Pension Reform Series: How Will PEPRA Affect Health Benefits That Can Be Offered?

Each week in the month of November, CSDA ran a series of articles by legal experts answering key questions on the California Public Employees’ Pension Reform Act of 2013 (PEPRA). The week of November 26, David W. Tyra answers the question:

How will the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”) affect health benefits that can be offered? Can different types of employees receive different health benefits?

Despite efforts by some in the California Legislature to address health benefits and OPEB (Other Post-Employment Benefits) as part of PEPRA, there is relatively little mention of these benefits in the act.

One way in which PEPRA does address health benefits involves the type of health benefit vesting schedule that can be offered by public employers to their employees.  Section 7522.40, which was added to the Government Code by PEPRA, forbids a public employer from offering a health benefit vesting schedule to (1) employees who are elected or appointed, (2) trustees, (3) employees who are exempt from collective bargaining, (4) employees who are exempt from civil service, or (5) managers, that is more advantageous than that provided generally to other public employees, including represented employees, of the same public employer who are in related retirement membership classifications.  According to CalPERS’ “Guide to Pension Reform,” this provision impacts both current and new members.

As is the case with many of PEPRA’s provisions, the language of new section 7522.40 raises more questions than it provides answers.  For instance, while the language of the new code section prohibits non-represented employees from receiving a more advantageous health benefit vesting schedule than represented employees, the language of the statute does not address whether a public employer may offer more advantageous levels of health benefits to one group of employees than that offered to another.

Also, the phrase “related retirement membership classifications” is undefined.  The issue of whether an employee in Job Classification A is in a “related retirement membership classification” to an employee in Job Classification B thereby requiring both employees to be provided similar health benefit vesting schedules is not addressed in the language of the new code section.

Finally, the question of whether a particular health benefit vesting schedule is “more advantageous” than another is unanswered.  For instance, is a health benefit vesting schedule that provides for vesting gradually over time more or less advantageous than a vesting schedule that utilizes so-called “cliff vesting”?  Would the answer to this question change if the cliff vesting schedule involved a shorter period of time (e.g., three years) in which to vest fully in the subject health benefits than a vesting schedule that involves gradual vesting over a longer period of time before an employee is vested fully, e.g., 20 percent per year over five years?

If a public employer intends to offer variable health benefit vesting schedules to different groups of employees, careful attention should be paid to these questions to prevent a violation of the restrictions contained in new section 7522.40.

Links to this article and others in the Pension Reform Series are below: