Understand How Unused Vacation Leave Affects Your Retirement Allowance
3+ Years Before Retirement
Your Unused Vacation Has an Affect on Your Retirement Allowance (Tiers 1, 2, and 3)
When you go to retire, ACERA will use the Retirement Formula to calculate how much your monthly retirement allowance will be, and you’ll get this monthly retirement allowance from us every month for the rest of your life.
In order to calculate your Highest Average Monthly Salary, which is one of the three factors in the retirement formula, ACERA will determine your Final Compensation Period, which is your period of consecutive highest pay during your career. We’ll calculate the total amount of gross pay you made during this period, and because we need to find your average monthly salary over that period, we’ll divide by the number of months in that period to get an average.
So while you work, you earn vacation. Sometimes you don’t take your vacation, and instead, your employer compensates you for your unused, earned vacation by writing you a check. There are two ways to get paid for your earned vacation you haven’t used:
Vacation Sell (or Sale): This is when you sell your earned vacation to your employer while you’re still employed. You get paid for your vacation at the time that you sell it.
Vacation Pay-Off (or Cash-Out): This is simply having vacation left over on the books when you stop working and/or retire. You’ll get paid for it at the time you stop working.
The idea here is that you earn vacation, but sometimes you don’t use it. If you don’t use it, your employer will compensate you for it by writing you a check. If you get paid for your unused vacation during your final compensation period, that means your total pay during that period was higher. If your total pay was higher, your average monthly pay during that time was also higher. Because your average monthly pay is one of the multipliers in the retirement formula, your retirement allowance will also be higher. Our video on Highest Average Monthly Salary includes and animated depiction of this.
ACERA does not include compensation for vacation in the calculation for Tier 4 members.
ACERA Must Limit How Much Vacation Pay is Included in Your Highest Average Monthly Salary Calculation by Law
The amount of vacation ACERA will include in your Highest Average Monthly Salary is limited to the amount of vacation that’s “earned and payable” to you during employment in your final compensation period, according to the 2012 California Public Employees Pension Reform Act (PEPRA). PEPRA does not allow inclusion of vacation pay in the salary calculation for Tier 4 members.
The limit is on a combination of both vacation sold while still employed and vacation paid off at the time of retirement. “Earned” means however much an individual member personally earns during the final compensation period. “Payable” means the amount an employer allows an individual member to sell during the final compensation period. If these two amounts differ, the limitation is on the lesser of what is earned and payable. If the final compensation period straddles fiscal years (July 1 – June 30), the payable limit will include an extra years’ worth.
If an employer allows an employee to sell 0 (zero) weeks of vacation, then ACERA does not include vacation compensation in the salary calculation. For example, some or all of Tier 3 members are not allowed to sell vacation, so ACERA cannot include any compensation for vacation in the Highest Average Monthly Salary calculation.
The charts below depict the limitations on inclusion of vacation pay in Highest Average Monthly Salary, unless your first day of retirement is on July 1; if so, the limitations will be lower.
*AHS Employees: Skip the charts, and see farther down the page for your limits.
For example, Tier 2 member Jon Jonson earns 5 weeks of vacation per year, and his employer allows him to sell up to 2 weeks of vacation per year. Jon sells 4 weeks of vacation during his 3-year final compensation period and receives cash for 8 weeks of vacation he still had on the books when he retired—this is a total of 12 weeks of vacation compensation. ACERA will include 8 weeks of compensation for unused vacation in Jon’s highest average monthly salary calculation, which is the maximum amount ACERA can include. This maximum for Jon is based on Jon’s employer allowing him to sell 2 weeks each of his 3 years of highest pay, for a total of 8 weeks.
Alameda Health System (AHS) Employee Limits for How Much Vacation Pay Can Be Included in Your Highest Average Monthly Salary Calculation
Employees of AHS don’t earn vacation and sick leave; they earn both in one bucket labeled Paid Time Off (PTO). In general, the limit of how much vacation pay can be included in your Highest Average Monthly Salary calculation is half of your unused PTO at the time of retirement. More specifically, ACERA will include all of the PTO pay in the calculation that your employer will compensate your for, which is typically half of your unused PTO. Check with your employer for the specific amount of your unused vacation they will compensate you for at termination.