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Senate Bill 104 Frequently Asked Questions

2017 Regular Session Kentucky General Assembly

Member Pension Spiking for Employees Retiring on or after January 1, 2018

During the 2017 regular session of the General Assembly, Senate Bill 104 was enacted creating new pension spiking rules for members retiring on or after January 1, 2018. Watch this video for an overview of these changes and the new process for retiring members and employers.

KPPA received a Private Letter Ruling from the IRS approving Tier 2 members to transfer their accounts to Tier 3. Tier 1 members are prohibited from transferring their account to Tier 3 because the employee contributions must be the same between the defined benefit plan and the hybrid cash balance plan.

Tier 2 members that choose this option will have their accumulated contributions, less any interest earned, deposited into a hybrid cash balance account. Employer pay credits will be added to the accumulated account balance for each month the member contributed prior to their election date. Interest credits will only be applied for periods on or after the effective date of election.

Service purchases made as a Tier 2 member that are not available under Tier 3 will be refunded and service reduced accordingly if the member opts-in to Tier 3.

Switching to Tier 3 may require a member to retire later than he or she would have been eligible to do so had he or she remained in Tier 2; Tier 2 members can retire with a reduced retirement, whereas Tier 3 members have no reduced retirement option. 

The decision to opt-in to Tier 3 is an irrevocable choice and members who do so will be subject to the same statutes and regulations governing Tier 3 membership as those whose participation date is 1/1/2014 and later.

SB 104 creates new pension spiking rules for members retiring on or after 1/1/2018. While only considering creditable compensation earned on or after 7/1/2017, the new law reviews the last five (5) fiscal years of employment to determine if one or more spikes occurred. An increase in creditable compensation greater than 10% when compared to the prior fiscal year’s creditable compensation will not be used when calculating the member’s retirement benefit. KPPA will refund all employee contributions and interest attributable to the reduction in creditable compensation to the employer for disbursement to the member. KPPA will retain the employer contributions as required by this provision.

Yes, fiscal years prior to 7/1/2017 will be exempt from reduction.  Additional exemptions are as follows: 
 
a)      An increase caused by a bona fide promotion or career advancement;
b)      An increase caused by a lump sum payout from compensatory time at termination only;
c)      An increase caused by a lump sum payout for alternate sick leave payments;
d)      Increases in years where the employee was on leave without pay in the prior fiscal year;
e)      Increases due to overtime work and pay required by a state or federal grant, grant pass-through or similar program; and
f)       Increases due to overtime work and pay required by a federal or state-declared emergency. The employer will have to report and certify any overtime due to a federal or state-declared emergency. KPPA will not make this determination.​


SB 104 clarifies that existing pension spiking calculations will continue to apply for employees retiring through 6/30/2017. In those cases, it is the employer that is required to pay for the spike and there is no change to the employee’s creditable compensation. 

No, SB 104 specifically exempts participants in Tier 3 from pension spiking provisions.

No, lump sum payments for compensatory time at termination are listed in SB 104 as exempt from pension spiking.

 


No, lump sum payments for alternate sick leave are listed in SB 104 as exempt from pension spiking.

Yes, creditable compensation reported to KPPA by multiple employers is subject to the pension spiking statute. 

​The process to opt-in to Tier 3 is currently being designed. Once complete, Tier 2 members will need to log into their Member Self Service account and select the link to initiate the Tier 3 opt-in process. During this process, members will be shown a comparison of their Accumulated Account Balance and projected monthly retirement payment options for an unreduced retirement date as a Tier 2 and as a Tier 3 member. Members should review this comparison closely when considering how their benefits will change. Once the member has reviewed the comparison, if he or she chooses to opt-in to Tier 3, the member will follow additional steps of the module to complete an affidavit electing to do so.

The decision to opt-in to Tier 3 is an irrevocable choice and members who do so will be subject to the same statutes and regulations governing Tier 3 membership as those whose participation date is 1/1/2014 and later.


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