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Understanding the Vermont Municipal Employees’ Retirement System

A Defined Benefit Retirement Plan

In 2004, Vermont-NEA’s Representative Assembly endorsed a resolution calling on the Association to educate ESP members about the Vermont Municipal Employees’ Retirement System (VMERS), and to strongly encourage local bargaining units to negotiate for inclusion into this pension system as a way of securing greater retirement security for their members.

This document is intended to be an introduction to VMERS and the defined benefit plans it offers to municipal workers and school employees vested in the system. Contact your UniServ Director if you are interested in learning more about how to secure this benefit for your members at the bargaining table. You can contact Mark Hage, Vermont-NEA’s Director of Member Benefits, to arrange for a comprehensive presentation on VMERS for your bargaining team and members.

1. What is VMERS?
VMERS—the Vermont Municipal Employees’ Retirement System—offers a uniform, defined-benefit pension plan for municipal employees, which includes support staff in our public schools. The system was established in 1975 and is administered by the State of Vermont.

2. Who manages the system?
The administration of VMERS rests with a Board of Trustees consisting of five members. They are: the State Treasurer (currently, Jeb Spaulding), a representative chosen by the Governor, and three trustees elected by the members of the system. The administrative functions of VMERS are managed by the Director of Retirement Operations and carried out by staff. Board meetings are open to the public and members are welcome to attend at any time.
VMERS’ website: www.vermonttreasurer.gov/retirement/vmers

3. If an employer offers a VMERS’ group benefit, do employees have to enroll in it?
Yes. Enrollment is mandatory as soon as employees meet the eligibility requirements, regardless of any probationary period.

4. What is meant by the words “defined benefit plan” when describing VMERS?
Defined benefit (DB) plans are the primary retirement plan for most teachers and education support professionals in the U.S. A DB plan provides a guaranteed benefit to vested members of the system based on (a) an individual’s years of service, multiplied by his or her (b) final average salary, and then multiplied by some (c) percentage (in Vermont, the percentage is between 1.4 and 2 percent, depending on the group plan you’re in).

The final benefit you collect is dependent on the formula above—NOT on the amount of contributions made into the plan. This is because when VMERS says the plan benefit is guaranteed, it means guaranteed. The benefit level is a promise, guaranteed by Vermont law, which must be kept to members and their beneficiaries.

5. How are DB plans different from “defined contribution” (DC) plans?
A DC plan is an investment account in which contributions are invested and income is earned on them. But the earned income is NOT guaranteed and depends entirely on the success of your investments. If your investments do well, chances are you will have enough money in your account to live securely at retirement. If your investments don’t yield the expected return, you will fall short of needed retirement income.

DC plans can do quite well, if an employee knows what he or she is doing or is being wisely guided and advised. Just the same, the investment risk in a DC plan, unlike a DB plan, is borne entirely by the employee. There is no promised or guaranteed return, and nobody is covering your back if your investments “go South” or flat.

6. How are investments made in DB plans to make sure the money is there to meet the guaranteed benefits?
Contributions are paid into DB trust fund over time based on periodic evaluations of what the plan must have in financial reserves to meet its obligations to retirees. This is called “reserve funding.”

Most pension funds invest their assets with what’s called an “optimum mix” of growth potential and risk (that is, investment decisions are not too aggressive and not to conservative).

7. Who makes the contributions in VMERS for school employees?
Contributions come from two sources: (a) VMERS’ members and (b) school districts.

8. What group plans are offered by VMERS and what do they require in the way of contributions from employees and employers?
VMERS offers three plans, which are listed below. All contributions are PRE-TAX and are made annually through salary deductions. The percentage of contributions is based on the employee’s salary.

VMERS Employee Contribution Employer Contribution
Groups
A 2.5% 4.0%
B 4.5% 5.0%
C 9.0% 6.0%

9. What are the age and service eligibility requirements for normal retirement in each of the benefit groups cited above?
Group A: age 65 and the completion of 5 years of creditable service; or as early as age 55 and the completion of 35 years of service.
Group B: age 62 and the completion of 5 years of creditable service; or as early as the age 55 and the completion of 30 years of creditable service.
Group C: age 55 and the completion of 5 years of creditable service.

10. What are the age and service eligibility requirements for early retirement in each of the benefit groups?
Group A: age 55 and the completion of 5 years of creditable service
Group B: age 55 and the completion of 5 years of creditable service
Group C: There is no early retirement benefit in this group.
Please note: Members who retire early will see a reduction of their basic earned benefit at a rate of ½% per month for every month (6% per year) under normal retirement age for the group they are retiring from.

11. How many retirement options are available in each of the three benefit groups?
There are five options, which the staff at VMERS can explain to you. You can also consult the system’s website and written materials for more details on each. They are:
- Life Only
- 50% Survivorship
- 50% Pop-Up
- 100% Survivorship
- 100% Pop-Up

12. Does VMERS offer a disability retirement benefit?
Yes. An employee is deemed “disabled” for retirement purposes if he or she suffers from a physical or mental ailment that makes it impossible to continue to perform his or her duties as an employee, and if the disability appears to be permanent, thus compelling the member’s retirement.

You are eligible to apply for a monthly disability pension if you have a minimum of 5 years of creditable service, and your application is filed with the retirement office not later than 90 days AFTER the date you separated from service, and you have met the disability criteria mentioned above.

A disability application is subject to review and certification by the system’s Medical Review Board and Board of Trustees.

13. How does VMERS calculate a member’s Average Final Compensation (AFC)?
An employee’s AFC for purposes of determining his or her pension benefit is the average of his or her five (5) highest consecutive years of earnings for Group A members; and the three (3) highest consecutive years of earnings for Groups B and C.

14. Can any ESP employee of a school district enrolled in VMERS be a member of the system?
Yes, provided he or she meets VMERS’ membership eligibility criteria. Retirement coverage will be extended to any school-district employee who works on a regular basis for not less than 30 hours a week and not less than 1040 hours for the school year.

All other municipal employees must work not less than 24 hours per week and for not less than 1040 hours in a year to be eligible for membership in VMERS.

15. How long does it take to become vested in VMERS?
First, what does “vested” mean? It means you have met the eligibility criteria of the system, AND you have worked the required number years of creditable service to earn a retirement benefit.

In VMERS, an employee must record five (5) years of creditable service to become vested.

16. How does VMERS define creditable service?
Creditable service is the period of CONTINUOUS service between the date of hire and termination of service during which the employee makes contributions. There are three kinds of creditable service, which the staff at VMERS can explain to you: (a) prior service; (b) membership service; and (c) eligibility service. “Prior” and “Eligibility” Service are linked to particular timelines and dates.

17. What happens to the money contributed into VMERS by an employee if he or she changes jobs and doesn’t have five years of creditable service in the plan? What happens if you leave your job WITH five years of creditable service in the plan and either withdraw your contributions or keep them in the system?
If you leave employment BEFORE you have acquired five consecutive years of creditable service, you may voluntarily WITHDRAW your accumulated contributions and your service credits will be cancelled. You may also leave your contributions in your account for up to three (3) years before VMERS will automatically withdraw your membership and refund your contribution.

If you separate from your job AFTER you have accumulated five or more consecutive years of creditable service, you may withdraw your accumulated savings, and if you do this, your service credits will be cancelled. You may also choose to leave your contributions in your account for up to three (3) years, after which VMERS will automatically put your account in what’s called a vested deferred status, if you have not returned to employment. “Vested deferred” means an employee is formally vested in VMERS and will receive a retirement benefit based on the formula discussed earlier, provided he or she does not withdraw the contribution balance; however, no further contributions can be made to the account while it is designated as vested deferred.

18. What does it mean to “terminate” service in VMERS?
“Termination” for vested members can result from three factors: (a) the death of a member; (b) the retirement of a member, or (c) withdrawal by a member of his or her accumulated contributions, regardless of the number of years of creditable service.

The withdrawal of non-vested members occurs when he or she has not been an active member of the system for more than 3 consecutive years after separation from employment.

19. If an employee is vested in VMERS, is he or she obligated to take a guaranteed pension, or can that person elect to withdraw his or her accumulated contributions?
A vested member of the system is NOT obligated to draw a pension. He or she may take a refund of his or her contributions, plus accumulated interest, in lieu of a pension. If they opt for the refund, they are subject to a mandatory 20% federal tax withholding, plus a possible excise tax (if the member is under age 59 ½) on the “taxable portion” of the refund. The taxable portion of the refund is the interest paid by the system on the member’s account, plus all employee contributions made on a pre-tax basis.

The only way to avoid the 20% mandatory withholding on a withdrawal is to direct VMERS to roll over the taxable monies to another qualified tax-sheltered plan.

20. Can a member of VMERS transfer creditable service from one municipality to another or from one retirement system to another?
Yes. There is no break in membership in VMERS if you leave employment in one VMERS entity and begin employment in another VMERS entity, provided you have NOT withdrawn your membership in VMERS during the interim.

Members of VMERS who become employed by the state or as a teacher may transfer their retirement credit to either the Vermont State Employees’ Retirement System or the Vermont State Teachers’ Retirement System within ONE YEAR of the start of their new employment, and vice versa, as long as they have not received a refund of contributions or any retirement benefits.

If dual membership is established in VMERS and one of the other Vermont retirement systems, you will be notified by the state retirement office of your option to transfer or withdraw your current membership.

21. Does VMERS permit employers to offer a higher-tiered benefit group to employees who are already in the system but have a lower-tiered group plan? For example, are employees allowed to transfer from Plan A to Plan C, if it is offered by or negotiated as a benefit with their employer?
Yes, but there are certain date restrictions. Once the higher-tiered benefit group is offered, employees have the option to remain in the current plan or switch to the higher-tiered group.

If an employee does not transfer to the higher-tiered group when it is first offered, he or she may elect to do so prior to December 31 of any year in the future by simply completing an election form. The actual transfer to the new group would become effective the following July 1. If an employee transfers to a higher-tiered group, he or she must accumulate no less than three years of creditable service in the new group to retire with that group’s benefits.

What about employees hired after the higher-tiered group becomes effective? New employees do not have the option of choosing between the lower-tiered and higher-tiered groups—they must participate in the higher-tiered group offered at that time.

22. Can an employee purchase credit in VMERS?
Yes, and for a number of reasons—military service, service in the Peace Corps and VISTA, or employment in another state or municipality; teaching service, public or private; service with the State of Vermont (other than temporary or contractual employment) for which you received no retirement credit.

You may also purchase service credit from membership in VMERS that was lost due to a withdrawal.

A member may also contribute to increase the benefit percentage of a previous, lower-tiered benefit group to equal a higher-tiered benefit group. For example, a Group B member may increase the value of previous service as a Group A member to equal Group B service.

All cost purchases in VMERS must be cost neutral to the system, which means you must pay the full cost of the added retirement benefit received.

23. Can purchases be made with post-tax dollars and/or with pre-tax dollars as a direct “rollover” from a 403(b), 457, 401(a), 401(k), IRA account or any qualified pension plan?
Yes.

24. Are employees who take a leave of absence to serve in the military, in the legislature or on a jury, or because of a worker comp injury, entitled to receive credit in the retirement system for the period of the leave?
Yes. Employers are required to report such leaves to the system, but it is the responsibility of the employee to be sure that proper credit is awarded.

25. Is a retirement pension taxable?
Most of your benefit is taxable. A specified amount will be excluded from taxes if you made contributions prior to 1999 or on an after-tax basis. Members will receive more detailed information regarding tax withholding at the time they retire. A monthly statement itemizing the current and year-to-date withholdings is mailed to each retiree only when a change occurs in the gross or net amounts, and in an annual statement in late December.

26. How does an employee keep track of his or her earnings and accrued benefits in VMERS?
Each member of the system receives a detailed annual statement of benefits each Fall. An employee should check these statements carefully to verify if the system has accurate information on his or her account.

Also, make sure there is no problem with your address.

27. Are their COLA (Cost of Living Adjustments) on pension payments?
Yes. Retirees who take normal retirement become eligible for their first COLA on the first January after receiving 12 pension checks. Retirees who take early retirement become eligible for COLA after attaining the age of 62 and after receiving 12 pension checks.

28. Are retirement benefits automatic when I retire?
No. You must apply for them. Contact the retirement office within the year that you plan to retire for an estimate of your benefits, application materials and tax forms.

29. Are members of VMERS still eligible for Social Security payments?
Yes. You must also apply for Social Security benefits. Note: VMERS has no effect on Social Security and vice versa. Full Social Security is paid at ages 65 to 67, depending on your year of birth. You must contact the Social Security office for more information regarding your S.S. benefits.

For more information, contact:
Vermont Municipal Employees’ Retirement System
133 State Street
Montpelier, Vermont 05663-6901

1-800-642-3191 or 1-802-828-2305

www.vermonttreasurer.gov/retirement/vmers

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