The California Public Employees’ Pension Reform Act (PEPRA), which took effect in January 2013, changes the way CalPERS retirement and health benefits are applied, and places compensation limits on members. The greatest impact is felt by new CalPERS members.
As defined by PEPRA, a new member includes:
- A member who first established CalPERS membership prior to January 1, 2013, and who is rehired by a different CalPERS employer after a break in service of greater than six months
- A new hire who is brought into CalPERS membership for the first time on or after January 1, 2013, and who has no prior membership in any California public retirement system
- A new hire who is brought into CalPERS membership for the first time on or after January 1, 2013, and who is not eligible for reciprocity with another California public retirement system
All members that don’t fall into the definitions above are considered classic members. Classic members will retain the existing benefit levels for future service with the same employer.
PEPRA is a complex law that can generate many questions. Below are some of the key subject areas affected by PEPRA.
ARP, a retirement savings program that certain state employees were automatically enrolled in for two years from their initial hire date, was eliminated. All new CalPERS members enrolled after June 30, 2013 are not affected, as enrollment in ARP has ended. State employees enrolled in ARP can convert their ARP service credit to CalPERS service credit. Visit Service Credit to learn about your options.
AB 1222 (Chapter 527, Statutes 2013) became law on October 4, 2013. This bill exempted California transit employees of public employers, whose interests are protected under Section 13(c) of the Federal Transit Act, from the PEPRA retirement benefit formula until January 1, 2015 or a court decision. AB 1222 was later extended until January 1, 2016 or a court decision.
The AB 1222 PEPRA exemption only applies to transit employees who became new members on or after January 1, 2013, and whose interests are protected under Section 13(c) of the Federal Transit Act, regardless of whether they are union or non-represented employees. These new members were eligible to receive their employer's pre-PEPRA level of benefit(s) existing on December 31, 2012. The AB 1222 PEPRA exemption applies to all eligible transit employees in the service area of the federally funded project. The process for handling incorrect membership classifications is the same for all transit employees, regardless of their status.
Due to the court decision State of California v. United States Department of Labor, if a transit employee first became a member of CalPERS or any public retirement system on or after January 1, 2013 to December 29, 2014, they will now be subject to the PEPRA retirement benefit formula effective December 30, 2014. This court decision ended the AB 1222 PEPRA exemption. However, all service credit earned during the time frame between January 1, 2013 and December 29, 2014, will remain in the classic retirement benefit formula. Service credit purchase deductions will not be impacted.
For additional information on AB 1222 refer to Circular Letter 200-075-13 (PDF).
If a public employer continued to maintain a defined contribution plan after December 31, 2012, new members may participate in a defined contribution plan that was in place prior to January 1, 2013. If a public employer adopts a new defined contribution plan on or after January 1, 2013, the new plan must conform to the requirements of PEPRA.
A public employer may provide contributions to a defined contribution plan for compensation above the pensionable compensation limit in 7522.02(c) when combined with the employer's contributions for compensation up to the pensionable compensation limit. These combined contributions may not exceed the employer's contribution (expressed as a percentage of pay) required to fund retirement benefits on compensation up to the pensionable compensation limit.
A defined contribution plan must meet the requirements and applicable limits under federal law. Internal Revenue Code section 401(a)(17) limits compensation that may be taken into account for retirement plan contributions. For 2015, the maximum compensation that may be counted for retirement plan contributions is $265,000. This limit is indexed and may change from year to year.
For public agencies, school employers, California State Universities, and the judicial branch; a new member’s initial contribution rate will be at least 50 percent of the total normal cost rate for their defined benefit plan or “the current contribution rate of similarly situated employees, whichever is greater,” except where it would cause an existing Memorandum of Understanding (MOU) to be impaired. The CalPERS State, School Pension Contribution Rates Lower Than Projected; Rise for New Fiscal Year news release has the latest information about employer contribution rates.
Any current or future public official or employee convicted of a felony while carrying out his or her official duties, in seeking an elected office or appointment, and/or in connection with obtaining salary or pension benefits, will be required to forfeit any pension or related benefit earned from the date of the commission of the felony.
The retiree health vesting equity requirement in PEPRA doesn’t require vesting schedules that existed prior to January 1, 2013, to be changed for employees who had a contractual agreement with an employer prior to January 1, 2013.
In addition to the current calculation options of the IDR benefit for a member, this provision adds a calculation for a safety member who qualifies for an IDR that may result in a higher benefit than 50 percent of salary. An actuarial reduced retirement formula, as determined by the actuary for each quarter year of service age less than 50, will be used to determine if the IDR benefit is greater for the safety member who qualifies for IDR. These provisions remain in effect only until January 1, 2018. After that date, the new IDR provisions will not apply unless the date is extended by statute.
Learn more by visiting Service & Disability Retirement.
Pensionable compensation refers to employee pay that is factored into the calculation of the pension benefits for new members under PEPRA when they retire.
PEPRA defines pensionable compensation as “the normal monthly rate of pay or base pay of the member paid in cash to similarly situated members of the same group or class of employment for services rendered on a full-time basis during normal working hours, pursuant to publicly available pay schedules.”
Thirteen types of pay that can’t be counted toward pensionable compensation include:
- Any one-time or ad hoc payments
- Housing or transportation reimbursements
- Overtime allowances
- Uniform allowances
- Vacation time
Until regulations have been approved and implemented, please continue to report all pensionable compensation in accordance with Circular Letter 200-062-12 (PDF).
In addition, for the 2015 calendar year, there is a cap on pensionable compensation of $117,020 for members who participate in Social Security and $140,424 for members who don’t. Both limits are subject to increases in the Consumer Price Index.
Public employers are prohibited from granting retroactive pension benefit enhancements that would apply to service performed prior to the operative date of the enhancement. An increase to a retiree’s annual cost-of-living adjustment within existing statutory limits is not considered to be an enhancement to a retirement benefit.
For retirees interested in working for a public employer in the same retirement system from which they retired (without reinstatement from retirement), PEPRA has certain requirements that need to be met. These requirements include, but are not limited to:
- A 180-day waiting period is required for all employees who retire from a public employer before a retiree can return to work within the same retirement system without reinstating from retirement, unless a specified exception applies. This 180-day wait period begins on the date of retirement.
- All retirees are prohibited from working more than 960 hours per calendar or fiscal year, depending upon the retirement system. For CalPERS, it is per fiscal year.
- A person retired from a public retirement system other than CalPERS who is appointed to a full-time position on a state board or commission will be required to suspend his or her retirement allowance and become an active member of CalPERS, unless the appointment is non-salaried.
Learn more about Working After Retirement.