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Published on Wednesday, August 16, 2017

New LEOFF 2 contribution change for third party contracts, new policy under scrutiny

As we have previously reported, the state’s newly-passed operating budget included a shift in pension contributions when the employer contracts with a non-LEOFF 2 employer for services. In these cases the employer will be responsible for both the employer and state LEOFF 2 contributions.

Section 963 of the budget bill states that “when an employer charges a fee or recovers costs for work performed by a plan member where: (a) the member receives compensation that is includable as basic salary… and (b) the service is provided, whether directly or indirectly, to an entity that is not an "employer”…; the employer shall contribute both the employer and state shares of the cost of the retirement system contributions for that compensation. Nothing… prevents an employer from recovering the cost of the contribution from the entity receiving services from the member.”

We’ve had a lot of questions about how to interpret this change and which contracts will be impacted. AWC has been in communication with the Department of Retirement Systems (DRS), the agency responsible for implementation, about the questions we have received. DRS recently put out an FAQ sheet to try to address some of the questions. The FAQ sheet is below.

It is important to note that the change took effect on July 1, 2017 and DRS will be working on reporting guidance that will be retroactive back to July 1. The change applies to the state’s fiscal years 2018 and 2019 which run from July 1 to June 30; we are currently in fiscal year 2018.

In our conversations with DRS, they have indicated that this is primarily focused on contracts with private entities like businesses and special event venues. They have told AWC staff that the new charges will not apply to contracts between cities and other cities or counties or fire districts as they are all considered LEOFF 2 employers, regardless of whether they provide services directly or indirectly. Additionally, DRS has indicated that the new charges will not apply to certain state agencies like Department of Fish and Wildlife and Department of Natural Resources because they too are considered LEOFF 2 employers. The charges will likely apply to contracts with federal agencies and tribal governments.

Cities should take this opportunity to review any third-party contracts for work performed by LEOFF 2 members and determine if this new provision applies. AWC will continue to share more information about implementation as it becomes available.

Section 963 of WA State 2017-2019 Operating Budget
LEOFF Plan 2 non-employer service
Employer FAQs

What changed?

The 2017-2019 state operating budget (SB 5883) includes a provision (Section 963) that says if a LEOFF employer charges a fee or recovers costs for services rendered by a LEOFF 2 member to a non-LEOFF employer, the LEOFF employer must cover the employer and state contributions on the LEOFF 2 basic salary earned for those services.

When is it effective?

The 2017-2019 state operating budget became effective July 1, 2017. This change applies to fiscal years 2018 and 2019.

What does it change in our processes?

DRS is analyzing the operational impacts of this change. As soon as we know the implementation details and timing, we will communicate that information to all LEOFF employers. Once the changes are implemented, DRS will work with employers to collect state contributions owed on applicable basic salary retroactive to July 1. Employers will NOT be charged interest due on state contributions owed for retroactive reporting periods that existed prior to implementation of changes made at DRS.

What is meant by “non-LEOFF” employer?

Any employer not covered under RCW 41.26.030(14)(b)(i),(ii),(iii), or (iv). These are not likely to be public employers. One example of this may be work performed for a private entity’s sporting event for which you receive a fee or recover costs for services rendered.

What if we don’t contract out our LEOFF 2 employees for these types of services?

You will not be responsible for the state contributions on any of your LEOFF 2 employees’ basic salary.

Will this affect my LEOFF 2 employees’ contributions or accounts in any way?

No. The LEOFF Plan 2 members’ accounts will not be affected by this change.

Will we have to change our payroll system to report a different code to separate it from the member’s regular compensation?

DRS will make every effort to avoid requiring reporting changes that would affect payroll systems.

How do we determine associated basic salary when our contracted payments for services are not directly tied to actual hours worked at the employee level?

Employers need to determine the percentage of basic salary associated with these types of contracted services for any given reporting period and report the total dollar amount represented by that percentage.

Is there a general guide that we can follow to determine if this change applies to any basic salary we report to DRS for our LEOFF Plan 2 employees?

Basically, if you can answer “Yes” to all three of the following questions, you are responsible for funding the State Contributions owed on the L2 Basic Salary earned for the associated services rendered:

  1. Were the services rendered to a Non-LEOFF Plan 2 Employer? (any employer not identified in RCW 41.26.030(14)(b)(i),(ii),(iii),(iv))*
  2. Is the salary reportable to DRS as LEOFF Plan 2 Basic Salary under RCW 41.26.030(4)(b)?
  3. Is your organization being monetarily compensated by the entity receiving the services?

*These are likely to be ‘private’ entities.

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