Effective January 1, 2021, MERS is implementing several modifications to the way in which defined benefit plans are administered. Below you will find an overview of each of the modifications.
After reviewing the information below, you will be required to submit an updated Adoption Agreement Addendum to MERS indicating changes and/or provision clarifications you’re making based on these modifications. Please note that any changes you make will be effective January 1, 2021, and future benefit changes do not impact prior benefits. Your addendum confirming your plan provisions is due to MERS by September 30, 2020.
What is Plan Eligibility?
Plan Eligibility defines which employee classifications are covered by the retirement plan. If an employee classification is included in the plan, then employees who are part of this classification will receive service credit if they work the required number of hours defined. If an employee classification is excluded from the plan, they will not be eligible for service credit.
Note: All eligible employees must be reported to MERS.
What is changing?
MERS is providing a structured form to help you better define your Plan Eligibility provision. The form will help clarify whether your part-time, temporary, seasonal, voter-elected, appointed officials and contract employees are eligible for the retirement plan. Moving forward you can choose to exclude classifications of employees based on your needs. For example, if you choose to exclude part-time employees who regularly work less than the hours you specified in your addendum agreement from the plan, they will not be eligible to enroll.
What is Day of Work?
Currently, “Day of Work” defines how an eligible employee earns service credit in a calendar month. An example of Day of Work is to require full-time employees to work a minimum of (10), eight-hour days in order to earn a month of service. This generally equals 80 hours in a month. Some employers define their Day of Work as a number of hours per month.
For employers who do define their Day of Work, MERS applies a default of (10) eight hour days. We recognize this default does not meet all employer needs. Further, some employers have defined their Day of Work to ensure part-time employees would not be unintentionally covered, which has created some challenges.
What is changing?
Effective January 1, 2021, the Day of Work definition will be replaced with Service Credit Qualification. In your updated Adoption Agreement Addendum, you will be asked to define your Service Credit Qualification as the specific number of hours an employee is required to work in a calendar month in order to earn service credit.
What is Leave of Absence?
The Leave of Absence provision defines whether or not an employee earns service credit during a leave of absence (i.e. disability, workers’ compensation, FMLA). Regardless if service credit is allowed, leaves of absence are required to be reported to MERS with the employee’s start and end dates of leave per month along with their hourly rate. Each type of leave has subtle differences related to granting service credit, reporting wages, remitting employee and employer contributions, and using the wages as part of an employee’s final average compensation (FAC) for benefit calculation.
What is changing?
In your Adoption Agreement Addendum, you will specify which type(s) of leave should be granted service credit, excluding military leave. Military leave is governed by the Uniformed Services Employment and Reemployment Act (USERRA) and affords an employee the right to service credit for qualified military leaves of absence if the employee returns to their same employer within the timeframe allowed.
Regardless of whether an eligible employee is awarded service credit while on the selected type(s) of leave:
- MERS will skip leave months when determining the employee’s final average compensation (FAC) amount for benefit calculation. Lump sum payments issued during a leave month will not be used in the calculation of benefit.
- Third-party wages are no longer reported for leaves of absence.
- Employers are not required to remit employer contributions based on leaves of absence when no wages are paid by the employer. However, you may submit additional voluntary contributions (amount determined by employer).
For contributory divisions, employee contributions are required for service credit to be retained. Employee contributions will be collected based on the Service Credit Qualification. You will calculate employee contributions due using the employee’s current hourly rate (prior to leave). For example: If an employee is required to work 120 hours to receive service credit, then employee contributions shall be equal to 120 hours times the employee’s hourly rate. Employees have three times the length of leave, up to a maximum of five years, to pay required employee contributions.
What is Definition of Compensation?
Definition of Compensation is used to calculate an employee’s final average compensation (FAC) and determine both employer and employee contributions. Wages calculated using the elected definition and paid to employees must be reported to MERS.
What is changing?
Effective January 1, 2021, there will be three standard definitions of compensation – Base Wages, W-2 Wages (Box 1), and Gross Wages, and we will continue to allow a fourth custom option. You may choose one Definition of Compensation – either a standard definition or a custom definition. If you choose to create a custom definition of compensation, wage types for inclusion of benefit calculation will be outlined in the custom definition section. You should also expect additional online validations and certifications when reporting ongoing wages and lump sum payments to MERS.
Many of the plan provisions outlined above may have an impact to your DC plan(s). Please watch for more information in the coming months.
For contributory plans, please ensure MERS has the most up-to-date employee contribution rate on record. If your reporting contact is required to provide a contribution discrepancy code each month when reporting employee wage and contribution data to MERS, this could mean MERS doesn’t have the correct rate on record. If you are unsure if this applies to you, or you would like to validate the information that MERS on file for you, please contact our Service Center at 800.767.6377.