Public pension funds have the authority to decide what forms of compensation can be considered part of pensionable earnings. This might include categories of compensation as merit bonuses, overtime payments and the like which are not regular wages or compensation for employees.
Last month the Illinois Municipal Retirement Fund (IMRF), one of the largest and clearly the most solvent of the public sector pension funds changed its position on whether cash payments in lieu of health insurance benefits can be considered part of pensionable earnings. At its December meeting, the IMRF Board adopted a resolution that gives employers the option of deciding whether cash paid in lieu of health insurance is reportable earnings to IMRF. This vote was the result of that Board’s review of practices at other public pension funds and the potential financial impact to employers as well as the Fund.
Public employers of IMRF participants should keep in mind that they are not obligated to include cash in lieu of health insurance as part of pensionable compensation. Rather, it is voluntary on the part of the employer. If the employer chooses to include these payments as part of pensionable earnings, the governmental entity must adopt a resolution which in turn must be kept on file with IMRF. The Fund has developed IMRF Form 6.75, which is its suggested resolution for governmental entities to adopt to make insurance opt out payments pensionable going forward.
As noted above, whether cash payments in lieu of health insurance are part of pensionable earnings remains a decision of each IMRF employer, but before an employer can report these payments as pensionable earnings, its board must adopt a resolution in the form suggested by IMRF. Employers should consider the increase to their contribution amount before making this decision, but the ability to increase their pensionable earnings with insurance opt out payments may encourage more eligible employees to opt out of the employer’s insurance plan helping the employer to reduce the overall cost of insurance.