Last week, Jeff blogged about some of the frequently asked questions employers have when making changes to their LAGERS benefit package. Nothing spurs coffee pot chatter like rumors of a LAGERS upgrade, so I thought we would take this week to sort out some of the fact and fables about how your benefit is impacted when an employer makes a change to their LAGERS benefit structure.
Benefit changes only affect active members with an employer. This means that retirees and terminated employees who have not yet retired are in no way impacted by these changes. If you retire from or quit working for an employer, your benefit would be calculated at whatever benefit program you had when you retired or terminated, regardless of any future upgrades or downgrades at that employer. The one exception: if a past employer makes a benefit upgrade after you have quit, and you later re-employ with that same employer prior to retirement, you are now eligible for the upgrade!
So how does an upgrade affect your benefit? It really depends on what your employer is changing:
If your employer is adding the Rule of 80, it does not impact the amount of the retirement benefit, but rather what age some employees may be eligible for unreduced retirement benefits.
If your employer is changing to non-contributory, again, your benefit amount does not change, but your employer is now footing the full bill, meaning you now get to take home that 4% that you were contributing out of your paycheck. (You still must keep your past contributions in LAGERS to preserve your credited service for that time.)
If your employer is switching from a 5 year final average salary to a 3 year average, the amount of your final benefit may increase slightly because a three year average generally produces a slightly higher salary; and the higher your salary, the higher your monthly benefit.
If your employer is changing benefit programs, these upgrades are what we call retro-active. This means that not only do we calculate all your future service at the new, higher program, but we also will calculate all you past service at the higher level too! For example, let’s say you’ve worked for your employer for 20 years, they then make and upgrade and you work 5 more years. When we calculate your benefit, all 25 years are calculated at the higher level, which can make a significant difference on your final benefit.
If you are nearing retirement, and think your employer is talking upgrade, make sure that you pay careful attention to the timing of your retirement. Here’s why: as long as you received a month of credited service in the month preceding the effective date of the upgrade, all your past time will be calculated at the higher level. If you retire two months before an upgrade, however, you will not be eligible. So, if you know that your employer is considering a benefit enhancement, choose your retirement date wisely, because it could have a tremendous impact on your final benefit!
You may be wondering when’s the next time your employer will be making a change to your LAGERS benefit plan. Every LAGERS employer has 100% control over how and when they wish to make changes, but that doesn’t mean employees have to stand idly by. We often see upgrade discussions that are collaborative efforts between employees and employers, working together to create a benefit package that is beneficial (and realistic) for everyone. Everything from employees foregoing pay raises in return for a benefit enhancement to negotiating for a higher benefit program by agreeing to go back to contributory which helps offset the cost for the employer. Every employer and employee group is different, so if your employer invites you to the table for this discussion, find something that works for you, and remember that your LAGERS benefits are designed to flexible and customizable!
While employers can upgrade their benefits once every two years, they can also downgrade. While benefit downgrades are much less common in LAGERS, if your employer does need to make this change, it will only impact service going forward. In other words, all the time you earned at the higher benefit level is always protected and calculated at that level regardless of any future downgrades. How much will it impact your benefit? Benefit downgrades can have a significant impact on a future benefit, but remember that since downgrades only affect service going forward, the closer you are to retirement, the less your benefit will be impacted and vice versa. What does this mean if you have the Rule of 80? Again, remember that state law protects your benefit at the highest earned level. Since an employer can’t take away a benefit that they have already promised you, choosing to remove the Rule of 80 retirement age option is the one downgrade that would apply to new hires only.
Adjusting LAGERS benefit elections is a great way for employers to tailor a benefit package to meet the current needs of their employee group. Understanding how a benefit change impacts your LAGERS retirement benefit as well as your overall compensation package is important. If your employer does decide to make a change, either by way of upgrade or downgrade, it might be a good time to reassess your benefits to make sure that you are still on track with your long term retirement goals. As always if you have questions about your benefits, please contact the LAGERS office to speak with a LAGERS representative.