Balance of Contract Pay is a concept frequently encountered by Arizona State Retirement System (ASRS) employers, especially in educational institutions where employment contracts often span an academic year. Understanding how this type of compensation fits within ASRS rules is essential for accurate reporting and helping employees make informed retirement decisions.
What is Balance of Contract Pay?
Balance of Contract Pay refers to the final payment made in a fiscal year that covers the remaining portion of a member’s annual salary. This amount is based on the member’s written request regarding the frequency of their contract pay distribution.
Example: A teacher has a 10-month contract from August to May. If they retire in April and receive a lump-sum payout for the remaining weeks of their contract, that is considered Balance of Contract Pay.
Under Arizona Administrative Code R2-8-901 through R2-8-905, Balance of Contract Pay is explicitly included in the definition of “compensation.”
This means:
•Employers must remit retirement contributions on these payments, just as they do for regular wages.
•These payments are considered part of the employee’s pensionable earnings and may affect their retirement benefit calculation.
How Does Balance of Contract Pay Affect Retirement Calculations?
The ASRS uses a member’s compensation history to calculate their Average Monthly Compensation (AMC), which is a critical component in determining their retirement benefit.
Balance of Contract Pay will be included in a member’s compensation history, and may increase their Average Monthly Compensation (AMC) if all of the following are true.
•It is paid in the same fiscal year it was earned.
•It is properly reported with regular contributions.
•It is earned under a valid employer contract.
When these conditions are met, Balance of Contract Pay can boost the members AMC, especially if it contributes to one of their highest paid 36 or 60 consecutive months. Whether a member’s AMC is calculated using the highest 36 or 60 months of contributions in the last 10 years of service depends on their membership date.
Important: If reported incorrectly—such as being treated as severance or a bonus, it may be excluded from AMC and flagged for correction during the retirement process.
Best Practices for Employers
To ensure compliance and accuracy:
•Review employment contracts to clarify whether payouts represent time already worked.
•Classify the pay correctly in your payroll system and contribution reporting.
•Report Balance of Contract Pay as regular compensation (not as post-employment, sick leave, or severance) using the correct pay type.
•Educate employees nearing retirement about how this type of pay may impact their retirement benefit.
Questions?
Send a secure message through your ASRS Employer Secure Account.
