About 1,700 California pensions are so big they exceed IRS limits

About 1,700 CalPERS pensions are so large they exceed an IRS limit and siphon money away from government employers, according to new figures from the retirement system.

The IRS sets an annual cap — this year it’s $245,000 — above which public pension payments must be treated as wages, subject to the same withholdings and deductions.

The extra-large pensions are growing more numerous in California, creating added costs for the cities and counties who have to pay for them. About 40% more retirees are receiving pensions above the limit today than four years ago.

Most of the recipients are former city managers and other local government officials whose salaries, length of service and pension formulas — set by the governments for which they worked — determined the size of their benefits in retirement.

Still, the costly pensions make up a small share of the retirement benefits paid to about 652,000 CalPERS retirees, who receive an average $39,000 per year.

A committee of the CalPERS Board of Administration is set to review the system’s administration of the big pensions at a Nov. 15 meeting. The latest stats were included in a report prepared by the system’s Customer Education and Outreach Division.

The large pensions are holdovers from before 2013, when California capped them at the federal limit as part of the Public Employees’ Pension Reform Act. But those who started work before Jan. 1, 2013 remain eligible for the more generous benefits they were promised.

Cities, counties, the state and other public agencies pay the above-limits portions to the retirees directly, separate from the pension checks CalPERS sends. The payments average $1,800 per month on top of the recipients’ pensions, according to the CalPERS report.

Local government agencies account for 73% of them, while 22% are state retirees and 5% retired from schools, according to the report.

CalPERS makes the necessary deductions — including, in some cases, for Medicare taxes and Old Age, Survivors, and Disability Insurance Social Security taxes — and coordinates with about 600 public employers to administer the payments. The retirement system charges affected retirees a 1.5% fee.

Other pension systems, including CalSTRS and those administered by counties, are subject to the same IRS limit.

Some pensions that are less than the dollar amount specified by the IRS each year still exceed the limit, due to retirements before age 62 and benefit election decisions, according to a fact sheet.

The CalPERS board in 2017 considered proposing legislation to stop administering the above-limits pensions, leaving the job to the employers, but decided against it.

The report prepared for next week’s meeting says CalPERS’ administration “ensures compliance and reduces the risk of concerns with our tax-qualified status.”