April 2002
Issue No. 3

Dear Delegate:

For your information, provided below is a copy of the most recent Administrative Bulletin sent in April to all Chief School Administrators, College and University Presidents and School Principals.

• Provisions Allowing Retiring Teachers to Elect between a Lump Sum Payment for Unused Leave or Reduction in Health Insurance Premiums

• Provisions Allowing Teachers to Receive Increased Salary or Cash Payments in Lieu of Health Insurance or Other Fringe Benefits in Years Preceding Retirement

The System is seeing an increase of provisions in collective bargaining agreements allowing retiring teachers to elect among a number of ways in which to apply their unused sick or other leave accruals. Under typical provisions we have seen, a retiring teacher might have the option of receiving a payment for unused accruals in the form of a lump sum or in the form of reductions in premiums that the teacher would otherwise be required to pay for health insurance continuing into retirement.

The System is also seeing provisions under which teachers have the option, revocable or irrevocable, of waiving health or other kinds of coverage in return for a cash payment or an increase in payroll salary during the last few years of teaching.

This bulletin discusses the System's position regarding the impact of these kinds of elections on the character of the compensation and its effect on the teacher's final average salary calculation.

Payment of Lump Sum or Reduction in Health Insurance Premiums

Payments for unused sick or other leave accruals pursuant to collective bargaining agreements are considered termination pay. As such, they may not be included in three-year final average salary calculations and are not reportable compensation in the case of Tier 2, 3 and 4 members of the System. Payments for unused sick or other leave accruals pursuant to collective bargaining agreements, however, may be reportable compensation and includable in the five-year final average salary calculations in the case of Tier 1 members who joined the System prior to June 17, 1971.¹

On the other hand, employer payments of health insurance premiums which otherwise would have been paid by retiring teachers are non-reportable fringe benefits. Such payments are non-reportable fringe benefits even though the teacher could have elected to take a cash payment from the employer in lieu of, or as an alternative to, the employer payment of the premiums. The fact that the teacher may have had an option to take a cash payment instead of having the employer apply that payment toward the retiring teacher's health insurance premiums does not change the fact that no actual unrestricted cash payment was made to the retiring teacher and the benefit received by the retiring teacher is health insurance.²

The System takes no position on whether the reduced premiums would constitute income to the teacher for federal and state income tax purposes.

Payment or Increased Salary in Lieu of Health Insurance or Other Coverage

Payments pursuant to provisions in a collective bargaining agreement which give individual teachers the option to waive employer paid health or other coverage and to receive a lump sum payment (or stipend) in lieu of the coverage may be considered non-regular compensation and included in the five-year final average salary calculations of Tier 1 members, if and only if:

      (i) the option is available to all members of the bargaining unit on an equal and unrestricted basis;³
      (ii) the option may be exercised by any teacher at any age without any reference to retirement or resignation;
      (iii) the option is negotiated as a permanent part of the collective bargaining agreement for the period covered by said agreement; and
      (iv) the employer does not have any responsibility for providing the health or other coverage to any of the employees electing the option.⁴

Such payments are considered non-regular compensation regardless of whether they are paid in a lump sum or as part of an increase in the teacher's payroll compensation. Thus, they may not be included in any three-year final average salary calculation and are not reportable in the case of members with a date of membership after June 30, 1973.

The System, however, will not treat payments as reportable compensation and as compensation which may be included in either a three or five-year final average salary calculation in situations where health or other coverage which had previously been totally or partially paid by the employer during the teacher's career is waived by the teacher in the final few years before retirement in exchange for a lump sum or increase in the payroll salary. Such arrangements, made on the eve of retirement, have the potential to artificially inflate the three and/or five-year final average salaries. Accordingly, in such cases, the payments will be excluded from the teacher's three and five-year final average salaries.

As always, nothing in this Bulletin should be construed as waiving or relaxing any of the rules or advice contained in previous Administrative Bulletins issued by the System.

¹ June 17, 1971 is the effective date of Section 431 of the Retirement and Social Security Law which bars the inclusion of payments for unused sick and other leave in any final average salary calculation. Prior Administrative Bulletins set out the conditions which must be met in order for termination payments to be includable in the five-year final average salary of members joining prior to June 17, 1971. As noted in prior Bulletins, buy-outs and moneys paid to a teacher for the purpose of procuring such teacher’s resignation do not constitute compensation earned as a teacher. Such payments are not reportable to the System and are not includable in either the three or the five-year final average salary calculation.
² The same analysis would be applied to any non-reportable other fringe benefit which a retiring teacher might elect in lieu of a cash payment for unused sick or other accruals. On the other hand, where the teacher with a membership date prior to June 17, 1971 has the option to elect to have the employer make a contribution by the end of the calendar year of retirement to a 403(b) tax-deferred annuity in lieu of the payment of the identical amount in cash to the retiring teacher, the contribution may be treated as reportable non-regular compensation and includable in the teacher’s five-year final average salary calculation.
³ In other words, literally everyone in the unit must have the same rights to benefit from such a provision. Restrictions having the effect of narrowing availability to fewer than all unit members will cause any such moneys to be non-reportable and not includable in any final average salary calculation.
⁴ For situations in which the employer ceases to have any responsibility for providing health insurance to any of its employees, please refer to Administrative Bulletin 2000-7.