99-000502 Stephen J. Megregian vs. Department Of Management Services, Division Of Retirement Status: Closed Recommended Order on Thursday, December 2, 1999.

Summary: Supplemental pay to college executive is a bonus and excluded from creditable compensation for Florida Retirement System benefit calculation.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

STEVEN J. MEGREGIAN, )

)

Petitioner, )

)

vs. ) Case No. 99-0502

)

DEPARTMENT OF MANAGEMENT SERVICES, )

DIVISION OF RETIREMENT, )

)

Respondent. )

___________________________________)

RECOMMENDED ORDER

On August 31, 1999, a formal administrative hearing in this

case was held by videoconference in Tallahassee and Orlando,

Florida, before William F. Quattlebaum, Administrative Law Judge,

Division of Administrative Hearings.

APPEARANCES

For Pe titioner: David A. Pearson, Esquire

Dean, Mead, Egerton, Bloodworth,

Capouano & Bozarth, P.A.

Post Office Box 2346

Orlando, Florida 32802-2346

For Respondent: Robert B. Button, Esquire

Division of Retirement

Cedars Executive Center, Building C

2639 North Monroe Street

Tallahassee, Florida 32399-1560

STATEMENT OF THE ISSUE

The issue in the case is whether supplemental payments made

to the Petitioner by Brevard Community College constitute

creditable compensation for purposes of determining retirement

benefits under the Florida Retirement System.

PRELIMINARY STATEMENT

By letter dated April 30, 1999, the Division of Retirement

notified Stephen J. Megregian, that supplemental payments made

under Brevard Community College's severance pay "opt-out" plan

would not be included in creditable compensation calculations for

purposes of determining benefits under the Florida Retirement

System. Mr. Megregian requested a formal administrative hearing.

The Division of Retirement forwarded the request to the Division

of Administrative Hearings, which scheduled and conducted the

proceeding.

At the hearing, Mr. Megregian (Petitioner) presented the

testimony of two witnesses and had Exhibits numbered 1-3 admitted

into evidence. The Division of Retirement (Respondent) presented

the testimony of three witnesses and had Exhibits numbered 1-4

admitted into evidence. Joint Exhibits numbered 1-3 were also

admitted into evidence. The Transcript of the hearing was filed

on September 16, 1999. Both parties filed Proposed Recommended

Orders pursuant to a deadline extension granted after the

Petitioner's copy of the transcript was delayed.

FINDINGS OF FACT

1. From 1970 until his retirement in June 1998, Brevard

Community College employed Stephen J. Megregian at an executive

level.

2. The State of Florida, Division of Retirement, manages

and oversees operation of the Florida Retirement System (FRS) in

which Brevard Community College (BCC) participates.

3. In June 1990, the college adopted an Employee Benefit

Plan for BCC Executive Employees. The provisions of the plan

covered Mr. Megregian, an executive employee. In fact, Mr.

Megregian drafted the plan, which was adopted by the college's

Board of Trustees.

4. The executive benefit plan included a severance pay

benefit for plan participants. The severance benefit was

calculated according to a formula using the employee's daily base

pay as multiplied by the sum of "benefit days." Benefit days

were earned according to employment longevity. A "severance day"

calculation determined the amount of severance pay a departing

employee would receive.

5. Apparently, at some point in 1994, participants in the

FRS learned that the Division of Retirement would exclude some

types of compensation, including severance pay, from the

"creditable compensation" used to determine retirement benefits.

6. In June 1995, the college amended the plan to provide a

severance pay "opt-out" provision to plan participants. The

provision entitled plan participants who were within five years

of eligibility for FRS retirement benefits to "opt-out" of the

severance package and instead immediately begin to receive

supplemental payments. Mr. Megregian drafted the "opt-out"

provision, which was adopted by the college board.

7. The decision to "opt-out" was irrevocable. A plan

participant could not change his or her mind and take the

severance package once the "opt-out" decision was made.

8. The supplemental payments were calculated based upon the

"severance days" that the employee would have otherwise earned

during the year. The payments were made along with the

employee's salary payment.

9. The "opt-out" plan did not require a participant to

retire after the fifth year of receiving the supplemental

payment.

10. The Petitioner asserts that the creation of the "opt-

out" provision was in accordance with information provided by the

Division of Retirement.

11. There is no evidence that the Division of Retirement

provided any information suggesting that the "opt-out" provision

would result in an increase in creditable compensation for

purposes of determining FRS benefits, or that the "opt-out"

provision was an acceptable method of avoiding the severance pay

exclusion.

12. There is no evidence that, prior to March of 1998, the

college specifically sought any direction or advice from the

Division of Retirement as to the supplemental payments made to

employees under the "opt-out" provision.

13. The evidence as to why the college did not simply

increase base salaries for employees to whom supplemental

payments were being made is unclear. There was testimony that

the plan was designed to avoid unidentified tax consequences.

There was also testimony that the supplemental plan was designed

to avoid increasing some employees base salaries beyond the

percentage increases awarded to other employees. There was

apparently some concern as to the impact the supplemental

payments would have on other college employees who were not

receiving the additional funds.

14. There is no evidence that the Petitioner performed any

additional duties on the college's behalf in exchange for the

supplemental payments.

15. The Petitioner was eligible to participate in the "opt-

out" plan beginning in the college's 1995-1996 fiscal year, and

he elected to do so.

16. As a result of his election, supplemental payments were

made in amounts as follows:

Fiscal Year 1995-1996, $7,938.46.

Fiscal Year 1996-1997, $8,147.13.

Fiscal Year 1997-1998, $8,395.40.

17. On March 21, 1998, Brevard Community College requested

clarification from the Division of Retirement as to how the

supplemental payments would affect a plan participant's benefit.

18. On April 30, 1998, the Division of Retirement notified

the college that the supplemental payments would not be included

within the calculation of creditable compensation.

19. The Petitioner retired from his employment at Brevard

Community College on June 30, 1998.

20. The Petitioner is presently entitled to retirement

benefits under the FRS.

21. The Division calculates FRS retirement benefits based

on "creditable compensation" paid to an employee during the five

years in which an employee's compensation is highest.

22. Some or all of the three years during which the

Petitioner received supplemental payments are included in the

calculation of his creditable compensation.

23. The evidence fails to establish that the supplemental

payments made to the Petitioner should be included within the

creditable compensation upon which FRS benefits are calculated.

24. Under the statutes and rules governing FRS benefit

determinations, the supplemental payments made to the Petitioner

are "bonuses" and are excluded from the "creditable compensation"

calculation.

CONCLUSIONS OF LAW

25. The Division of Administrative Hearings has

jurisdiction over the parties to and subject matter of this

proceeding. Section 120.57(1), Florida Statutes.

26. The Petitioner has the burden of establishing by a

preponderance of the evidence, entitlement to the relief sought.

Balino v. Department of Health and Rehabilitative Services , 348

So. 2d 349 (1st DCA 1977). Florida Department of Transportation

v. JWC Company, Inc. , 396 So. 2d 778 (Fla. 1st DCA 1981). In

this case, the burden has not been met.

27. The evidence fails to establish that the supplemental

payments to Stephen J. Megregian, constitute "compensation" for

purposes of determining retirement benefits under the FRS.

Section 121.021(22), Florida Statutes, in relevant part provides

as follows:

"Compensation" means the monthly salary paid

a member by his or her employer for work

performed arising from that employment.

(a) Compensation shall include:

1. Overtime payments paid from a salary

fund.

2. Accumulated annual leave payments.

3. Payments in addition to the employee's

base rate of pay if all the following apply :

a. The payments are paid according to a

formal written policy that applies to all

eligible employees equally;

b. The policy provides that payments shall

commence no later than the 11th year of

employment ;

c. The payments are paid for as long as the

employee continues his or her employment; and

d. The payments are paid at least annually.

(emphasis supplied)

28. The formal written policy under which Mr. Megregian

received supplemental payments did not provide that the payments

were to commence not later than the eleventh year of his

employment.

29. Section 121.021(22), Florida Statutes, in relevant

part, further provides as follows:

(b) Under no circumstances shall

compensation include :

1. Fees paid professional persons for

special or particular services or include

salary payments made from a faculty practice

plan operated by rule of the Board of Regents

for eligible clinical faculty at the

University of Florida and the University of

South Florida; or

2. Any bonuses or other payments prohibited

from inclusion in the member's average final

compensation and defined in subsection (47).

(emphasis supplied)

30. The supplemental payments to the Petitioner are bonuses

as defined at Section 121.021(47), Florida Statutes, which in

part provides as follows:

"Bonus" means a payment made in addition to

an employee's regular or overtime salary. A

bonus is usually nonrecurring, does not

increase the employee's base rate of pay, and

includes no commitment for payment in a

subsequent year. Such payments are not

considered compensation. Effective July 1,

1989, employers may not report such payments

to the division as salary, and may not make

retirement contributions on such payments.

(a) A payment is a bonus if any of the

following circumstances apply :

1. The payment is not made according to a

formal written policy that applies to all

eligible employees equally.

2. The payment commences later than the 11th

year of employment .

3. The payment is not based on permanent

eligibility.

4. The payment is made less frequently than

annually. (emphasis supplied)

31. In this case, the payment of supplemental funds to the

Petitioner constituted payment of a bonus. The payments to

Mr. Megregian commenced later than the eleventh year of his

employment.

32. The Petitioner asserts that Section 121.021(47),

Florida Statutes, characterizes a bonus as "nonrecurring, does

not increase the employee's base rate of pay, and includes no

commitment for payment in a subsequent year," and that the

payments made to the Petitioner are contrary to these

characteristics. The Petitioner's interpretation requires that

the qualifier "usually" be ignored, as well as the remainder of

the section, including the requirement that such supplementary

payments commence prior to the eleventh year of employment.

33. Calculation of benefits under the FRS is based upon the

employee's "average final compensation." Section 121.021(24),

Florida Statutes, provides as follows:

(24) "Average final compensation" means the

average of the 5 highest fiscal years of

compensation for creditable service prior to

retirement, termination, or death. For in-

line-of-duty disability benefits, if less

than 5 years of creditable service have been

completed, the term "average final

compensation" means the average annual

compensation of the total number of years of

creditable service. Each year used in the

calculation of average final compensation

shall commence on July 1.

(a) The average final compensation shall

include:

1. Accumulated annual leave payments, not to

exceed 500 hours; and

2. All payments defined as compensation in

subsection (22).

(b) The average final compensation shall not

include:

1. Compensation paid to professional persons

for special or particular services;

2. Payments for accumulated sick leave made

due to retirement or termination;

3. Payments for accumulated annual leave in

excess of 500 hours;

4. Bonuses as defined in subsection (47);

5. Third party payments made on and after

July 1, 1990; or

6. Fringe benefits (for example, automobile

allowances or housing allowances).(emphasis

supplied)

34. The Division of Retirement has adopted rules that have

been codified by the preceding statutes. Rule 60S-6.001(16),

Florida Administrative Code, provides as follows:

(16) COMPENSATION OR GROSS COMPENSATION --

(a) Compensation means the total gross

monthly salary paid a member by his employer

for work performed arising from that

employment, including :

1. Overtime payments, except as provided in

60S-6.001(11)(b)4.;

2. Accumulated annual leave payments, as

defined in Section 60S-6.001(1);

3. Payments in addition to the employee's

base rate of pay if all the following apply :

a. The payments are paid according to a

formal written policy that applies to all

eligible employees equally, and

b. The policy provides that payments shall

commence not later than the eleventh year of

employment , and

c. The payments are paid for as long as the

employee continues his employment, and

d. The payments are paid at least annually;

4. Amounts withheld for tax sheltered

annuities or deferred compensation programs,

or any other type of salary reduction plan

authorized under the Internal Revenue Code;

5. Payments, whether made annually or in 12

or 26 equal payments within a 12- month

period, made in lieu of a permanent increase

in the base rate of pay when the member's

base pay is at the maximum of his pay range.

When a portion of a member's annual increase

raises his base pay to the maximum of his pay

range, and the excess is paid as a lump sum

payment, such lump sum payment shall be

compensation for retirement purposes.

(b) Compensation shall not include :

1. Any bonuses or other payments prohibited

from inclusion in the member's average final

compensation and defined in 60S-6.001(6)(b );

2. Any public funds paid by an employer into

an employee's salary reduction, deferred

compensation, or tax-sheltered annuity

program on or after July 1, 1990 (the date as

of which all employers were notified in

writing by the Division to cease making

contributions based on such amounts).

However, if an employer was notified in

writing by the Division to cease making such

contributions as of a different date, that

employer shall be subject to the requirements

of such written notice.

3. Any amounts in excess of the Internal

Revenue Code ( IRC) Section 401(a)(17)

limitation as follows:

a. For any person who first became a member

before July 1, 1996, compensation for all

plan years beginning on or after July 1,

1990, shall not include any amounts in excess

of the maximum of $200,000 in 1989, adjusted

for changes in the cost of living;

b. For any person who first became a member

on or after July 1, 1996, compensation for

any plan year shall not include any amounts

in excess of the maximum of $150,000 in 1996,

adjusted for changes in the cost of living

only in increments of $10,000. (emphasis

supplied)

35. Rule 60S-6.001(6), Florida Administrative Code,

provides as follows:

(6) AVERAGE FINAL COMPENSATION -- Means the

average of the 5 highest fiscal years of

compensation for creditable service prior to

retirement, termination or death calculated

in accordance with 60S-4.004(1).

(a) The average final compensation shall

include:

1. Accumulated annual leave payments as

defined in 60S-6.001(1), not to exceed 500

hours;

2. All payments defined as compensation in

60S-6.001(16).

(b) The average final compensation shall not

include :

1. Compensation paid to professional persons

for special or particular services.

2. Payments made due to retirement or

termination for accumulated sick leave as

defined in 60S-6.001(3).

3. Payments for annual leave in excess of

500 hours.

4. Bonuses as defined in 60S-6.001(11) .

5. Third party payments made on and after

July 1, 1990.

6. Automobile allowances.

7. Housing allowances. (emphasis supplied)

36. Rule 60S-6.001(11), Florida Administrative Code,

provides as follows:

(11) BONUS -- Means a payment made in

addition to an employee's regular or overtime

salary that is usually non-recurring, does

not increase the employee's base rate of pay

and includes no commitment for payment in a

subsequent year. Such payments are not

considered compensation and, effective

July 1, 1989, shall not be reported to the

Division as salary, and retirement

contributions shall not be made on such

payments.

(a) A payment is a bonus if any of the

following apply :

1. The payments are not paid according to a

formal written policy applying to all

eligible employees equally, or

2. The payments commence later than the

eleventh year of employment , or

3. The payments are not based on permanent

eligibility, or

4. The payments are paid less than annually;

(b) Bonuses shall include but not be limited

to the following:

1. Exit bonus or severance pay;

2. Longevity payments in conformance with

the provisions of 60S-6.001(11)(a) above;

3. Salary increases granted due to an

employee's agreement to retire, including

increases paid over several months or years

prior to retirement;

4. Payments for accumulated overtime or

compensatory time, reserve time, or holiday

time worked, if not made within 11 months of

the month in which the work was performed;

5. Quality Instruction Incentives Program

( QUIIP) Payments;

6. Lump sum payments in recognition of

employees' accomplishments. (emphasis

supplied)

37. Essentially, the Brevard Community College "opt-out"

provision was an attempt to circumvent the State Division of

Retirement exclusion of severance payments from creditable

compensation calculations. College officials were aware of, and

concerned about, the Division's severance exclusion, yet the

college made no attempt to determine whether the "opt-out"

provision would avoid the severance pay exclusion.

38. The college asserts that a hypothetical employee,

apparently with substantial FRS credits prior to employment,

could take advantage of the "opt-out" provision and receive

payments prior to the 11th year of employment, thus avoiding the

"bonus" definition.

39. The hypothetical presented by the college is irrelevant

in this case, where the facts are clearly different. Here, the

supplemental payments to the Petitioner clearly meet the

statutory and rule definition of "bonus" and are excludable from

creditable compensation for determination of FRS retirement

benefits.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is recommended that the State of Florida, Division of

Retirement, enter a final order finding that supplemental payments

made to Stephen J. Megregian are bonus payments and are excluded

from calculation of creditable compensation for FRS benefit

purposes.

DONE AND ENTERED this 2nd day of December, 1999, in

Tallahassee, Leon County, Florida.

___________________________________

WILLIAM F. QUATTLEBAUM

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

(850 ) 488-9675 SUNCOM 278-9675

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 2nd day of December, 1999.

COPIES FURNISHED:

David A. Pearson, Esquire

Dean, Mead, Egerton, Bloodworth,

Capouano & Bozarth, P.A.

Post Office Box 2346

Orlando, Florida 32802-2346

Robert B. Button, Esquire

Division of Retirement

Cedars Executive Center

Building C

2639 North Monroe Street

Tallahassee, Florida 32399-1560

A. J. McMullian, III, Director

Division of Retirement

Cedars Executive Center

Building C

2639 North Monroe Street

Tallahassee, Florida 32399-1560

Paul A. Rowell, General Counsel

Department of Management Services

4050 Esplanade Way

Tallahassee, Florida 32399-0950

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within 15

days from the date of this Recommended Order. Any exceptions to

this Recommended Order must be filed with the agency that will

issue the final order in this case.