August 15, 2006
This information is intended to provide clarification of which payments made to your employees pursuant to current, as well as future, salary augmentation plans or salary enhancement programs (also known as “enhanced longevity buy-out” provisions, or “ELBOs”) are pensionable, and which are not.


Background

In April 2006, the Public Employee Retirement Administration Commission (PERAC) amended its regular compensation regulation (840 CMR 15.00, pdf) to exclude any “extraordinary, ad hoc, or non-recurring payments,” such as ELBOs. The regulation includes grandfathering language allowing certain current and future ELBO payments to be pensionable.


Criteria for determining whether current and future payments are pensionable

Pursuant to the “grandfathering” provision, in order for a member’s ELBO payments to be pensionable:

  • The member must be covered by a collective bargaining agreement (CBA) or an individual contract that includes an ELBO plan and was in effect on or before January 25, 2006.
  • The member must begin to receive the ELBO payments, and make retirement contributions thereon, during the term of the CBA or individual employment contract that was in effect on or before January 25, 2006.
  • The ELBO plan must not be one that would be excluded from regular compensation under the prior regulation (e.g. those that are directly linked to retirement, or that involve a trade of sick leave).

If the above criteria are met, the member may complete the plan or program under that CBA or individual employment contract, or under a successor CBA or individual employment contract, and have such payments be pensionable, provided that said successor agreement or contract continues to have an ELBO plan that does not exceed the amount of the plan that was in effect on or before January 25, 2006.


Sample scenarios

Pursuant to the “grandfathering” provision, in order for a member’s ELBO payments to be pensionable:

  • The member must be covered by a collective bargaining agreement (CBA) or an individual contract that includes an ELBO plan and was in effect on or before January 25, 2006.
  • The member must begin to receive the ELBO payments, and make retirement contributions thereon, during the term of the CBA or individual employment contract that was in effect on or before January 25, 2006.
  • The ELBO plan must not be one that would be excluded from regular compensation under the prior regulation (e.g. those that are directly linked to retirement, or that involve a trade of sick leave).

If the above criteria are met, the member may complete the plan or program under that CBA or individual employment contract, or under a successor CBA or individual employment contract, and have such payments be pensionable, provided that said successor agreement or contract continues to have an ELBO plan that does not exceed the amount of the plan that was in effect on or before January 25, 2006.


Sample scenarios

  1. Mary Educator’s CBA, which was in effect on 1/25/2006, covers the term of 2005–2008. As required in that CBA, Mary gives notice to her superintendent that she plans to collect her ELBO payments beginning with the 2006-2007 school year. The plan provides for a $4,000 payment for three consecutive years. Is Mary’s ELBO grandfathered under PERAC’s regulation?

    Yes. Mary’s ELBO payments will commence during the term (2005-2008) of the CBA that was in effect on January 25, 2006. Thus, the payments she receives in the 2006-07 and 2007-08 school years are grandfathered. The payment she receives in the 2008-09 school year will also be grandfathered, but only if the successor CBA (covering 2008-2011) contains the $4,000 ELBO provision.
  2. Tom Teacher’s district has a new CBA commencing on July 1, 2006. There was a $4,000 ELBO plan in the 2003-2006 CBA that expired on June 30, 2006. The exact same ELBO plan is contained in the new 2006-2009 CBA. In November 2005, Tom notified his superintendent that he plans to collect his first ELBO payment in the 2006–07 school year. Can Tom’s ELBO payments be included in his regular compensation?

    No. The term of the CBA that was in effect on or before January 25, 2006 was 2003-2006 and that CBA expired on June 30, 2006. Although Tom gave notice of his intention to collect the ELBO payments within the term of that CBA, he did not start to receive payments for the ELBO plan and make retirement contributions thereon before that contract expired.

  3. The same contract scenario as 2, above, only Tom notified his superintendent in November 2004 and received his first ELBO payment during the 2005–2006 school year. Tom is scheduled to receive two more payments of $4,000 under the new contract in effect July 1, 2006. Can Tom’s next two ELBO payments be included in his regular compensation?

    Yes. Tom’s ELBO payments commenced during the term of the contract in effect on January 25, 2006. His first payment is grandfathered as it was made in the 2005-06 school year (the final year of the 2003-2006 CBA). The second and third payments will also be grandfathered because the successor CBA (2006-2009) contains the same ELBO plan provision.


There are, of course, numerous other scenarios and this information is meant to act as a guide. If you have questions, we strongly encourage you to contact our office for clarification.