PERAC Memo #14 - 2018: Interest Payments in Certain Situations

M E M O R A N D U M

TO: All Retirement Boards

FROM: Joseph E. Connarton, Executive Director

RE: Interest Payments in Certain Situations

DATE: March 2, 2018

This memorandum concerns the payment of interest, and is intended to clarify and to complement – but not supersede – PERAC Memoranda No. 43/1999, which was issued on November 9, 1999 (regarding the 2% deduction on amounts over $30,000) and No. 32/2013, which was issued on November 20, 2013 (regarding interest to be paid out by retirement boards in certain circumstances). Additionally, this memorandum is intended to supersede Section 3, Paragraph C of PERAC Memorandum No. 29/2016, which was issued on December 13, 2016 (regarding the buyback of call firefighter time).

This memorandum is divided into four sections. Section I addresses when interest may be payable by a retirement board to a member or beneficiary. Section II concerns those situations in which a member or beneficiary may owe interest to a retirement board. Section III is a chart setting out various scenarios which may arise, and whether or not interest would be payable in each scenario. Finally, Section IV concludes this memorandum.

SECTION I — A RETIREMENT BOARD PAYING INTEREST TO A MEMBER OR BENEFICIARY

The logistics of a retirement board paying interest to a member or beneficiary on a lump sum payment were addressed by PERAC in Memorandum No. 32/2013, as noted directly above.

That memo was in turn prompted by the Supreme Judicial Court ("SJC") case of Herrick v. Essex Regional Retirement Board, 465 Mass. 801 (2013), which held that G.L. c. 32, § 20(5)(c)(2) provides a remedy for all errors made by the board that affect the amount of benefits a member or beneficiary receives, requiring the actuarial equivalent of benefits they would have received had the board not erred.

In accord with Herrick, a mistake made by a Board which results in a member or beneficiary receiving less than the benefits to which they would have been entitled will result in a retirement board paying the correction of errors interest rate to a member or beneficiary.

In accord with Hollstein v. CRAB, 47 Mass. App. Ct. 109 (1999), interest should not be provided to the member in a situation where a return of deductions is processed when the deductions were erroneously contributed. Interest should only be paid when an error is discovered that results in a change in the benefit amount paid to the member. This was affirmed in Lydon v. Quincy Retirement Board, CR-16-479 (DALA, November 24, 2017).

Amendment to PERAC Memorandum No. 29 of 2016

Section 3, Paragraph C of Memorandum No. 29 of 2016 has been edited as follows: Any payments made by members for uncompensated service under G.L. c. 32, § 4(2)(b) must be returned to the member pursuant to G.L. c. 32, § 20(5)(c)(2) without interest in accordance with Hollstein v. CRAB.

SECTION II — A MEMBER OR BENEFICIARY PAYING INTEREST TO A RETIREMENT BOARD

Members Erroneously Excluded from Membership

PERAC has revisited its long-held position that members erroneously excluded from membership may purchase service without interest. Following Bristol County Retirement Board v. CRAB, 65 Mass. App. Ct. 443 (2006), DALA and CRAB no longer treat equitable grounds as a basis to waive interest. In Knightly v. SBR (DALA 2011) and McDonough v. Quincy Retirement Board (DALA 2016), it was held that members erroneously excluded from membership must pay interest on service purchases. PERAC's position is that the "correction of errors" interest rate adopted by each board should apply in such situations.

Other Situations

For all purchases of rendered creditable service — redeposits of refunds or purchases of prior non-membership time — boards must require the member to pay interest. Generally: purchases under § 4 require buyback interest; purchases under § 3 require actuarial assumed interest; and redeposits require buyback or actuarial assumed interest depending on timing. Members who were erroneously excluded pay the correction of errors rate. Members do not pay interest on under-withheld deductions.

Waiving Interest — the Needham Bill

G.L. c. 32, § 20(5)(c)(3) gives boards discretionary authority to waive interest owed to the board when: (i) the error persisted for more than one year; (ii) the error was not caused by erroneous information from the member; and (iii) the member had no knowledge of or reason to believe there was an error. Per Bristol County, this waiver is purely discretionary and cannot be compelled by CRAB.

SECTION III — EXAMPLE CHART

Scenario / Interest is Paid / Interest is Not Paid / Comments

Payroll incorrectly withheld retirement deductions on overtime payments — No interest — does not affect the benefit to which the member was entitled.

Member overpaid for a service purchase — No interest — refund will not affect the amount of the benefit.

Retirement allowance calculation does not include stipend in a 3-year or 5-year average — Correction of errors interest rate — affects benefits or amount of pension.

Dependent Allowance not paid for four years after ADR is approved — Correction of errors interest rate — affects the amount of the allowance or benefit.

Person on Superannuation is approved for accidental disability retirement, adjustment required — No interest — no error made by either the board or the member.

Member receives a retroactive contract settlement — No interest — no error.

Member erroneously excluded from membership buying back excluded time — Correction of errors interest rate adopted by the board.

Member paid amount Board calculated for service purchase, later found to understate what should have been paid — Interest at the rate of the section the buyback was originally made under (§ 3 or § 4).

Payroll did not withhold retirement deductions on a stipend — No interest on under-withheld deductions.

Retirement allowance overpaid for a number of years — Member owes interest to the board.