Chapters

00:00 Introduction

00:30 Benefit Formula Reminder

01:06 Special Roles and Rules for Earned Compensation

01:59 Earned Compensation Exclusions

03:17 Highest Four Year Calculation Methods

03:58 Average Compensation Example

06:25 Action Items

07:16 Next Video Preview and Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, former school finance officer, and host of the PERS Pro YouTube channel. Today, we're peeling back the curtain on earned compensation, what counts, what doesn't, and how PERS calculates your average compensation that defines your retirement lifestyle. Let's get started.

Before we dive into the compensation discussion, let's take a step back and look at the PERS benefit formula. Two variables matter most, your total years of service credit and your average compensation or the highest four. PERS uses these two numbers to calculate your maximum allowance. If you increase your service credit, your benefit goes up. If you increase your average compensation, your benefit goes up. In a previous video, video number 31, we explained the eight different ways you can accumulate service credit. Today, we are focusing on the compensation side of the benefit formula.

So what exactly is earned compensation? In simple terms, it is the total amount earned during a fiscal year by an employee that does not exceed the employee compensation limit and is subject to certain exclusions that we will go over in a moment. While most PERS members receive a standard W-2 salary, Mississippi law and PERS regulations have specific subsections to define reportable income for various roles including constables, chancellors and clerks, coroners, members of the state legislature, and local elected officials. If you hold one of these positions, your earned compensation may include net earnings or specific statutory allowances that don't apply to a typical state employee, and you can consult PERS Board Regulation 65 for more details.

It's often easier to define what counts as earned compensation by looking at what PERS explicitly says does not count. You might see these amounts in your paycheck, but they won't help your average compensation for retirement purposes. Let's review the exclusions. section 401A-17 of the Internal Revenue Code. This amount is $350,000 for 2025-2026 state fiscal year. Expense reimbursements such as mileage, meals, and hotels. Fringe benefits. This can be either the use of or dollar allowance towards automobiles, cell phones, internet, monetary awards, commuting benefits, housing benefits, and education assistance. Termination pay, such as severance, early retirement incentives, or reduction in force programs. Performance-based incentive that were paid after July 1st, 2013. Excess lump sum leave payments for unused leave at termination retirement that exceed what is authorized under state law. Note, however, that payments for unused leave at retirement that are within the limits authorized under state law are included in earned compensation.

PERS doesn't just look at your last four years when computing your average compensation, they look for your highest four years. These four highest years don't even have to be consecutive, though for most members they are. There are actually four different ways PERS can compute this average to ensure you get the highest possible benefit. They can use four highest fiscal years, such as July 1st to June 30th. Four highest calendar years, January 1st to December 31st. Four highest consecutive years, this is any 48 month period, or a combination of the above depending on your specific pay history and retirement date.

Now let's look at a realistic example of a hypothetical PERS member who we will call Jane, who is retiring with the last five fiscal years of salary and compensation as follows. Year one, $50,000 base salary plus a $4,000 coaching supplement totaling $54,000 in pay. Year two, $52,000 base salary plus a $5,000 Education Assistance Payment totaling $57,000 in pay. Year 3, $55,000 base salary plus $1,000 Performance Incentive totaling $56,000 in pay. Year 4, $58,000 base salary. This year she received a promotion plus $6,000 National Board Supplement totaling $64,000 in pay. And year 5, a $60,000 base salary plus $6,000 national board supplement plus a $3,000 lump sum unused leave payment totaling $69,000 in pay.

Let's walk through how PERS identifies what is earned compensation and how Jane's Highest Four is calculated. Step one, we exclude non-earned pay. From year two, PERS removes the $5,000 education assistance payment, and from year three, PERS removes the $1,000 performance incentive payment. All other supplement payments will be included for earned compensation. Step two. We identify the highest four. Jane's highest four, after applying the exclusions, are year one, year three, year four, and year five. In year one, her earned compensation will be $54,000. In year three, her earned compensation will be $55,000. In year four, her earned compensation will be $64,000. And in year five, her earned compensation will be $69,000. Step three, average the total. We add up 54,000, 55,000, 64,000, and $69,000 and then divide that total by four, giving us $60,500. Jane's average compensation or highest four years for the retirement formula is $60,500.

Ready to calculate your own average compensation? Here are your action items for today. One, review your annual statement. Look at your reported earnings for the last few years. If the numbers look lower than your total pay, check for those excluded items like performance-based incentives and fringe benefit allowances. Two, project your highest four. If you are close to retirement, calculate how a potential raise from an increase in the state teacher salary scale or a national board supplement or a promotion in your final year or two might impact your average compensation. Three, be smart with your unused leave. Compare the economic benefit of certifying unused leave for additional service credit against a payout for that same leave for additional average compensation.

I hope this video helped you better understand how your highest four is calculated. In our next video, we'll explore what service retirement benefit base options does a Mississippi PERS retiree have? Please make sure you subscribe so you don't miss this and other videos in our new retirement series. If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members. If you have a follow up question about PERS or anything else related to personal finance, please visit our website at perspro.ms and submit your question or topic for a future episode. Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Disclaimer. This video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal advice specific to your situation.