Key Points

• Starting in 2022, CalPERS contracting agencies will bear the risk of certain overpayments to retirees that result from compensation reporting errors.
• The employer, rather than the retiree, will have to repay the overpayment and pay a “penalty” based on the present value of future benefit payment adjustments.
• The new law applies retroactively to CalPERS determinations disallowing reported compensation made on or after January 1, 2017, if an appeal has been filed and the retiree (or their survivor or beneficiary) has not yet exhausted their administrative or legal remedies.

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Governor Newsom recently signed Senate Bill 278 (SB 278), which will make employers responsible for CalPERS retirement benefit overpayments in certain cases. If CalPERS determines that a retiree, survivor, or beneficiary has been overpaid pension benefits due to the employer’s compensation reporting error, CalPERS will correct the recipient’s benefit amount going forward. The employer must reimburse CalPERS for the full amount of the overpayment. In addition, the employer will owe a penalty equal to 20% of the present value of the difference between the incorrect benefit amount and the lower, correct benefit amount, for the remaining period over which benefits are projected to be paid. The employer must pay 90% of the penalty to the retiree, survivor, or beneficiary, and the remaining 10% to CalPERS.

Background

CalPERS administers retirement benefits for employees of the state, schools, and public agencies that contract with CalPERS to provide retirement benefits to their employees. The rules for calculating employees’ retirement benefits are set forth in the Public Employees Retirement Law (PERL), as amended by the California Public Employees’ Pension Reform Act of 2013 (PEPRA), as well as CalPERS regulations. CalPERS retirement benefits are determined using a formula based on the member’s years of covered employment (or “service”), age at retirement and “final compensation” as defined in the CalPERS rules.

The state, schools, and CalPERS contracting agencies must comply with the CalPERS rules for reporting compensation that can be counted in determining a member’s final compensation. The types of compensation that are “reportable” are different for members covered by PEPRA than for those who became members before PEPRA took effect. The rules also establish several conditions employers must meet in order for compensation to be reportable.

Employers may unintentionally report compensation for their employees that CalPERS subsequently determines is not reportable or “disallowed.” In some cases, CalPERS may determine that the error affected the benefit calculation for a retiree, resulting in the retiree having received an overpayment of benefits. In the past, CalPERS typically corrected benefit overpayments by adjusting the retiree’s benefit to the correct amount and recouping the overpayment from the retiree (subject to certain statutory limits).

SB 278 Establishes a New CalPERS Procedure for Correcting Benefit Overpayments Resulting from Disallowed Compensation

Under the new law, if CalPERS determines that an employer erroneously reported disallowed compensation, CalPERS will require the employer to discontinue reporting that compensation for active members. For both active members and retirees affected by the error, CalPERS will credit the employer for both member and employer contributions based on the disallowed compensation. The employer must reimburse affected active members for contributions they made based on the disallowed compensation, including any “employer paid member contributions.”

For a retiree (or a survivor or beneficiary of a retiree) whose benefit calculation included the disallowed compensation, resulting in an overpayment, CalPERS will reduce the benefit amount going forward to the correct amount. Rather than recouping the overpayment from the retiree, however, employers now will be responsible for directly reimbursing CalPERS for the full amount of the overpayment, if the following conditions are met:

1. The compensation was reported to CalPERS and contributions were made on that compensation while the retiree was actively employed;
2. The employer and the retiree’s union agreed to treat the compensation as reportable in a memorandum of understanding or collective bargaining agreement, and did not knowingly agree to compensation that was disallowed;
3. CalPERS determined the compensation was disallowed after the retiree’s retirement date; and
4. The retiree was not aware that the compensation was disallowed at the time it was reported.

If these conditions are met, the employer must:

• Repay the full amount of the overpayment directly to CalPERS, and
• Pay a penalty equal to 20% of the present value of the difference between the incorrect and the correct monthly benefit amount for the remaining period for which benefits are projected to be paid to the retiree (or survivor or beneficiary). The employer must pay 90% of the penalty to the retiree (or survivor or beneficiary), and the remaining 10% to CalPERS.

Under the new law, CalPERS must review and provide guidance regarding additional compensation items proposed for inclusion or contained in a memorandum of understanding for “consistency” with its compensation reporting rules within 90 days of submission by an employer. These determinations, however, are not binding on CalPERS, meaning that CalPERS could later reverse itself and determine that the compensation is disallowed.

The new law also requires CalPERS to provide notice of overpayments and penalty amounts to employers and affected retirees, and to provide employers with retirees’ contact information as necessary to comply.

Notably, the new law does not affect an employer's or retiree's right to appeal any CalPERS determination regarding disallowed compensation.

If you have questions, please reach out to your contact in the Hanson Bridgett Employee Benefits Group.