Prior to 2021, the maximum benefit that could be earned in a defined benefit LOSAP in New York State was essentially $1,200. The statute states, in essence, that the monthly payment cannot exceed an amount equal to $30 for each year of service credit up to a maximum of forty years of service credit. Then, in 2021 statute was amended to allow a sponsor to extend the maximum years of service credit to fifty, making the maximum benefit $1,500.
As a way to control costs, some plans were originally established with service credit maximums that were less than 40 years. Most commonly we see plans limit service to 30 years, and sometimes 20 or 25. Soon we will see plans that were established on January 1, 1990 have participants earning their 40th year of service credit in 2024. If these sponsors do not amend the program to extend the maximum years of service credit, participating volunteers will no longer be able to earn additional benefits.
A question we have been asked frequently is if participants reach the service credit maximum and in a future year the LOSAP is amended to extend the maximum years of service credit, can those participants receive credit for the "capped" years? For example, if a $20 defined benefit LOSAP was designed to limit service to 20 years, and participants started to hit the 20-year cap in calendar year 2012, then effective January 1, 2023 the maximum was extended to 50 years, could participants receive service credit and a benefit for the 10 years from 2013 to 2022?
First, and foremost, we are not attorneys, so it is best to review this blog post with your local attorney.
Second, in the example we provided, we don't believe that the additional 10 years would be able to credited retroactively in the true sense. Meaning, the service credit that would have otherwise been earned in 2013 would be credited for 2013 with a retroactive adjustment in a participant's benefit effective 1/1/2014. We believe the law is clear that an amendment can be prospective only, so a sponsor would not be able to retroactively provide an additional benefit.
However, we do think it is reasonable that a sponsor could credit the 10 years of service credit effective on the date of the amendment - in our example on January 1, 2023. Of course, provided the participant actually earned 50 points and service credit in each of those years. Although the service credit was earned prior to the date of the amendment, the increased benefit is provided prospectively only. The cost of providing those additional years might dissuade a municipal sponsor from taking this approach.
The reasoning behind this opinion is the interpretation of whether or not participants who have earned the maximum service award continue to earn service credit and not just an additional benefit. In our sample LOSAP, a participant could be viewed as having earned a 21st year of service credit, but just not be able to earn more than the maximum benefit of $400 ($20 x 20 years of service credit).
As a reminder, the statue actually stipulates the maximum benefit that can be accrued, with that maximum based on years of service credit. If in our sample LOSAP the maximum benefit is $400 once a participant earns 20 years of service credit, it could be interpreted that the participant can continue to earn points and service credit, just not an additional benefit. Then, if the sponsor increases the maximum benefit to $1,000 ($20 x 50 years of service credit) on January 1, 2023, the amendment could stipulate that on January 1, 2023 the years of service credit earned in excess of 20 years will be used to determine a participant's service award as of January 1, 2023. Again, in our example, this would result in some participants going from a $400 monthly benefit to a $600 monthly benefit on January 1, 2023, provided they earned service credit each year for those 10 years. Since this provides just for a prospective increase in benefit we believe this can be authorized under the statute.
This is not typically how programs are amended - usually once a firefighter hits the maximum benefit (or maximum years of service credit) they are deemed to no longer be eligible to earn additional benefits or service credit. Then, when the amendment becomes effective, the participants at the maximum are able to earn additional service credit and benefits going forward from the date of the amendment. That is for various reasons, including cost or recordkeeping of those years that were capped. But we think the law can be read to support this type of amendment.
It would be very important to work with your attorney and TPA to craft the language of the resolution and proposition to be clear about how the amendment will be administered and the associated increase in contributions.
The 80% Funding Myth
We recently had a sponsor that inquired about amending their program to improve benefits. The program was exactly 80% funded as of January 1, 2023. One of the questions that came up during the discussion was if the plan was funded well enough to consider an amendment. Normally, it would be preferred for a program to have funded a majority of the benefits already earned before increasing contributions to pay for larger benefits to be accrued in the future.
There is no rule that directly applies to a LOSAP when it comes to this question. There are IRS rules that apply to qualified plans, for example the cost impact of any benefit improvement to a plan that is under 80% must be immediately funded and cannot be amortized into the future. Additionally, accelerated forms of payment, such as lump sums, are restricted when a plan has a a funded ratio under 80%. But again, no such rules apply to a LOSAP.
In doing some research to point to a specific article on this topic for our client, we came across an article from the Society of Actuaries on a commonly cited theory that a plan is healthy if the funded ratio is 80%. This article was very thorough and touched on may topics we routinely discuss with clients. Therefore, we thought we would share it with you! Please read the article by following this link:
If you have additional questions after reading this article, please contact us!
Miscellaneous Activities Category
One of the point system categories is Miscellaneous Activities. The state law provides:
(vii)Miscellaneous activities—maximum fifteen points. Participation in inspections and other
activities covered by the volunteer firefighters’ benefit law and not otherwise listed—one point per
The three main criteria for an event to be a miscellaneous activity is:
1) It must be an activity. For example, you cannot give 5 points to a committee chairman under the miscellaneous activities category, since being the chairman is not an activity. You can give points for attending committee meetings, but not just to be the chairman.
2) The activity must be covered by VFBL. Sorry, softball games are not miscellaneous activities.
3) The activity must not be covered under another category. For example, if your department has more than 20 drills in a year, you cannot credit attendance at drills in excess of 20 as a miscellaneous point. A drill is a drill and cannot be a miscellaneous activity.
It seems reasonable for a sponsor to specify the activities that will be credited under this category, thereby giving some control over it and preventing the possibility for abuse. But generally, most sponsors leave the miscellaneous activities category open ended, and require just that the activity meet the statutory definition.