The Board of Retirement made changes to the rules on how much vacation sell back (during employment) and vacation cash out (at termination) can be included in the “compensation earnable” used to calculate benefits for Tier 1 and 2 members who retire after June 17, 2021.
When a Tier 1 or 2 member sells back or cashes out accrued vacation, some of the amount the member receives may be included in the calculation of the member’s benefits. The law limits the includable amount to what can be both “earned” and “payable” in each twelve-month period of the member’s “final compensation period.” “Earned” refers to the amount of vacation a member accrues. “Payable” refers to the amount of vacation a member can sell back to the employer.
Until June 17, 2021, a retiring Tier 1 or 2 member could include in “compensation earnable” the lesser of what was “earned” or “payable” during the member’s “final compensation period.” Because a 12-month period of “final compensation” can include portions of two fiscal years, members have been allowed to include sell backs in two fiscal years within one 12-month period of the “final compensation period.” This has been commonly referred to as “straddling” because a 12-month period “straddles” two fiscal years.
The issue of whether straddling is permitted has recently been raised in the Deputy Sheriffs’ Association lawsuit. The California Attorney General has argued that straddling is no longer permitted based on the California Supreme Court’s opinion in that case. Several other county retirement systems have already disallowed straddling based on that opinion. After receiving input from a number of parties at the Operations Committee meeting on June 2, 2021 and the Board meeting on June 17, 2021, the Board decided to disallow straddling for members who retire after June 17, 2021. This brings ACERA in line with most other County retirement systems. The Board also made two other minor adjustments to the rules on how much value in vacation sell back and cash out Tier 1 and 2 members may include in “compensation earnable.” For more information on the Board’s decisions, please review the legal memorandum in the Board’s June 17, 2021 meeting packet. In addition to disallowing straddling, the Board adopted the other minor changes recommended in that memorandum (one of those three recommended changes was moot based on the Board’s decision to disallow straddling).
What This Means for ACERA Members
Tier 3 Members
No impact, because they are not currently allowed to sell back any accrued vacation while they are employed.
Tier 4 Members
No impact, because vacation sell back and cash out cannot be included in the calculation of their benefits.
Tier 1 and 2 Members Retired on or Before June 17, 2021
No impact, because the Board’s decision is effective only for members who retire after June 17, 2021.
Tier 1 and Tier 2 Members Retiring After June 17, 2021
ACERA will include vacation sell back and cash out in these members’ “compensation earnable.” The amounts included may, however, be lower for some members, which will lead to lower benefits, as compared to the rules that were in place through June 17, 2021.
ACERA will post further information in the coming days and will contact members who received final retirement estimates based on the old rules.