Commonwealth of Massachusetts | Public Employee Retirement Administration Commission
Five Middlesex Avenue, Suite 304, Somerville, MA 02145
Ph 617 666 4446 | Fax 617 628 4002 | TTY 617 591 8917 | www.mass.gov/perac
Domenic J. F. Russo, Chairman | A. Joseph DeNucci, Vice Chairman
Mary Ann Bradley | Paul V. Doane | Kenneth J. Donnelly | James M. Machado | Donald R. Marquis
Joseph E. Connarton, Executive Director
M E M O R A N D U M
TO: All Retirement Boards
FROM: Joseph E. Connarton, Executive Director
RE: Regular compensation & motor vehicle usage
DATE: June 20, 2008
In the wake of the decision of the Supreme Judicial Court (“SJC”) in Pelonzi & PERAC v. the Beverly Retirement Board & CRAB, the monetary value of the personal use of an employer-supplied automobile cannot be included as regular compensation for retirement purposes. A summary of the SJC’s decision is set out below, and the decision of the SJC nullifies the directives given to the retirement boards by PERAC in Memoranda #3/2001, #25/2001, #41/2001, #38/2002 (as to motor vehicle issue only) and #18/2006. This memorandum supersedes the above-listed memoranda.
Summary of the SJC decision
Based upon the wording of the statute and the definition of regular compensation contained in case law, PERAC responded to inquiries in 2000 and 2001 and concluded that the monetary value of the personal use of an employer-supplied motor vehicle should be included as regular compensation, that contributions should be made on this monetary value, and that the regular compensation including the monetary value of the personal use of an employer-supplied motor vehicle should be used, when received in the three highest consecutive years, in determining an individual’s retirement allowance.
In reliance upon these instructions, retirement boards accepted contributions from members, calculated retirement allowances on this basis, and in some cases made substantial retroactive payments to individual retirees. In late 2003, after the Contributory Retirement Appeal Board (“CRAB”) decided that the monetary value of the personal use of an employer-supplied vehicle was not regular compensation, PERAC instructed boards to cease taking contributions or paying retirement allowances until such time as a court would resolve the issue. Over two years later, in early 2006, a Justice of the Essex Superior Court affirmed PERAC’s reasoning. Thereafter, in accord with the directive of the Justice, PERAC instructed boards to treat the monetary value of the personal use of an employer-supplied automobile as regular compensation. Subsequently, when the Beverly Retirement Board appealed one of the many cases brought to Superior Court to the Appeals Court, the SJC took the case on its own initiative.
In a decision rendered on May 21, 2008, the SJC determined that the monetary value of an employee’s personal use of an employer-supplied vehicle shall not be included in regular compensation. The SJC found that such use is not compensation, but a benefit supplied to the employee from the employer. The SJC also noted that the only non-cash form of regular compensation listed in the statute is a non-cash maintenance allowance in the form of full or partial boarding or housing. Thus, an employee’s personal use of an employer-supplied vehicle will not be permitted as regular compensation.
Obviously, while it is good to have a definitive ruling in this matter, the decision of the SJC does present a hardship for certain members and many retirement boards, and PERAC regrets this. When this issue came to the forefront in 2001, PERAC sought only to assure uniformity among the various boards in the treatment of what the SJC has now termed a “benefit” of employment as opposed to compensation.
In regard to commuting in an employer-supplied vehicle, the IRS attributes a value of $1.50 per one-way commute for 249 days each year. This amount is added to an employee’s W-2 form. Under the holding in Pelonzi, this cannot be treated as regular compensation.
After a careful review of the Pelonzi decision, PERAC instructs the boards to take the following steps:
As the SJC has ruled that the monetary value of the personal use of an employer-supplied motor vehicle is not regular compensation, it naturally follows that there is no authorization or purpose in taking regular contributions out of such a benefit. Therefore, as a preliminary matter, all deductions being taken on such use of an automobile should immediately cease. Further, contributions previously taken should be returned to any members or retirees who are paying or have paid such deductions, without interest. The statute does not authorize the payment of interest in this situation. Please note that even where a return of contributions is owed, the contributions should be held as a possible offset against what is owed by a retiree to a board because of the overpayment of retirement allowances. The contributions should only be paid after the member or retiree has repaid the system what it is owed. In many, if not all cases, the contributions owed to a retiree should be retained by the system as partial payment of the amount the retiree owes to the system.
All retirement allowances initially calculated or recalculated following retirement to include the personal use value of an employer-supplied automobile must immediately be recalculated and reduced to reflect that the personal use of such a vehicle is not regular compensation.
Many retirees have been paid retirement allowances factoring in their use of an employer-supplied automobile. Like Mr. Pelonzi, such retirees will have to repay the boards for any amounts they were overpaid due to the inclusion of the monetary value of the car use in their allowances. Many retirees received a large retroactive check when this benefit was first found to be included in regular compensation. Thereafter, retirees and some members who subsequently retired had their retirement allowances recalculated to include the amounts attributable to the monetary value of the personal use of an employer-supplied automobile. Now any payment received by a retiree because of the inclusion of his personal use of an employer-supplied automobile must be recouped, without interest.
Under the Pelonzi decision, the SJC made no provision for “grandfathering” the receipt of this employment benefit. Therefore, as stated above, all allowances calculated based upon the monetary value of the personal use of an employer-supplied vehicle must be recalculated. Under Pelonzi, all retirees who were overpaid by the systems must repay the systems in full, upon the terms and conditions that each board shall prescribe, consistent with the decision in Pelonzi and the directives contained in this memorandum. The boards should endeavor to set up a fair repayment plan for effected retirees. The boards should certainly provide retirees an optimum amount of time to repay the systems, not to exceed six years (72 months) from the date of notification of the amount owed, unless approved by the Commission.
We have received several inquiries about possible waivers by the boards of amounts owed by retirees. As with any situation dealing with an overpayment to a member of a retirement system, the boards may wish to consider whether to waive the amount owed to the system by the retiree under the so-called “Needham bill.” The Needham bill is contained at G.L. c. 32, § 20(5)(3) and provides as follows:
3) At the request of a member or beneficiary who has been determined to have been paid amounts in excess of those to which he is entitled or at the request of a member who has been determined to owe funds to the retirement system, the board may waive repayment or recovery of such amounts provided that:
(i) the error in any benefit payment or amount contributed to the system persisted for a period in excess of one year;
(ii) the error was not the result of erroneous information provided by the member or beneficiary; and
(iii) the member or beneficiary did not have knowledge of the error or did not have reason to believe that the benefit amount or contribution rate was in error.As in all cases involving Section 20(5)(3), waiving the overpayment remains in the absolute discretion of the individual retirement board. For those boards choosing not to permit a waiver, the Commission urges a reasonable repayment plan as outlined above.
Finally, the SJC instructed Justice Riley of the Essex Superior Court, who originally found that the personal use of an employer supplied vehicle should be included in regular compensation, to issue an order saying it is not includable. However, the SJC also specifically vacated his ruling. Therefore, the boards should take immediate action based upon the instructions contained in this memorandum.