School Districts Beware - Limit the Use of "Opt-Out" or Health Benefit "Waivers"

For many years, school districts have utilized “opt-out” or “waiver” payments to provide an incentive for employees to not take the health benefit plans offered by districts to its employees. These “waivers” were used most heavily when districts provided for 100% of the premiums for health benefit coverage. As the employees’ share for health benefit premiums has increased, these waiver payments have had less success or certainly had less significance that they once had in the overall health benefit planning for an employer.

“Opt-out” provisions are very popular with many employers. However, while they are not yet prohibited, they will come under additional scrutiny due to the new "temporary high risk insurance pool" funded by the federal government, which will remain in existence until January 1, 2014. Basically, the high risk insurance pool will cover those individuals who have high risk claims and have not had health insurance for a period of at least 6 months. It is expected that the government will attempt to recoup any amounts it pays for high risk claims from employers that incentives their employees not to enroll in employer-provided coverage. Therefore, while it is not illegal to provide an opt-out bonus to its employees, the district faces some risk in continuing to do so.

Pension calculation does not include illegal payments

It is not from a Pennsylvania court, but I cannot see our courts finding any differently than Illinois.

A teacher's supervisor agreed to give the teacher a raise in return for the teacher kicking-back half the net increase to the supervisor.  After the teacher retired, she was very upset when the Illinois agency responsible for pension calculations excluded that amount from her calculation.  She challenged that finding.  The basis for her claim was that she was never charged or convicted of any wrongdoing, but the court found against her.

Lesson for today? Apparently, illegal payments -- well, if discovered -- will not count towards pensions in Illinois (and likely in PA, too).

The case is Adams v. Board of Trustees of the Teachers' Retirement System of the State of Illinois, 2011 WL 670291 (Ill.App. 4 Dist.).

Does Mr. Testerman Really Believe that the Recently Adopted Public Pension Bill Solves the "Pension" Crisis?


On Monday, November 15, 2010, the Pennsylvania House voted 165-31 to make a number of changes to the State’s public sector pension plans. The legislation increased from 5 to 10 years the time it takes for an employee to become vested, moved the retirement age back to 65, and ended the practice of withdrawing lump sum payments upon retirement. The legislation also spreads out the unfunded accrued liability over 24 years for the teachers’ pension system and over 30 years for the state workers’ system. Under the terms of the legislation, the following will be the contribution rates based upon salaries for pensions moving forward, which are obviously lower from what they were, but are still extraordinarily high:



















The President of PSEA, James P. Testerman, commented on the bill by stating that it “resolves the pension crisis in a responsible manner and over time will save the taxpayers billions of dollars. It also keeps the promise of a secure retirement for current and future workers.”

Mr. Testerman is definitely correct that the bill will keep “the promise of a secure retirement for current and future workers” who are fortunate enough to be covered under the pension program. However, the bill falls far short of resolving the “pension crisis” in a responsible manner.

The contribution rates moving forward are still extraordinarily huge obligations on the part of the taxpayers of the Commonwealth of Pennsylvania and given the fragile state of the overall economy, I cannot see how public entities moving forward will be able to meet these obligations without availing themselves of protection under Act 47 and Chapter 9 of the Bankruptcy Code.

Though the move of our State Legislature was certainly in the “right direction,” the “pension crisis” is far from over and still will represent a huge obligation moving forward in the worst economy since the Great Depression.

What Was the Pennsylvania Legislature Thinking When it Passed Act 210-46 Directing PSERS to Recertify the Employer Contribution Rate From 8.22% to 5.64%?

We have been talking about the funding crisis for paying the school district’s share of pension contributions for some time now.

For too many reasons, our existing PSERS system is admittedly unaffordable and instead of addressing the root causes of the problem (i.e., a too rich defined benefit pension plan), our Pennsylvania Legislature directed the Public School Employees’ Retirement Board to change the projected employer contribution rate of 8.22% for the 2010-2011 school year to 5.64% in Act 210-46.

The PSERS Board has been created to have the fiduciary responsibility to maintain a properly funded pension plan as required under the law and based upon the obligations of the plan concluded that for the 2010-2011 school year the contribution rate should be 8.22%.

Our State Legislature should frankly be ashamed of itself by changing that rate from 8.22% to 5.64%, which effectively creates an underfunded obligation for upcoming fiscal years.

As the result of this inane action, the projected contribution rates moving forward (assuming an 8.5% return of investment) are as follows:






8.22% changed to 5.64% by the Act of the State Legislature









Though it might sound politically popular for the State Legislature to lower the PSERS contribution rate, from a purely fiscal and accounting standpoint, the action was irresponsible. In fact, I have not heard one justification to support why the State Legislature did this, other than trying to stem the outcry on the amount of contributions that will need to be made to fund a pension system that not only benefits our public school employees and state employees, but also the legislators who vote on the system.

I am fully aware of the challenges that it will take to reform and cure the PSERS issue. The fact is if our State Legislature does not address this issue, the system will collapse under its own weight. When I say the “system,” I am not only talking about PSERS, but the educational system as we know it. Our taxpayers in the Commonwealth of Pennsylvania and our school districts cannot continue to afford to pay its upcoming obligations on the PSERS program.

I am certain that the State Legislature will come forward with other “brilliant” ideas, such as reamortizing the debt and spreading on the costs of the pension program to our children and grandchildren. We simply cannot continue to afford to do this.

In the private sector, many industries that have stayed solvent have properly addressed their defined benefit pension plan.

The PSBA proposal is certainly a good early step in that direction, but it simply is not enough. What PSERS needs to do is to grandfather certain individuals already in the pension program and provide them their pension benefits as part of the program. The non-grandfathered individuals would have to be subject to a new and less costly defined contribution plan.

I am mindful that there is case law that indicates that there may be some protection for existing PSERS participants, but I am not convinced that legal position will stand. That issue needs to be squarely addressed by our State Legislature, and we simply have to fashion a system that we can afford to fund in the future.

What has been done very frequently under the National Labor Relations Act and in accordance with law is to freeze participants in a pension plan as of a date certain. In other words, all of the contributed benefits to date will eventually result in what their ultimate pension amount would be. As for future accruals, they could be on a defined contribution basis.

This issue needs to be resolved and politically palatable solutions of simply lowering the PSERS Board’s contribution rate is the most unacceptable way to deal with a financial crisis that our State Legislature does not seem to want to address.

What were they thinking?

The Myths and Facts Revolving Around Early Retirement Incentives

 In this era of limited financial ability on the part of educational institutions to fund their budgets, employee groups and/or unions frequently suggest early retirement incentive programs (ERIPs) as vehicles to save the school entity dollars.

Indeed, the initial logic is simple. If Employee A retires at an annual salary of $100,000.00 per year and is replaced by an employee with a $50,000.00 annual salary, the school entity will, on its face, save $50,000.00.

However, in order to actually measure a savings, an effective ERIP will induce an individual to retire who otherwise was not planning to retire in that year in question. If there is an inducement (usually in the form of actual dollars or retiree healthcare benefits for a defined period of time), those costs need to be subtracted from the savings.

The great unknown about ERIPs is what basis an employer can assert a savings takes place when the employer really does not know if the employee was going to retire anyway either in the first year of the ERIP or some year down the road. This becomes a pure “guestimate” on the part of the employer and no one can absolutely know for sure what was the primary motivating factor in securing an employee’s resignation.

If a unionized entity represents the employees who are subject to the ERIP, in many states, including Pennsylvania, the employers must bargain with the union the implementation and provisions of an ERIP.

A carefully drawn ERIP should address the following issues:

·                    Clear eligibility criteria of the employees.

·                    Amount of benefit to be received by the employee. It is important to note that if the employer gives the employee options to select for the ERIP it could run afoul of the constructive receipt rules under the Internal Revenue Code. An attorney who is skilled in understanding benefits and tax-related issues needs to review the ERIP to make certain that a constructive receipt issue is not there, which could cause an adverse tax consequence on the employee.

·                    The ERIP can establish a minimum number of individuals who need to provide their irrevocable retirement notice to the employer before a date certain in order for the ERIP benefit to be triggered.

·                    The ERIP should establish a window period for exercising the rights of the ERIP and the submission of the irrevocable resignation.

·                    If it does cover retiree healthcare, the ERIP should address what happens if the early retiree’s spouse still remains employed by the school entity or what would happen in the event that the early retiree were to die before all of the benefits under the ERIP were paid out. Some of the issues may be determined by Internal Revenue Code requirements, including but not limited to the ability of an early retiree to have his/her estate collect on such dollars if the monies are to go into a non-elective 403(b) plan upon retirement (this will be a problem).

·                    Multiple year payouts for early retirement payments may need to be booked as a liability for the school entity under various GASB requirements. Though ERIPs very often do save school entities money, it is usually not as large as that asserted by the union and the amount of the savings dissipates year after year.

·                    Prior to an ERIP being suggested, the demographics of the employees must be reviewed and further reviewed in accordance with either a state-administered pension program or a privately-administered pension program. In many situations, particularly when a state program is involved, an ERIP cannot be successfully fashioned because the employees have too great of an incentive to wait for the statutory pension plan benefits. If a school entity has a very young employee population/bargaining unit, all the retirement incentives in the world will not encourage enough individuals to retire to make the plan worthwhile.

·                    There are a number of downsides other than the economics of the situation. A school entity can find itself in a very difficult situation as the result of losing its top educational talent to an ERIP. These are often the educational leaders in the school, which would include but not be limited to department chairs, organizers of various programs in buildings, and the like.

·                    Though an ERIP can indeed be used to save a school employer dollars, more often than not, they do not generate enough savings to make them worthwhile.

·                    Though the tool of an ERIP should not be overlooked in the negotiations process, they have certainly lost their vogue and are not necessarily popular with the person authoring this blog because of the difficulty in actually calculating the savings from such an ERIP.

Pennsylvania School Districts Beware - Proper Planning is Necessary for a School District to Move Away from an Insured Core Health Benefit Plan to a Self-Insured Core Health Benefit Plan


By: Jeffrey T. Sultanik, Esquire, Chair of the Education Law Group, Fox Rothschild LLP

As part of the economic squeeze impacting school districts in the region, many school districts are looking to the benefits of going to self-insured core health benefit programs to save district dollars. There is quite a lot of evidence to indicate that going to a self-insured health benefit program may yield some substantive health benefit savings for the employer.

Looking at the decision on the savings issue alone, however, is not enough. There are number of additional factors that need to be addressed prior to moving to self-funding.

  • Bargaining Considerations – Fringe benefits, including healthcare coverage, are considered to be “wages” within the meaning of the Public Employe Relations Act and are, therefore, a mandatory subject of bargaining. The question that has been raised with respect to self-insurance is whether a change “related” to benefits but with no practical impact on bargaining unit employees triggers a bargaining obligation on the part of the district.

In 1995, the Pennsylvania Labor Relations Board in Palmyra Area Education Association v. Palmyra Area School District, 26 P.P.E.R. ¶26087 (March 21, 1995), involved the school district’s implementation of a self-insured plan with benefits identical to those available under the prior Blue Cross contract. The Labor Board nevertheless found that transitioning to a self-insured status, in and of itself, was enough to trigger a bargaining obligation. The Labor Board emphasized the fact that the district was no longer subject to regulation by the Commonwealth Insurance Department (as was Blue Cross), and the district’s position inappropriately “dismissed any significance placed on the reputation and track record of an insurance carrier or plan.”

The Palmyra decision, however, is not necessarily consistent with federal labor law under the National Labor Relations Act, which often is followed by the Pennsylvania Labor Relations Board. In Connecticut Light and Power Company, 196 NLRB 967, 969 (1972), the National Labor Relations Board reasoned: “The method used in processing of employee claims under a medical/surgical policy, the practices and procedures of the insurance carrier in allowing or disallowing claims, and the dispatch and efficiency of its personnel in processing such claims are facts connected with a carrier’s administration of a health insurance premium … It is difficult to accept [employer’s] argument that whereas an employer must bargain as to the benefits which may be provided under a health insurance program … bargaining [may] stop short of involving the actual selection of a carrier and leave that matter to its sole discretion.” In sum, the Pennsylvania Labor Relations Board has held that the bargaining was mandatory with respect to both the nature of the health benefits and the provider. The Second Circuit disagreed and refused to enforce the Labor Board’s decision and found that nearly every managerial decision impacts in some way upon wages, hours, working conditions, and that the employer was free to choose whatever carrier it liked to fulfill the terms of its bargained-for agreement with the union.

Fox Rothschild’s Labor and Employment Department has been successful in working out Memoranda of Understanding with various school districts regarding the implementation of a self-insurance program. This is something that needs to be addressed and discussed as part of the process.

  • Non-Discrimination Testing – The move to self-insurance would also trigger the requirements of Section 105(h) of the Internal Revenue Code. The district would then need to engage in benefits testing to make certain that highly compensated individuals under a self-insured medical plan would not be discriminated in their favor over non-highly compensated individuals, typically not covered by a collective bargaining agreement. In Pennsylvania, this often means that cabinet level employees and/or the Act 93 group who have a health benefit plan that requires a lesser employee contribution in premiums than what is provided to non-highly compensated individuals may have to report the value of the benefit as part of their taxes.

This may be an unanticipated tax consequence faced by many school entities that have recently moved to self-insurance.

These issues will become more prevalent by 2014 because under the recently passed federal health benefits legislation, these non-discrimination requirements will take effect as of then. In the meantime, districts face a risk of being audited by the Internal Revenue Service and having to undergo required benefits testing.

Fox Rothschild can assist your school district in engaging in benefits testing should this be an issue for your district.


Health Care Reform Act


By: Jeffrey T. Sultanik, Esquire, Chair of the Education Law Group, Fox Rothschild LLP


The passage of the Health Care Reform Act has caused quite a stir, both in the public and the private sectors.  We are aware that there have been many questions about its impact on your organization.


Our office is working on materials and handouts that will contain a complete analysis of the law.  To date, our office has published the first three parts of a six (or maybe seven or eight) part series that breaks down the Act piece by piece so that employers can consider how it impacts them.  This is available at


If you have any questions about the Act, please let us know, and we will try to explain it further, absent the needed regulations to interpret the Act.

Response To Comments, Fall 2008

Its time again to write about some comments. I wrote about the District of Columbia School Chancellor’s efforts to implement performance pay in “Teacher pay and tenure: creating a free agent market.”  Professor Fox added a comment regarding improvement to the current common rater method of assessing performance. I also wrote a piece about confederate flag waiving students (“Yet another confederate flag case”)” that garnered a response from Lynn accusing me of revisionist history and political correctness (me!). Craig wrote an interesting question in response to the entry “College-Student Disciplinary Contract Claims.”  Finally, in “Fourth Circuit Placement Decision Revisited: the last word,” I brought readers up to date on the case at issue and responded to a previous comment critical of my suggestion that open and honest communication can be a salve to the bad decision. Well, I got a comment from Nagla in support of my view!  Thanks for all your comments, even if I don't get to address each one.  Now to the four comments.

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Teacher pay and tenure: creating a free agent market?

I have been known to describe the current situation of public education as not sustainable. The pay and benefits, and job protections, are very generous. Most working schlubs would really like to have that set up. I also freely admit that I would not be a good teacher in the sense of an objective assessment of cost-in versus product-out by which most of us are measured. Perhaps, however, changes will take hold that can save public education from itself. 

In Washington, D.C., the School Chancellor and the teachers’ union look set to make some real reform. According to The Economist,  in exchange for much higher merit-based pay, teachers would give up tenure protections. Teachers who excel get justified rewards while those who do not could be let go with ease. Backers believe not only will school and student performance improve by weeding out ineffective teachers, financial savings will come through greater system flexibility. Jonathan Alter, writing in Newsweek, also addresses the issue, albeit under a political guise. At least this time, I am not a lone voice on “educational sustainability.”

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New IRS Guidance on § 409A and Deferred Compensation

The IRS has again issued new guidance impacting on education in particular.  In response to teacher concerns about recent changes to deferred compensation rules, the IRS issued a press release and a “frequently asked questions” guidance regarding deferred compensation under § 409A. 

This part of the Tax Code affects teachers and others whose compensation payments are not based a typical calendar year.  Teachers, for example, might be paid an annual salary over 10 months, a typical school term.  But a school system may also allow teachers to elect to be paid over 12 months, although the months in that case coincide with a typical school year rather than a calendar year.  If a person elects a 12 month schedule, the compensation spans two taxable years and so the election must meet the procedures of § 409A.  These procedures are further addressed in the FAQs.  

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IRS releases final § 403(b) regulations

On July 26, 2007 the IRS published final regulations regarding § 403(b) plans and related regulations. Named after the pertinent section of the Internal Revenue Code, § 403(b) plans involve tax sheltered retirement annuities offered by public schools, colleges, universities, and § 501(c)(3) charitable organizations. The final regulations (including commentary) can be viewed in the Federal Register.   

The regulations will take effect, generally, in December 2008, with some exceptions. The IRS press release, Employee Plans News, highlights the impact of the regulations, including effective dates.  Additional information can be found at the IRS’s website.

Although much of the information is publicly available, tax planning is complicated and neither this Blog nor the public information should be mistaken for legal advice. Anyone interested in § 403(b) plans can contact one of the Fox Education Law Group attorneys or, for general tax matters, a member of the Tax Department.

IRS contacting districts about 403(b) plans

According to an IRS news release, a pilot project involving three states has found most school districts are not in compliance with the universal availability requirements of § 403(b) plans. According to the news release, “[t]he law requires that all public school employees normally expected to work 20 hours per week must be offered the opportunity to participate in a § 403(b) plan if the school or district sponsors one.” Substitute teachers, janitors, cafeteria workers and nurses are, according to the IRS, often not included. The noncompliance, according to the news release, appears to be based on a lack of understanding and not any bad intent. 

As a result of the pilot project’s findings, the IRS’s Employee Plans Compliance Unit is sending questionnaires to all public school districts, initially to those in Alaska, Florida, Hawaii, Illinois, Nevada, Pennsylvania, Tennessee and Virginia, and reaching all 50 states by 2008.