In a unanimous decision, the Arizona Supreme Court has ruled that employer contributions to deferred compensation plans are compensation under the ASRS statute. As a result, current and former employees covered by the Arizona State Retirement System (ASRS) whose employers failed to treat employer-deferred compensation payments as ASRS compensation may be entitled to benefit increases.
The plaintiffs, former Chandler City Attorney Mary Wade and Chandler City Clerk Marla Paddock, were represented by Martin & Bonnett and co-counsel Tom Rogers. The appeal was successfully argued by Susan Martin
of Martin & Bonnett.
In its ruling, the Court found that employer contributions to deferred compensation plans are "compensation" under Arizona retirement law. Employees are entitled to have their pension benefits calculated based on final average compensation that includes the amount of those payments.
As a result of the Supreme Court's decision, ASRS will notify its 600-plus participating employers to identify all current and former employees for whom deferred compensation contributions were made and not reported to ASRS. ASRS will then calculate and direct the employers to remit payment of the back contributions with appropriate interest. Every affected employee, former employee and retiree will then be notified and given an opportunity to have their benefits increased by making arrangements for payment of their appropriate share of employee contributions.
Both plaintiffs had contracts that required the City of Chandler to contribute a stated percentage of their base salaries to the City's Section 457 Deferred Compensation Plan. The City had always included the amount of those contributions as part of the total compensation reported and contributed to ASRS.
In 2010, ASRS advised the City not to contribute to ASRS on those amounts, asserting that only employee elective contributions, and not employer contributions, to deferred compensation plans counted as compensation under the ASRS statute. As a result of the ASRS's instruction, the City ceased making contributions to ASRS on those payments, thereby significantly reducing the plaintiffs' retirement benefits.
The plaintiffs sued both ASRS and the City of Chandler on behalf of themselves and others similarly situated, claiming that the failure to contribute unlawfully violated the statute, plaintiffs' contractual rights, and the Arizona and federal constitutions. After losing in Maricopa County Superior Court, the plaintiffs won on an interlocutory appeal in the Arizona Court of Appeals addressing the meaning of the statute. The Arizona Supreme Court accepted review and agreed that (a) employer payments to deferred compensation plans are included in the definition of compensation under the ASRS statute and (b) ASRS's dictates to the contrary were unlawful. The Court also awarded plaintiffs their attorney's fees.