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November 10, 2009

Determining final average salary for retirement purposes - lump sum payments

Determining final average salary for retirement purposes - lump sum payments
Wallon v NYS Teachers' Retirement System, 294 AD2d 644

An employee's final average salary [FAS] is a critical element in determining the individual's retirement allowance. In the Wallon case the issue before the court concerned whether or not certain "lump sum payments" should have been included in determining the retiree's FAS.

When Thomas Wallon retired from his position as an elementary school principal with the Avon School District, the School District included its lump sum payments of $21,500 to Wallon's tax-sheltered annuity and $14,793.43 in lieu of health insurance in reporting his compensation to the New York State Teachers' Retirement System [TRS]. Both lump sum payments were made in accordance with the terms of a collective bargaining agreement between the District and Wallon's collective bargaining unit representative.

Initially TRS included these lump sum payments in determining Wallon's FAS for the purpose of calculating his retirement allowance. Later TRS decided that neither lump sum payment constituted "compensation" for the purpose of determining his FAS within the meaning of Education Law Section 501(11).

TRS also determined that the inclusion of these amounts in calculating Wallon's retirement allowance resulted in a $9,031.63 overpayment of retirement benefits. This, said TRS, required it to deduct $1,000 from Wallon's monthly benefits until this overpayment was recouped.

Wallon sued, seeking a court order annulling TRS's determinations. Supreme Court ruled that while the lump sum payment for Wallon's tax deferred annuity may not be included in determining his FAS, Avon's "payments in lieu of health insurance was properly included in determining [Wallon's] FAS."

Wallon and TRS both appealed this ruling.

The Appellate Division affirmed the lower court's decision, holding that it had previously ruled that "payments made near the end of an applicant's career of benefits which he [or she] accumulated throughout the course of his [or her] working life will not be included in the ultimate determination of his [or her] retirement income," citing Martone v New York State Teachers' Retirement Sys., 105 AD2d 511.

According to the decision, the record did not demonstrate that "the payments to [Wallon's] annuity were for services performed during the time period covered by the … collective bargaining agreement."

Turning to the question of including the amount of the lump sum payment in lieu of health insurance in determining Wallon's FAS, the court noted that although TRS had included such payments in the FAS of another Avon retiree, Richard Letvin, it disallowed similar payments in Wallon's case. It appears that TRS's decision was based on its finding that Letvin, in retirement, was covered by his spouse's health insurance while Wallon used his lump sum payment to purchase health insurance.

The Appellate Division agreed with Supreme Court's conclusion that Wallon and Letvin "were similarly situated and had to be similarly treated by [TRS] to avoid being arbitrary and capricious."

Finally, the court sustained the recoupment any overpayments made by TRS to Wallon, commenting that TRS did not abuse its discretion by demanding such repayment over a nine-month period since Wallon was on notice for at least 13 months that substantial portions of his FAS were being disputed and that he might be required to repay any overpayments.

The Appellate Division observed that once Wallon had initiated his lawsuit, TRS suspended the monthly deduction pending resolution of the litigation, thus giving Wallon an additional 15-month grace period before resumption of the now reduced deductions. Accordingly, the court ruled that TRS's recoupment schedule of repayment over a nine-month period was neither arbitrary nor capricious.

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