Chapter 4: What Is Reportable Compensation for TRS - DRS Employer Handbook
TRS Reportable Compensation
What Is Reportable Compensation?
In order for a payment to be subject to retirement system contributions and included in the calculation of a member's retirement benefit, the payment must meet the definition of "earnable compensation" in TRS retirement law, RCW 41.32.010(10). "Reportable compensation" is defined in rule as "earnable compensation." The term "reportable compensation" was coined to allow DRS to use the same term when discussing compensation in different retirement systems.
Reportable Compensation is Based upon the Nature of the Payment
DRS determines reportable compensation based upon the nature of the payment you make to an employee, not the name given to it. To determine if a payment is reportable compensation, consider the following:
- what the payment is for; and
- whether the reason for the payment brings it within the statutory definition of earnable compensation.
A payment conditioned upon retirement is not reportable compensation. Attaching the label "longevity" to the payment does not change the fact that the payment is conditioned on retirement. Such a payment is not for services rendered and will not be counted as reportable compensation despite being identified by the employer as a longevity payment.
What Payments Qualify as Reportable Compensation?
The basic statutory standard for determining whether a payment qualifies as reportable compensation is if the payment is for services rendered. To determine whether a payment meets this definition and is to be reported, ask the following questions:
- Was the payment earned as a salary or wage for services rendered?
- If the answer is no, the payment is not reportable.
- If the answer is yes, ask the next question.
- Was the payment paid by the employer to an employee?
- If the answer is no, the payment is not reportable.
- If the answer is yes, the payment is reportable.
An employee goes on unpaid leave from the employer to work for a third party. The employer pays the employee for his or her work with the third party on the condition the third party reimburses the employer. The payments earned by the employee were actually paid by the third party, not the employer. Those payments do not qualify as reportable compensation.
Payments considered to be for services rendered
Base salary is a salary or wage earned for services rendered and is reportable. The base salary is usually described in the employee's base contract.
Sick and annual leave is accumulated over time and paid to a person during a period of excused absence. The paid leave is deferred compensation for services previously rendered and is reportable.
Earned Severance pay is reportable compensation for TRS Plan 1 only if it is earned over time in the same manner as annual and sick leave. The employment contract or compensation policy in effect at the beginning of the employment period must specify that a certain amount of severance pay will be earned during that employment period in consideration for services rendered. Severance pay that qualifies as reportable compensation and is earned within the member's AFC period, is excess compensation.
Mr. Jones is a TRS Plan 1 member employed in an administrative position. At the beginning of his employment, his contract specified that he would earn one week of severance pay for every year of employment. The earned severance pay is reportable. At the time Mr. Jones retires, the two weeks of severance pay earned during his two highest paid years; i.e. one week per year for two years, is included in his TRS Plan 1 retirement benefit calculation. Because this pay is used in the benefit calculation, it results in an excess compensation billing to his employer.
Note: For TRS Plan 2 and Plan 3, severance pay is not reportable compensation.
Bonuses that are based upon meeting certain performance goals or having to work under unusual conditions such as over-enrollment are earned for services rendered and are reportable.
Retroactive salary payment to an employee who worked during the period covered by the retroactive payment is a salary or wage for services rendered and is reportable.
Evening or summer school payments are for additional time worked and are usually authorized in supplemental contracts. These payments are for services rendered and are reportable.
Extracurricular assignment payments are for extracurricular assignments, such as coaching, which provide services to an employer and are reportable.
Supplemental Contracts -a school district may compensate an employee for additional time, responsibility or incentives. (See RCW 28A.400.200 .) These payments are for services rendered and are reportable if they are for:
- Additional time
- Additional responsibility (extra enrollment or duties)
- An incentive payment (meeting performance goals specified by the employer).
Longevity or educational attainment -a member who receives a salary increase based upon longevity or educational attainment receives a higher salary without working more hours. The higher salary indicates a higher level of service due to greater experience or more education. The payment is a payment for service and is reportable compensation.
Deferred wages (payments earned by, but not paid to, an employee) -payments earned by an employee for services rendered, but deducted from his or her salary rather than paid, are reportable.
- Tax withholding
- Retirement contributions
- Voluntary deductions (403(b) contributions or other authorized deductions)
Cafeteria plans -Compensation received in any form under the provisions of a "cafeteria plan," "flexible benefits plan," or similar arrangement according to the provisions of section 125 of the United States Internal Revenue Code is reportable compensation if the employee has an absolute right to receive cash or deferred cash payments in lieu of the fringe benefits offered. In such an instance, the fringe benefit is provided instead of cash and is considered reportable compensation same as cash. If there is no cash option, the value of the fringe benefit is not a salary or wage and is not reportable.
Reportable compensation not for services rendered
In general, payments cannot be considered
reportable compensation unless they are for services rendered. Some payments are reportable that are not for services rendered. A description of these payments is included in WAC 415-112-470 through 477.
The following types of payments, not for services rendered, may be included as reportable:
Paid leave not earned over time -may be reportable if:
- The payment is equal to the salary for the position from which the employee is on leave, and
- The payment is actually from an employer.
Union leave-salary may be reportable if:
- The leave of absence is authorized by a collective bargaining agreement that provides the member retain seniority rights with the employer during the period of leave; and
- The compensation reported does not exceed the salary paid to the highest paid job class covered by the collective bargaining agreement.
Note: Refer to DRS Notice 93-014 for more information about reporting an employee who takes a leave of absence to serve as an elected official of a labor organization.
Legislative leave -salary foregone may be reportable if:
The salary the employee would have earned had he or she not taken a leave to serve in the Legislature provided the member serves at least five years. (Only employee contributions are required.)
Plan 2 and Plan 3
The member chooses between:
- Option 1: The reportable compensation the member would have earned had the member not served in the Legislature; or
- Option 2: The actual reportable compensation received for teaching plus the legislative reportable compensation.
Note: If the employee selects Option 1, he or she is responsible for paying the additional employer and employee contributions on any difference between the Option 1 and Option 2 amounts.
Sick, Annual and Personal Leave Usage
Sick leave, annual leave and personal leave are typically accumulated over time and paid to a person during a period of excused absence. Leave accrues at a prescribed rate, usually a certain number of hours per month. The employee earns a leave day by rendering service during the month the leave was accumulated. When the employee uses his or her accrued leave to take a paid day off, the payment is deferred compensation for services previously rendered. The payment is a salary or wage earned for services rendered and is reportable.
Cash out payments for sick, annual and personal leave
If an employee receives payment instead of using accrued leave, he or she receives a "cash out" for the accrued leave. Cash outs are reportable for TRS Plan 1 members only. Cash outs are excluded by statute from the definition of reportable compensation for TRS Plan 2 and Plan 3 members (see RCW 41.32.010(10)(b) ).
The following cash outs are reportable for TRS Plan 1 members only.
Annual leave and personal leave cash outs, like payments for leave usage, are deferred compensation earned for services previously rendered.
Annual leave and personal leave cash outs are reportable for TRS Plan 1 members. (Refer to "Excess Compensation" on page 4-8 TRS.)
Plan 2 and Plan 3
Annual leave and personal leave cash outs are excluded from the definition of reportable compensation in TRS Plan 2 and Plan 3 and are not reportable.
Sick Leave Cash Outs -by statute, sick leave cash outs are prohibited from being used in the calculation of an employee's retirement benefit. Therefore, sick leave cash outs are not reportable for all TRS plans.
Payments not Considered Reportable Compensation
The following payments are not for services rendered and are not reportable:
Reimbursements for expenses incurred while performing services for an employer are not wages for services rendered and are not reportable. Examples of reimbursement expenses include mileage reimbursements for use of a private car on employer business or meal and lodging reimbursements for business trips.
Car Allowance -some employers pay car allowances instead of reimbursing for actual miles driven in the employee's car for the employer's business. These payments are not for services rendered and are not reportable.
Disability Insurance -payments for disability insurance are not payments for services rendered. They are for disability payments paid because an employee is unable to render service due to a disability. These payments are not reportable.
Worker's compensation payments -to a member are not payments for services rendered and are not reportable. This is true whether the payments come from the Department of Labor and Industries or from a self-insured employer.
Note: Some employers have an employee on unpaid disability leave submit his or her worker's compensation payments to the employer and then issue the employee a check through their payroll system. This exchange does not change the nature of the worker's compensation payments and does not make the payment reportable.
Retirement Bonus or Incentive -a payment made to an employee as a bonus or incentive to retire or terminate is not a payment for services rendered and is not reportable.
Severance pay -not earned over time-severance pay negotiated, because of a termination settlement or agreement, is not earned for services rendered and is not reportable.
At the time of an employee's termination, the employer agrees to pay a lump sum payment equal to two months salary. The employer identifies this payment as "severance pay." Because the payment was not earned for services rendered, it is not reportable compensation.
Optional payments -if an employee can receive an additional payment conditioned upon the employee taking some action in addition to providing service to the employer, the payment is not for services rendered and is not reportable.
An employer offers to make a contribution to a deferred compensation plan on behalf of an employee only if the employee elects to have a portion of his or her salary deferred. Because the employee does not have an absolute right to receive the contribution based solely on the rendering of service, the payment is not reportable compensation.
Fringe Benefits -payments made by an employer to a third party to provide benefits for an employee are not part of the employee's salary or wage and are not reportable. Examples of these payment types are insurance premiums and employer retirement contributions.