Members of the Cash Balance plan contribute a set percentage of their salary each month to their own account as required by Kentucky law:
Nonhazardous Members - 5% of creditable compensation
Hazardous Members - 8% of the creditable compensation
All Members - 1% to the health insurance fund which is not credited to the individual account and is not refundable.
All employees meeting the requirements for membership are required to contribute a percentage of their gross wages, referred to as creditable compensation, to KRS.
When mandatory employee contributions are deducted from an employee's check, the contributions are exempt from Federal and State Income Tax withholding. Mandatory employee contributions have been exempt from Federal and State Income Tax withholdings since August 1, 1982. These contributions are tax deferred, which means the contributions are withheld from employees’ gross pay before Federal and State Income Tax.
From January 1, 1987 through December 31, 2016, Federal Social Security withholdings were also exempt. This changed January 1, 2017 under a Memorandum of Agreement between the Commonwealth of Kentucky and the Internal Revenue Service. As of January 1, 2017, employee contributions are deducted after Federal Social Security is withheld.
Employer Pay Credit
The employer contribution rate is recommended annually by the KRS Board of Trustees based on an actuarial valuation. The employer contributes a set percentage of the member’s salary each month. When employer contributions are received, an Employer Pay Credit is deposited to the member’s account. If you are a nonhazardous member, your account is credited with a 4% Employer Pay Credit. If you are a hazardous member, your account is credited with a 7.5% Employer Pay Credit. The Employer Pay Credit represents a portion of the employer contribution.
Most employers list the full Employer Contribution on your paycheck instead of just the Employer Pay Credit which is added to your account.
The example below shows how a member’s account is credited each month for the
Member Contribution and the Employer Pay Credit.
5% Member Contributions
4% Employer Pay Credit
8% Member Contributions
7.5% Employer Pay Credit
How are the contributions invested?
Members in the Cash Balance plan do not make their own investment decisions and do not bear the risk of investment losses. The assets of the plan remain in a single investment pool and the employer assumes all the investment risk. Even if the underlying investments lose value, the employer is still obligated to pay the required contribution so the plan can pay a benefit based on your individual account balance.
In other words, a member’s Cash Balance retirement account will never be reduced due to investment losses. The KRS Board of Trustees and its investment professionals are responsible for investment decisions that impact Cash Balance plan accounts. The Board has established clearly defined investment policies, objectives and strategies for both the pension and insurance portfolios. If you would like more information on our Boards investment policies and detailed monthly investment performance reports please see our
Your account earns a base of 4% interest annually on both the member contributions and the Employer Pay Credit balance. Interest is credited to your account each June 30, based on your account balance from the preceding June 30. New members do not see interest credited in their first year since there is no prior year balance.
Over time, the value of your account can increase a great deal because of compounding interest. A great way to keep tabs on your account is to visit https://kyret.ky.gov/Pages/Login.aspx for more information on your personal account.
The additional interest credit that may be applied is referred to as Upside Sharing Interest.
Upside Sharing Interest is not guaranteed. The following conditions must be met before Upside Sharing Interest is credited to a member’s account:
- The system’s geometric average net investment return for the last five years must exceed 4%.
- The member must have been active and participating in the fiscal year.
If a system’s geometric average net investment return for the previous five years exceeds 4%, then the member’s account will be credited with 75% of the amount of the return over 4%. The credit will be applied to the account balance as of June 30 of the previous year. The following example illustrates how upside sharing interest works.
In the example below, upside sharing interest would be credited to both the member contribution balance and Employer Pay Credit balance. Remember, upside sharing interest is an additional interest credit. Member accounts automatically earn 4% interest annually. In this example, the additional 2.63% Upside Sharing Interest credit means the total interest paid would be 6.63%.
EXCESS RETURN OVER 4% BASE INTEREST CREDIT
Geometric Average Net Return - Base Interest = Excess return over 4% interest credit
7.5% - 4% = 3.5%
Upside Sharing Interest Credit
Amount of Return Over 4% * 75% Amount of Return = Upside Sharing Interest Credit
3.5% * 0.75% = 2.625%
Total Interest Paid
Upside Sharing Interest Credit + Base Interest = Total Interest Paid
2.625% + 4% = 6.63%
The geometric average net investment return is calculated on an individual system basis (i.e. KERS, CERS and SPRS). It is possible that the Upside Sharing Interest percentage will differ from system to system. It is also possible that one system may get an upside sharing percentage, and another system would not.