I learned something new this week about how PERA calculates service credit in the School and DPS Divisions. I knew the basics (and the basics are what applies to most people). I knew:
- To earn a month of service credit, the member must earn at least 80 times the current federal minimum wage in the month (currently 80 x $7.25 = $580 in a month).
- You cannot earn more than 12 months of service credit in a 12 month period.
- While I’m not aware of any Colorado school districts that pay their teachers over just 9 months instead of 12, I knew there was a procedure to handle that so they get a full year of service credit (and this would apply to 9-month hourly workers as well).
While I knew about that last one, I didn’t know the exact mechanism of how they did it. Now I do, and it creates some interesting edge cases. These won’t apply to very many people, but can be really important to those it does apply to. Here’s the mechanism (again, only in the School and DPS Divisions).
- PERA uses a standard 12-month period (August through July) for everyone in the School and DPS Divisions.
- By law, PERA is allowed to apply up to 1.5 months of service credit per salary posting.
- By default, PERA assigns 1.5 months per salary posting (assuming you have the income) starting in August. This means that at the end of August you have 1.5 months of service credit for that year. At the end of September, 3 months. By the end of March, the full 12 months. PERA is effectively “front-loading” your service credit.
- But since you are only allowed to earn 12 months of service credit from August through July, when your April check posts they reduce all of your postings from 1.5 to 1.33 (still a total of 12). And the keep reducing until your July paycheck posts at which point you are back to 1.0 for each month (still a total of 12).
In and of itself I find that interesting. But it also brings up some rare – but interesting – cases where this can really benefit a member. Here are some of the ones I’ve thought of.
- Maternity/Paternity Leave: Often when an educator takes maternity/paternity leave, the district has a procedure in place where they can still get paid for that leave (typically six weeks). In that circumstance, it has no impact on PERA because the employee is still getting their regular monthly check. But if an employee were to take off longer – and didn’t get paid for the entire time off – there are some situations where they would still get a full 12-months of service credit even though they didn’t work/get paid for all those 12 months. (And, of course, if they don’t qualify for even the 6 weeks of paid time off, this would apply there as well.)
- Part-Time Work: My daughter started in PERA in high school, working in before and after school care and continued during the summers in college. Her hours (and therefore pay) were sporadic, so some months she made a lot, some she made a little, and quite a few she didn’t make anything. For that time period she actually received more months of service credit than she actually worked, because some of the months she earned enough to get the 1.5 months of service credit (and it never got “reduced” back down to 1.0 because she didn’t work all 12 months).
- Substitute Teaching: Similar to part-time work, a substitute teacher could earn more months of service credit than the months they actually worked in if they worked enough in any given month to earn more than 1.0 months of service credit.
- Purchasing Service Credit: PERA members with a membership date on or after January 1, 1999, are eligible to purchase qualified service credit (typically working for a school in another state) after 1 year of earned service credit, and nonqualified (typically Social Security covered work) service credit after 5 years of earned service credit. Given the front-loading, that means that someone new to PERA could purchase qualified credit as soon as April of their first year, and nonqualfied credit as soon as April of their fifth year (in both case, 4-5 months sooner than I would’ve thought). This could be helpful in getting money out of a bad 403b sooner, or transferring money sooner from a different pension plan where you aren’t vested.
- Vesting: A member is vested in PERA when they reach five years of earned service credit. This is important for two reasons. First, once you vest, you are guaranteed a defined benefit when you reach age 65. Second, the benefit “tier” you are on (referred to as HAS Tables in PERA) is often defined by when you vest. This means that someone who stops working in late March of their fifth year would still be vested and guaranteed a defined benefit (and also locked into the HAS table currently applicable).
- Sick Leave Payout: Many school districts do a sick leave payout when you retire if you have enough accumulated sick leave. Many (but not all) districts do this payout as a separate check in August following your last “regular” paycheck in July. In the past I’ve told folks that this often will give you one additional month of service credit, which equates to a small (but still meaningful) additional 0.20833% of your HAS (2.5% divided by 12) for the rest of your life. But assuming your sick leave payout is at least $870, then it would seem as though you would actually get 1.5 months of service credit, which ends up being 0.3125% of your HAS for the rest of your life (2.5%/12 * 1.5). (Note that I do not know for sure that’s how PERA does this, but it would seem consistent with the front-loading policy.)
None of these are earth-shattering by any means, but could be really important (and helpful) to certain PERA members. And, if nothing else, it gives everyone insight into the complexities of PERA and the amount of thought that has gone into the plan design.
Note: This can also cause some interesting perturbations in their HAS calculation itself at times. For the most part it won’t have much of an impact unless this happens in the last 3-5 years that they work.
Fisch Financial 