Effective January 1, 2021, MERS is implementing several modifications to the way in which defined benefit, defined contribution and hybrid 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 will be sent via DocuSign from MERS and is due 60 days from that delivery. If you need more time, please contact MERS at: DataCollectionProject@mersofmich.com for an exception.
What is Plan Eligibility?
Plan Eligibility defines which employee classifications are covered by the retirement plan. If any employee meets service credit qualification (or, day of work definition) for three months or more in a calendar year, they are considered eligible for membership in MERS and receive service credit regardless of classification of employee, e.g., part-time and temporary.
Note: All eligible employees must be reported to MERS.
What is changing?
MERS is providing you with a structured form to help you better define what Plan Eligibility means to you. The format will help MERS understand 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 as specified in your addendum agreement, 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 not 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.
There are no changes to how vesting is determined under the defined contribution and defined contribution portion of hybrid; elapsed time and hours reported will continue to be the way vesting is calculated.
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, worker’s 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 pay 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 vesting, eligibility, and in some cases service credit (for benefit)for qualified military leaves of absence, if the employee returns to their same employer within the required timeframe and requirements are met. Additional details surrounding Military leaves can be found in the DB Employer Reporting Guide.
Regardless of whether an eligible employee is awarded service credit while on the selected type(s) of leave, the provision will have the following results:
- MERS will skip leave months when determining the employee’s final average compensation (FAC) amount for benefit calculation (this does not affect the reporting of service credit). 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 when service credit is allowed.
- Mandatory employee contributions must be collected by the employer. There is no option for an employee (or an employer to allow an employee) to forego service credit and not pay required contributions. (This is to comply with IRS guidelines on mandatory contributions and 401(a) plans, which can have no elective choice on the matter of employee contributions.)
- When service credit is granted, employee contributions are calculated based on the employer’s Service Credit Qualification requirement.
- Employee contributions are calculated for months where zero wages are reported to MERS, using the employee’s pay rate coupled with the employee’s contribution rate.
- For example: If an employee is required to work 120 hours (Service Credit Qualification requirement) to receive service credit, then employee contributions shall be equal to 120 hours times the employee’s pay rate times the employee’s contribution rate (in effect at time of leave) to determine required amount for employee payment due each month of leave.
- Employees have three times the length of leave, up to a maximum of five years, to pay required employee contributions.
- Contributions are collected on a pre-tax basis when the employee returns to work from their leave of absence.
- Extra contributions withheld are reported to MERS through monthly wage and contribution reports based on the month collected.
For defined contribution and the defined contribution portion of hybrid, employee and employer contributions are determined using actual wages worked.
- For example, if an employee is on short-term disability for three weeks of a month and returns the fourth week, the employer will use that fourth weeks’ earned wages to determine the employee and employer contributions. Elapsed time continues to accrue towards vesting, regardless of contributions submitted.
- Employers who determine vesting based on hours reported in a year should report actual hours worked.
What is Definition of Compensation?
For defined benefit and the defined benefit portion of hybrid, the 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.
For the defined contribution and defined contribution portion of hybrid, the Definition of Compensation determines the wages that are used to calculate employee and employer contributions. IRS maximums apply.
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.
FAQ for Hybrid Employers:
Have my definitions of compensation under the defined benefit and defined contribution components always been the same?
Over the past decade, MERS introduced changes to the defined contribution component of the hybrid plan. Many employers have been using the same definition given the treatment of this program as one benefit. If employers have been using different definitions, that would mean an inconsistency in the wages used to determine contributions under the defined benefit and defined contribution portions. In an effort to address inconsistencies, we are asking employers to confirm they are using the same definition. If your municipality uses a different definition of compensation, and wishes to continue doing so, please contact MERS at DataCollectionProject@mersofmich.com and let us know you wish to manage these portions differently and we will walk you through next steps.
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 defined benefit or defined benefit portion of hybrid 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.
Employers who participate in defined contribution or the defined contribution portion of hybrid are encouraged to include wages in their regular payroll reporting to support auditing of any variances.
Learn more information on reporting updates and provisional changes through these videos:
Influencing Retirement Outcomes through Effect Plan Design (overview of upcoming changes to PDA plans)
Reach out to your benefit plan coordinator with any questions.