3 months service. This limits the purchase to the original intent of allowing employees who work a full school year, but less than 12 months, to purchase the months needed to complete the school year (the summer months).
Vesting Requirement Before Purchase. A "vesting" requirement was added to several types of service purchases. This means the participating employee must earn 60 months credit, if under age 65, before making the service purchase. Only 48 months of service credit are required if the employee is age 65 or older. This requirement assures that the employee will have sufficient service and salary on which to calculate a benefit should he retire or die shortly after making the purchase.
The vesting requirement has been added to the following service purchases:
Regular full-time service with an area development district that does not participate in CERS.
Regular full-time service with a business development corporation created pursuant to KRS Chapter 155 that does not participate in CERS (approval by Internal Revenue Service or U.S. Department of Labor required).
Approved educational leave.
Approved leave to work for a work-related labor organization (approval by Internal Revenue Service or U.S. Department of Labor required).
University Service. An employee may purchase state university service credit in 12-month increments. This means that eligible service may be purchased in 12-month blocks (1 year, 2 years, etc.). Under past law, the employee had to purchase the full period of service all at once, which made it prohibitive in some cases. Service must be regular full-time that would have qualified forpurchase had the state university participated in the retirement system.
Planning Commission Service. An employee participating in CERS who has 60 months of service credit if under age 65 (48 months if age 65 or older) may purchase credit for periods served with a city, county or joint city-county planning commission which was not covered by a state-administered retirement system. Purchase is allowed whether or not the service averaged 100 hours of work per month. The purchase of this service must be approved by the Internal Revenue Service or the U.S. Department of Labor. If approved, the employee pays 100% of the actuarial cost.
Community Mental Health and Mental Retardation Program Service. An employee who has 60 months of service credit if under age 65 (48 months if age 65 or older) may purchase credit for periods of regular full-time employment with a regional community mental health and mental retardation services program that does not participate in a state-administered retirement system. The employee must pay 100% of the actuarial cost for purchasing the service.
Local School Board. An employee who has 15 years of service credit may purchase up to 2 years of credit for service on a local school board created pursuant to KRS 160.160. The service to be purchased cannot overlap service in a position covered by one of the state-administered retirement systems. The employee pays 100% of the actuarial cost and must make the purchase prior to December 31, 1996.
Vocational Technical School Service. An employee who has 60 months of service credit if under age 65 (48 months if age 65 or older) may purchase credit in KERS for periods served in a noncertified part-time position with a vocational technical school. Purchase is allowed if the service averaged 80 hours of work per month. The employee pays the employer and employee contributions that would have been paid on the service plus interest at the actuarial rate.
Beneficiary of Deceased Employee. The beneficiary of an employee who dies while contributing to one of the state administered retirement systems may repay the deceased employee's refund. This law was amended to require the repayment to be made within 1 year of the employee's date of death. In many cases payments must be made in the same month the employee dies to fully combine with service in other retirement systems for death benefits.
KRS 78.615 was amended to clarify how service is credited to noncertified employees of school boards who are reported to CERS.
A full-time employee of a school board is defined as an employee who works an average of 80 hours per month over a calendar or fiscal year. In some cases, an employee may be hired as full-time but may not work all of the days in the contract. Under past law, if the service did not average 80 hours per month, the retirement system was required to refund the employer and employee contributions. The employee did not receive any service credit.
The revised law provides a three-step method of crediting service.
1. If the employee averages 80 hours per month and works every day of hisemployment contract, service credit is given by dividing the number of days in the employee's employment contract by 20 (average number of working days in a school month) and rounding to the nearest whole month.
2. If the employee averages 80 hours per month but works fewer than the number of days in his employment contract, service credit is given by dividing the number of days actually worked by 20 and rounding to the nearest whole month.
3. If the employee does not average 80 hours per month and works fewer than the number of days in his employment contract, service credit is given for any months in which the employee worked 80 or more hours.
For any employment that does not meet these tests, employee and employer contributions will be refunded.
CERS agencies are required to forward all employer and employee contributions on wages for a particular month by the 10th of the following month. Effective with contributions due in August, a late penalty will be applied if all contributions are not forwarded to the retirement office within 20 days of the due date.
The penalty will be equal to interest on the delinquent contributions at the rate of 8% compounded annually, but not less than $100.
This late penalty will affect few agencies. The vast majority of CERS agencies report contributions correctly and within required time limits.
At the time of retirement, a member with service credit in CERS and the Judicial Retirement Plan may combine the service credit in the two systems for determining the amount of his medical insurance premium to be paid by the retirement system.
The member may elect to receie the insurance benefit from either CERS or Judicial. Once he elects to participate in the insurance program of one of the two systems, the member must continue with that plan and forfeits participation in the other plan's insurance benefit.
The General Assembly made some changes to the 1994 health care reforms. The changes will affect retirees under age 65.
Retirees eligible for Medicare will not be affected by the changes.
Kentucky Kare will continue to be offered. State employees and retirees will continue to be covered through the Health Purchasing Alliance.
The exclusion period for preexisting illnesses has been extended from 6 monthsto 12 months. However, the exclusion does not apply where the individual was previously covered for 12 months under another health insurance policy and where there was not a break in coverage of more than 60 days.
A new Health Insurance Advisory Committee will review the standard plans and make recommendations to the Department of Insurance regarding what plans may be offered in the future.
Next year, employees, inactive members and retired members of the County Employees Retirement System will vote for two individuals to serve on the Board of Trustees.
Per KRS 61.645, the Board must place three names on the ballot for each position to be filled.
The Board of Trustees is asking for names of members who would be interested in running for the two CERS trustee positions.
To be eligible a person must be a member or retired member of CERS. The full board meets a minimum of five times per year. In addition, members appointed to certain committees may have monthly committee meetings to attend. Board members do not receive a salary. Members receive a per diem and necessary travel expenses.
If you are interested, please send a resume (be sure to include your Social Security number) to the retirement office by August 1, 1996.
The Board of Trustees will select six names (three for each position) at the August meeting that will appear on the ballot to be mailed in January 1997.
The General Assembly passed legislation to place all current Circuit Clerks and their deputies into CERS effective August 1, 1996.
The employer and employee contributions that have been paid to KERS for all service as a Circuit Clerk or Deputy Circuit Clerk will be transferred to CERS. All liabilities for benefits will also be transferred from KERS to CERS.
Former Circuit Clerks or deputies may also elect to transfer to CERS. A calculation must be done to determine if the employer and employee contributions associated with the period of service as a Circuit Clerk or deputy is sufficient to fund the CERS benefits. If the transferred contributions are not sufficient, the employee will be required to pay the difference in the cost for the service.
Any cost associated with this legislation for former Ciruit Clerks or their deputies is subject to the restrictions imposed by Section 415 of the Internal Revenue Code.
Those already retired are not eligible to transfer.
"Last day of paid employment" means the last date employer and employee contributions are required to be reported in accordance with KRS 16.543, 61.543, or 78.615 to the retirement office in order for the employee to receive current service credit for the month.
The last date the employee received wages and was entitled to service credit under the statutes would be the last day of paid employment for determining the effective date of retirement. This is especially important where the member is applying for disability benefits and may have been on sick leave without pay.
Remember, application for disability benefits must be made within 12 months of the "last day of paid employment." If you go on extended sick leave without pay, you may want to contact the retirement office concerning your eligibility for disability benefits.
"Objective medical evidence" means medical histories; reports of examinations or treatments; medical signs which are anatomical, physiological, or psychological abnormalities that can be observed; psychiatric signs which are medically-demonstrable phenomena indicating specific abnormalities of behavior, affect, thought, memory, orientation, or contact with reality; or laboratory findings which are anatomical, physiological, or psychological phenomena that can be shown by medically-acceptable laboratory diagnostic techniques, including, but not limited to, chemical tests, electrocardiograms, electroencephalograms, X-rays, and psychological tests.
Objective medical evidence does not mean a statement from a physician simply saying a person is disabled.
The statute governing beneficiary designations before retirement and at the time of retirement has been rewritten to make it easier to understand.
The main purpose for rewriting the statute was to make it clear that an estate or trust is not eligible for a monthly payment under a survivorship option.
The Board of Trustees conducted a six-year study of the retirement systems to compare actuarial assumptions (assumed rates of retirement, rates of return on investments, life expectancy, etc.) with the actual experience of the systems. These studies are conducted on a regular basis to assure the funding and projected liabilities are based on sound assumptions.
As a result of this study, several assumptions will change effective July 1, 1996.
The assumed rate of return on investments is increasing from 8% to 8.25%.
The assumed rates of disability retirement will increase 50% above current rates. Actual numbers of disability retirements over the last six years greatly exceeded expected numbers.
Rates of termination for nonhazardous employees after 5 years will be reduced to 80% of current rates.
Because of these changes, the interest rate charged on repayment of refunds and other service purchases will increase to 8.25% July 1, 1996. The factors used for determining service under the delayed contribution payment will also change effective July 1, 1996.
The employer contribution rates on creditable compensation earned effective July 1, 1996 are as follows:
KERS Nonhazardous 8.89%
KERS Hazardous 17.87%
SPRS 26.58%
CERS Nonhazardous 8.65%
CERS Hazardous 18.69%
The rates shown for KERS and SPRS are the rates set in the Executive Budget.
Starting in August, the retirement office will be scheduling appointments for benefits counseling.
If you are coming to the office to see a benefits counselor, you can call ahead to schedule an appointment for a benefit estimate, service purchase or to retire.
We are scheduling appointments because we will be converting paper records to optical disk storage. While we are converting records, there may be some delays in pulling your file if you walk in. To keep you from having to wait in the lobby while we find your file, we ask that you call ahead to schedule an appointment. That way we can have your records ready before you arrive.
Section 415 of the Internal Revenue Code (IRC) places restrictions on the amounts that an individual can contribute to his employer sponsored pension plan. These restrictions apply to the Kentucky Retirement Systems (KERS, CERS and SPRS). The Kentucky Retirement Systems must comply with the restrictions or lose its status as a "qualified" plan and become subject to federal tax.
The IRC Section 415 limits contributions to 25% of gross salary actually received by the employee during the plan year (July 1-June 30) or $30,000, whichever is less. The restriction does not apply to the mandatory employee contributions of 5% for regular employees and 7% for hazardous duty employees which are tax deferred. The restriction does apply to voluntary lump sum and payroll deducted amounts used to purchase additional service credit.
If you are purchasing service credit and the cost of the service exceeds the limit based on your actual gross salary for the fiscal year, the purchase will not be allowed. You may have to purchase a smaller amount of service or make the purchase through the installment purchase plan (if possible). Down payments toward installment purchases must be considered in the fiscal year in which the installment purchase is started. Payments received within 30 days of the end of the fiscal year may be applied to the previous year's limits, if possible.
If you buy service based on your expected earnings, but terminate before the end of the fiscal year, the retirement systems may have to refund some or all of the purchase if the service purchase exceeds 25% of your actual earnings during that fiscal year. In some cases this could make you ineligible to retire.
The restriction does not apply to repayment of refunds or to contributions that should have been reported on previous salary (omitted contributions). If you are eligible to repay a refund and purchase other service credit, the cost of the refund will not count toward the 25% of your gross salary that you may pay during that fiscal year.
The following are some examples of how the Section 415 limitation could affect an individual.
EXAMPLE 1. Bob is 35 and a contributing member of KERS. He is currently making $25,000. He wants to purchase 4 years of military service and 3 years he worked for a city which has recently joined CERS. His military will cost him $4,497. His city service will cost $3,767. To purchase both periods of service in a lump sum, the cost would be $8,264. This is more than 25% of his gross salary. Bob cannot purchase both types of service in the same year. He does have several options:
He could purchase his military service in one fiscal year and his city service the following fiscal year. He could put both types of service on an installment purchase plan with payments over several years. He could purchase his military and one year of city service this year and purchase the remaining 2 years of city service next fiscal year.
EXAMPLE 2. Jim is 56 and a meber of CERS. He is employed by the county police and feels he is ready to retire August 1. He applies for retirement in June and discovers he is eligible to buy credit for the 6 years he worked for the federal government. Jim is making $3,000 a month ($36,000 a year). The total cost of the service is $23,067. He can only purchase up to 25% of his salary during the current fiscal year. That means Jim can buy 2 years if he makes the purchase before June 30. Since he plans to retire August 1, his salary for the next fiscal year will only be $3,000 (plus any payments for vacation or overtime). The 25% restriction will not permit Jim to purchase any more service if he still plans to retire August 1.
EXAMPLE 3. Jane is 57 and a member of CERS. She is employed by a city. She has 17 years service, but she can buy 3 years that she worked for the city before it joined CERS for $5,000. That would give her 20 years for the insurance benefit. She makes the purchase in July based on her estimated annual salary for the fiscal year of $24,000. She then decides to retireDecember 1. She gives the city her resignation and comes into the retirement office. Her total salary for the period July-November is $10,000. When her retirement is calculated, she is informed that she is only eligible to retain 1 year of purchased service based on her 5 months of salary. That means she will not have 20 years for insurance and will have to pay 25% of her insurance. The retirement office is required to refund the cost of the additional 2 years of service to her.
As you can see from the examples, Section 415 restrictions can have a serious impact on your retirement plans.
If you have service that you are considering purchasing, you should look into the purchase as soon as possible. You may not be able to purchase service by lump sum payment when you retire.
If you decide to retire in the same year you make a purchase, be sure to check with the retirement office about your purchase before making a final decision on retirement.
If you do not earn enough salary in the fiscal year to qualify for the purchase, the retirement office must refund the purchase and you will lose the service.
Please call or write the retirement office if you have questions about Section 415 and service purchases.
Last Updated: 7/01/2002