PENSION SPIKING refers to an increase in compensation of more than 10% from the immediately preceding fiscal year for KRS members nearing retirement. When this happens, the increase inflates, or “spikes,” the member’s pension payment and allows them to receive a larger benefit than they would otherwise be entitled to receive.
In 2017 the Kentucky General Assembly passed Senate Bill 104 to reduce the potential for spiking. State law requires that members who retire on or after January 1, 2018, are not allowed to have a salary increase of more than 10% over the immediately preceding fiscal year, except in certain instances. The 10% increase shall not occur at any time during the last five (5) years of employment.
When a member applies for retirement, the account is always evaluated for pension spiking. Here’s how it works:
- Upon KRS’ receipt of the “Form 6000, Notification of Retirement,” the member’s account is audited and the final retirement paperwork is prepared and mailed to the member.
- If a spike is detected, the creditable compensation is automatically reduced to reflect the 10% limit, and a letter of explanation is sent to the retiring employee.
- At the same time, a “Form 6487, Request for Member Pension Spiking Exemption Amounts” is generated and sent to the employer to determine if the increase in wages is a true spike or if the additional monies are exempt.
Occasionally, a spike can be caused by a promotion, certain lump sum payouts, or other activities that the General Assembly has determined to be exempt from the spiking provisions. Form 6487 gives employers the opportunity to clarify the cause of the spike to see if it should be allowed.
- If the increase in creditable compensation is determined to be EXEMPT, KRS will recalculate the member’s retirement benefits during the Post-Retirement audit and issue a retroactive payment for any money owed to the member due to the initial reduction.
- If the increase in creditable compensation is NOT EXEMPT, a refund of the member’s contributions and interest attributable to the reduction in creditable compensation will be sent to the employer to withhold proper payroll taxes before disbursement to the member. The member will also receive a letter explaining all refunded amounts and how the money will be refunded.
Pension spiking exemptions:
A member’s final compensation will be adjusted unless the increase is due to one of the following exemptions:
- Bona Fide promotion or career advancement;
- Lump sum payout from compensatory time at termination only; or
- Lump sum payout for alternate sick leave payments.
- Increases in years where the employee was on leave w/o pay in the prior fiscal year;
- An increase due to overtime work and pay as the result of a state or federal grant, grant pass-through or a similar program that requires overtime as a condition or necessity of the employer’s receipt of the grant.
- An increase due to overtime work and pay required by a federal or state-declared emergency.
KRS has a fiduciary responsibility to ensure that our participating agencies accurately report their employees’ compensation so our members' retirement benefits are calculated correctly. Doing so helps us confirm the retiree receives all the benefits they have earned, and protects the Systems from undue financial harm. We appreciate the ongoing efforts of our participating agencies to help us guard against spikes and protect the Systems’ assets.
If you have any questions about pension spiking we invite you to call us toll free at 1-800-928-4646, or refer to the Senate Bill 104 Frequently Asked Questions page on our website.