For those who attended our ASRS Employer Conference recently and selected the Compensation and Contribution Reporting breakout session, you were reminded about Termination Incentive Programs. This article serves to reinforce what you learned, just with less legalese and more layman's terms.
Basically, Arizona Revised Statute 38-749 makes sure that employers do not create an unfunded liability when they offer special programs to employees to retire. These programs are called "termination incentive programs.”
What is an Unfunded Liability?
Imagine the ASRS as a big pot of money in which employer and employee contributions are collected, and that pot of money increases with interest over time as well. This pot is supposed to have enough money to pay everyone their pension when they retire.
An unfunded liability means there's not enough money in the pot to pay all the promised pensions. It's like owing money but not having it. One way this can happen is when employers and employees may not have paid enough into the retirement plan over time.
What does this statute say about such programs?
- Termination incentive programs (TIP) can create extra costs: If an employer offers a TIP that makes retirement more expensive for the Arizona State Retirement System (ASRS), the employer has to pay the extra cost, also known as an unfunded liability.
- Employers must give ASRS a heads-up: Employers have to tell ASRS if they plan on offering a TIP so the ASRS can advise the employer what implementing the TIP would cost.
- Invoices must be paid on time: If an employer owes money to ASRS because of a TIP, they have 90 days to pay. If they're late, they'll have to pay interest.
What counts as a Termination Incentive Program?
- Big salary increases before retirement: Giving an employee a raise of 30% or more in the years right before they retire if that raise is used to calculate their pension, and it's not for a promotion.
- Other benefits by agreement: A TIP can also be anything of value offered to an employee conditioned upon them terminating and retiring, like a bonus if they retire by a certain date, that isn’t tied to performance or additional hours worked. Normal vacation payouts, sick leave payouts, etc., don't count unless they're more than usual.
In a nutshell, this law ensures that the ASRS general retirement fund is properly funded against employers offering termination incentive programs that cause the ASRS to pay out more in benefits than was contributed by the employer and employee.
To safeguard against this, the ASRS reviews retirement calculations to determine if a retiree’s pay increased at least 30% during the period used to calculate the member’s average monthly compensation. If identified, the ASRS takes the following steps.
- Notifies employers of the potential TIP.
- Requests proof to be provided within 90 days of notice that the raise was not part of a TIP. This may involve providing documentation that the increase was due to a promotion.
- If the employer cannot provide proof that the increase was due to a promotion, an invoice will be issued for the unfunded liability as a result of that increase.
If you receive a notice of a potential TIP, which the ASRS issues via employer secure message (ESM), please respond to the notice and provide any required documentation. If you’re unsure what to provide, you can always contact the ASRS with your questions.
By Genevieve McBride, Employer Relations
Published 9/30/2024
