Many members ask us how termination pay impacts the calculation of their retirement benefit. Lump-sum payments at termination that are includable as compensation for retirement purposes based on your retirement system, are included in the calculation of your HAC.
HIGHEST AVERAGE COMPENSATION (HAC) - Means your highest average monthly compensation during a set period, either 36 or 60 consecutive months of membership service and is used in the calculation of your retirement benefit.
How Does A Lump Sum Payment Affect Your Retirement Calculation? Each system defines compensation, or what is included as compensation for retirement purposes, slightly different. If, for example, payout of sick and vacation are considered compensation at termination, then that payout will be included in the calculation of your HAC, by replacing lower compensation months with the same number of higher compensation months. For members of PERS, SRS and GWPORS, hired:
• before July 1, 2011, your HAC is 36 months.
• after July 1, 2011, your HAC is 60 months.
Contributions you make to a VEBA account at termination are not included in your compensation reported to MPERA and will not be included in the calculation of your HAC.
In our example Wanda Retire has her highest 36 months of compensation from 2010-2012.
12 months - $1500 per month
12 months - $1800 per month
12 months - $2000 per month
Before Payout: HAC = $1,766.
Her HAC was $1,766 before her final payout. She received a sick/annual payout of $20,000. If we divide that amount (20,000) with her normal month’s salary ($2,000), we come up with 10 months at the higher $2,000. MPERA will drop the lowest 10 month’s salary ($1,500) (at the beginning of the 36 month period) and add 10 months at the highest salary ($2,000).
Payout = $20,000; $20,000 divided by $2000 = 10 months;
10 months of $2000 HAC is added
10 months of $1500 HAC is dropped
02 months - $1500
12 months - $1800
12 months - $2000
10 months - $2000
After Payout: HAC = $1,905. When recalculated, Wanda’s HAC is $1,905 ($139 greater than the original HAC).
* Compensation Limit - For a member hired on or after July 1, 2013, the following amounts of excess earnings in the calculation of a member’s highest average compensation are not included:
• for the first year included in the calculation, any compensation that is greater than 110% of the compensation paid to the member in the previous year; and
• for each subsequent year included in the calculation, any compensation that is greater than 110% of the compensation included in the calculation for the previous year.