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Benefit Calculation

How is my Benefit Calculated?

The three systems administered by KPPA in Tier Two are qualified defined benefit plans for members participating prior to January 1, 2014. A defined benefit plan pays benefits based on a formula. 

Formula
Final Compensation * Benefit Factor * Years of Service = Annual Benefit

If there is an early retirement penalty, it will also be used in the formula.

Final Compensation

A Tier Two member's Final Compensation, or Salary Average, is determined by dividing the total salary earned (Last 5 or 3-High) by the total months worked, then multiplying by twelve (12). 

Nonhazardous retirement benefits are based upon your last five (5) years' salaries. When Final Compensation is based on the last five salaries, it must include 60 months - the years used must be full (12 month) years. 

Hazardous retirement benefits are based upon your 3 highest salaries. When Final Compensation is based on the 3-High, it must include 36 months - the years used must be full (12 month) years.

Member Pension Spiking

In 2017, Kentucky Revised Statute 61.598 was amended to establish a different process for pension spiking.

Under current law, KPPA reviews the last five fiscal years of employment for Tier 1 and Tier 2 members retiring on or after January 1, 2018. Any increase in salary earned after July 1, 2017 in excess of 10% from the immediately preceding fiscal year will be exempt from creditable compensation when calculating the member's retirement benefit, if the fiscal year is to be used in the member's final compensation. KPPA will refund member contributions and interest attributable to the reduction in creditable compensation back to the employer. KPPA will allocate the employer contributions to the appropriate system to offset the unfunded pension liability.                    

A member's final compensation will be adjusted unless the increase in creditable compensation by more than 10% is due to one of the following exemptions:

  1. Bona Fide promotion or career advancement;
  2. Lump sum payout for compensatory time at termination only;
  3. Lump sum payout for alternate sick leave payments;
  4. Increases in years where the member was on leavewithout pay in the prior fiscal year;
  5. An increase due to overtime work and pay as the result of a state or federal grant, grant pass-through, ora  similar program that requires overtime as a condition or necessity of the employer's receipt of the grant;
  6. An increase due to overtime work and pay required by a federal or state-declared emergency.

Important Note: For retirement dates of July 1, 2021 and after, the 10% cap on creditable compensation growth will not apply when it results in a benefit change of less than $25 per month. If there is a benefit change of $25 or more per month due to pension spiking, the member's creditable compensation will be reduced by the appropriate amount to meet the new $25 monthly threshold.

Member Pension Spiking FAQs

Benefit Factor

Benefit factors are set by statute and vary depending upon the type of service, amount of service, participation date and the retirement date. 

Nonhazardous Member Benefit Factors

  • 1.10% - Service Credit less than or equal to 120 months 

  • 1.30% - Service Credit between 121 and 240 months 

  • 1.50% - Service Credit between 241 and 312 months 

  • 1.75% - Service Credit between 313 and 360 months 

  • 2.00% - Service Credit in excess of 360 months only

Hazardous Member Benefit Factors

  • 1.30% - Service Credit less than or equal to 120 months 

  • 1.50% - Service Credit between 121 and 240 months 

  • 2.25% - Service Credit between 241 and 299 months 

  • 2.50% - Service Credit greater than 300 months

Years of Service

The years of service used in a Tier Two member's calculation include current service, prior service, purchased service, and sick leave service. This applies to all service purchases made by the member or employer with the exception of omitted service, re-contribution of service refunds, and hazardous conversions as well as service credit for free military and purchase of sick leave in excess of 6 months. 

  • Current Service - Service earned by working in a participating position. 

  • Prior Service - Service earned before the establishment of the Retirement Systems (July 1, 1956, for KERS, July 1, 1958, for CERS and SPRS). 

  • Purchased Service - Service purchased by the member to enhance the retirement benefit. 

  • Sick Leave Credit - Accrued sick leave balance at the time of retirement.

What do I Pay and What Does My Employer Contribute?

Members pay a pre-tax 5% rate based on creditable compensation, if nonhazardous; 8% if hazardous duty. Employers pay different rates based on the member's system, and nonhazardous vs. hazardous duty. Additionally, you pay a pre-tax 1% Health Insurance Contribution that is used to fund insurance benefits. 

The employer contributions are paid into the Retirement Allowance Account, and are used for paying monthly benefits. The CERS employer contribution rate is determined by the Board of Trustees, and the KERS and SPRS rates are approved by the General Assembly during the biennial budgeting process. See the current employer contribution rates

Am I Eligible for a Refund of My Account if I Quit My Job?

At the time of termination, you are eligible to either take a refund of your accumulated account balance or begin receiving monthly payments, if eligible for retirement. You can also leave your funds in your account until the time you either become reemployed or are eligible to retire. If you terminate employment and request a refund, you are eligible only for your member contributions and associated interest. Learn more on our Refund of Contributions page.


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