Act 10 and Total Employee Compensation
February 23, 2015

How well do your employees understand their total compensation beyond their base salary? Many employers are now providing information directly to individual employees with respect to how much the employer contributes toward their health insurance benefits. An employee’s total compensation, though, includes other benefits you provide, such as contributions toward retirement benefits.

If you are a public employer participating in the Wisconsin Retirement System (WRS), you may have received questions about what types of employee benefits are available through the WRS.

Act 10

As a brief background, the WRS is administered by the Department of Employee Trust Funds (ETF). State law provides that every month employers must send employer-required and employee-required contributions to the WRS, with the ultimate goal of providing each employee with a benefit when he or she reaches retirement.

Prior to Act 10, many employers paid the WRS employee contributions on behalf of their employees through policy, a contract or collective bargaining agreement. As a result, employees may only have been tangentially aware that employers were contributing anywhere from 10-17% of their salary to the WRS in the form of employee and employer contributions every month on their behalf.

After Act 10, most employees were required by state law to begin paying the WRS employee portion of the contribution themselves. Because of that, employees may be asking more questions about their payment of that contribution as well as the employer contributionand what it means to them.

Basic Overview of Certain WRS Benefit

Once a year, ETF sends each WRS-covered employee a Statement of Benefits. In addition to that statement, it may be helpful for employers to give employees a basic idea of how the employer and employee contributions translate into potential WRS benefits.

Vesting

At the outset, it is important to be aware that Act 10 created a new WRS vesting period of five years. That means any employee who was not covered by the WRS prior to July 1, 2011 must have five years of WRS service (under one or more employers) prior to being eligible to receive the employer contributions that have been made on their behalf for purposes of a retirement benefit. It is important to note, however, that an employee is always vested in employee contributions, including interest earned on the employee contributions.

Retirement Benefits

Once an employee nears minimum retirement age (55 for most employees, 50 for WRS protective occupation participants), that employee may request a retirement benefit estimate from ETF. WRS retirement benefits are calculated in two different ways: the formula method, and the money purchase method. An employee receives the higher of the two calculations.

A formula monthly retirement benefit is computed by using:

  • Final average monthly earnings (using the three highest years),
  • Years of WRS creditable service,
  • The formula multiplier(s) for the employee’s service and employment categories, and
  • Any age reduction factor(s) based on an employee’s age at retirement.

A money purchase monthly retirement benefit is calculated by multiplying the total employee contribution balance and matching employer balance plus interest by an actuarial factor based on the age when the retirement benefit begins. An employee’s money purchase balance is reported on his or her annual Statement of Benefits.

If an employee’s WRS account balance is fairly small, it may not reach the annual threshold amount for paying a monthly annuity. In that the event, the employee would instead receive a lump sum payment.

Separation Benefits

If an employee leaves WRS employment before reaching minimum retirement age, that employee is eligible for a WRS separation benefit, consisting of employee contributions and interest earned on those contributions. The employee does not receive the employer contributions.

Though employees may be eligible for a separation benefit upon leaving employment, taking a separation benefit is analogous to what is termed “leakage” in a 401(k) plan. In both instances, employees are withdrawing funds meant to provide income in retirement prior to reaching retirement age. If an employee were to instead leave contributions in the WRS even after leaving WRS employment, those contributions would continue to accumulate interest and would later provide income at retirement.

Disability Benefits

To be eligible for a disability retirement benefit from the WRS, an employee would have to be disabled because of a physical or mental impairment which was likely to be permanent. That employee would also have to meet a service requirement.

Employees and employers do not pay a separate premium for regular disability benefits. Rather, they are figured in to the normal employee and employer contributions.

In addition, there exist special disability benefits for employees in the WRS employment category “protective occupation participant,” which includes police officers, firefighters and some other related positions. State law requires employers to pay an annual contribution toward duty disability benefits based on the number and amount of claims filed by their employees.

Conclusion

Because Act 10 required most employees to begin making WRS employee contributions themselves, it brought into focus WRS benefits as part of an employee’s total compensation package. Being knowledgeable about basic WRS benefits can assist employers in highlighting both WRS employee and employer contributions in that regard.

Also, please note that any discussion of WRS retirement and separation benefits necessarily brings up another topic—return-to-work/rehired annuitants. This topic will be the focus of future articles and a presentation at the Davis & Kuelthau April 29, 2015 Public Officials annual event in Kimberly, Wisconsin.

 

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