Adjusting STRS When Employee Exceeds the Compensation Cap
The following explains how to adjust the STRS reporting when employee exceeds the compensation cap. The Compensation cap only applies to members under the 2% @ 62 retirement formula. According to STRS, employers should not submit contributions on compensation over the compensation cap. Also, STRS has added a new Creditable Earnings indicator ‘C’ to be used for identifying earnings over the limit. The ‘C’ is in position 89 of the contribution line of the F496 file. Note that this CSI is written for payroll and retirement experts. It is not written as step-by-step instructions, but as a detailed discussion of the process so that you can apply the information to different scenarios. The scenario shown here is a simple example of how a payroll technician can fix an employee who has exceeded the cap BEFORE payroll is locked in. Of course, a retirement expert would review the adjustments prior to submitting the STRS file. It is important to point out that we worked with STRS concerning this CSI, having them review the STRS file containing the edits shown here. They found the file to be accurate.
Determining When Gross Limit Is Reached
Here are the earnings for a STRS member with 2% @ 62 retirement formula who will reach the compensation cap of $137,941.00 for the 2015 fiscal year in April.
|Pay Date||Pay Rate||Earning Amt||Fiscal YTD|
The member’s salary would be reported as usual from July – March. Since April is where the cap will be broken (earnings total $141,083.30), the April service will have to be broken up accordingly.
Under the Cap:
|Annual Compensation Limit||$137,941.00|
|Calendar YTD for March||- $126,974.97|
|Under the Cap Amount for April||$10,966.03|
Over the Cap:
|April Earnings Amount||$14,108.33|
|Under the Cap Amount for April||- $10,966.03|
|Over the Cap Amount for April||$3,142.30|
By default, Escape Online calculated contributions and deductions for the full earnings ($14,108.33), resulting in the following amounts:
- Deduction STRSN rate is 8.15% or $1,149.83
- Contribution STRSN rate is 8.88% or $1,252.82
The calculation does not take into consideration the cap though. STRS requires contributions and deduction to be calculated only on the earnings of $10,966.03 (under the cap). Therefore, the contribution and deduction amounts for the over-the-cap earnings ($3,142.30) need to be backed out. If I calculate what the contribution and deduction would be for the over-the-cap earnings only, I now have the figures that should not have been included.
- 3142.30 x 8.15% = $256.10
- 3142.30 x 8.88% = $279.04
In the next two steps, I am going to back out those figures, leaving only the contribution/deduction amounts for the under-the-cap earnings.
Fixing the Contributions/Deductions in the Adjust Payroll Activity When the Cap Is Reached
In Adjust payroll, I entered a negative Deduction adjustment for $256.10 (using deduction ID STRSN) and a negative Contribution adjustment for $279.04 (using contribution ID STRSN) to refund the employee and employer portions for over-the-cap amounts.
Once the over-the-cap amounts are backed out, I can run the snapshot and see that the accurate amounts now stand:
- 1149.83 (original amount) - 256.10 (adjustment) = $893.73
- 1252.82 (original amount) - 279.04 (adjustment) = $973.78
I also want to point out that Escape Online puts an asterisk by each amount, alerting me to the adjustments.
Fixing the Retirement Lines in the STRS Editor Activity When the Cap Is Reached
In the STRS Editor, I entered a new line, for the under-the-cap earnings with contributions and deductions (Contribution Code = 1). Then, I deleted the original line (Contribution Code = 1) which had incorrect earnings and also deleted the line with negative EPMC Pct (this line was generated when I made contribution and deduction adjustments in payroll). Next, I set the EPMC Pct column to zero and the District Amt to zero for the special compensation line (Contribution Code = 6). Finally, I added a new line for over-the-cap earnings with no contributions and deductions (this line combined with the special compensation earnings should equal the over-the-cap amount of $3,142.30).
Fixing the STRS File When the Cap Is Reached
When the STRS file is generated, on the contribution line of the F496 file in the Creditable Earnings Indicator field (field position 89) you will see an asterisk (*). The file will need to be edited, with the asterisk being replaced with the new Creditable Earnings Indicator 'C'.
Wrapping Up the Fiscal Year
For all remaining periods of 2015 Fiscal Year, you will need to make contribution and deduction adjustments in Adjust Payroll to back out the full STRSN contribution and STRSN deduction (since no contributions and deductions are allowed on earnings over the cap). For my sample employee, for May and June you would make the following deduction and contribution adjustments to zero them out.
I also had to take care of the changes in the STRS editor, where I deleted the line with no Pay Rate and negative EPMC Amt. For the remaining lines, I zeroed out the EPMC Pct and District Amt.
I also had to fix the Creditable Earnings Indicator in both the May and June files, changing it from an asterisk to 'C'.
Following these guidelines, you should be able to adjust the handful of employees who have reached their cap for STRS.