Hybrid Rate Separation

Employers make a monthly payment to VRS that includes:

• Board-certified or state-budget-approved employer defined benefit rate, which is currently reduced proportionately for hybrid members’ voluntary defined contribution elections and the required employer matching contribution.
• Employee contribution of 4% for defined benefit component.

Employers make per-payroll payment to MissionSquare Retirement that includes:

• Mandatory 1% employer and employee defined contributions.
• Employee voluntary contributions.
• Employer match to member voluntary defined contributions.

Currently, the defined contribution component rate of the Hybrid Retirement Plan is offset against the defined benefit contribution rate and, therefore, linked to the service credit earned by the member for the defined benefit component.

Because the rates are linked, VRS business rules pertaining to the defined benefit component also apply to the defined contribution component. The linkage restricts the defined contribution component in a way not normally allowed per IRS guidelines for a stand-alone defined contribution plan.

Starting July 1, you will administer the hybrid defined contribution component and defined benefit component as separate, independent plans.

Employers will make a monthly payment to VRS:

• Board-certified defined benefit rate that is the same for all employees (Plan 1, Plan 2, Hybrid defined benefit component) and no longer includes an amount for expected matching contributions to the defined contribution plan. The defined benefit rate will no longer be reduced by the defined contribution rate for hybrid plan members and will be paid in full.

Employers will make per-payroll payments to MissionSquare that include:

• Mandatory 1% employee and employer defined contributions, based on the member's creditable compensation for that paycheck.
• Employee voluntary contributions, based on the member’s creditable compensation for that paycheck.
• Employer match to member’s voluntary defined contributions, based on the member’s creditable compensation for that paycheck.

Key Points

• Withhold and remit mandatory defined contributions from every paycheck, even if the employee starts or leaves mid-month or you have 26 or 52 pay periods.
• Defined contributions payments to MissionSquare will continue to vary based on each employee’s voluntary contribution percentage.
• You will no longer divide the employee’s annual creditable compensation evenly over 12 months for the defined contribution component. Instead, the defined contribution deductions will be based on the employee’s creditable compensation for that pay period.

Update Your Payroll System

Depending on the payroll structure you have in place, you will need to contact your third-party payroll provider, meet with internal technology staff or update the internal spreadsheet or software you use to track contributions.

Starting in July, the defined benefit and defined contribution rates will no longer be linked.

Currently your payroll system, software or spreadsheet likely has the defined benefit employer rate reduced by the hybrid defined contribution employer match and mandatory rate.

Prepare now to disable or discontinue any programming or calculations that link the defined benefit and defined contribution rates in your payroll processing so that you are ready by July 1.

With rate separation, the VRS snapshot will no longer show the estimated defined contribution amount. Therefore, calculations to determine amounts to withhold and remit to MissionSquare should occur within your payroll system.

Historical defined contribution component amounts and any outstanding adjustments will continue to be visible and maintained in the member’s historical record in myVRS Navigator for all snapshots that occurred before July 2024.

Schools and Higher Ed

If you do not currently withhold defined contributions during the summer (off-contract months), you will need to make a process change. The IRS requires defined contribution plans, such as 403(b) plans, to take contributions from each paycheck.

NoteFor less-than-12-month contract employees, defined contribution deductions per pay period will begin at the start of the new contract. For 12-month employees on 12-month contracts, the change is effective July 1.

Batch Filers

Although you will see changes in how defined contribution information is displayed in myVRS Navigator, there are no changes to the batch file format. You should test your payroll system changes for rate separation internally. However, there is no need to test with VRS because the file format you send to VRS will not change.

Budget for Contribution Payments

• You will need to budget to pay a fixed defined benefit contribution rate to VRS each month for all employees, including hybrid plan members.
• You will need to budget for the employer mandatory and the employer match to member voluntary defined contributions remitted to MissionSquare each pay period.

Look Forward to Fewer Reconciliation Issues

• Address existing payment reconciliation issues in your system now and strive to stay current leading up to rate separation.
• Consider whether you need to update your internal reconciliation and reporting processes or policies to be ready for rate separation.
• Starting July 1, you will continue to reconcile the defined benefit amounts withheld from employees’ paychecks to the amounts on the VRS monthly snapshot.
• You will reconcile the defined contribution amounts withheld from employees’ paychecks to the amounts remitted to MissionSquare Retirement each pay period. Contact employer support at MissionSquare Retirement to request a Source Detail Report, which will provide a detailed breakdown of amounts remitted by plan, individual member and source for a specified timeframe to match against payroll.

If we hire an employee after the 15th of the month, they do not receive their first payroll until the following month. When should we send the employee's contribution to MissionSquare?

Contributions are withheld when the person is paid; no contribution is required until the first payroll, which would likely be in the subsequent month.

How will MissionSquare determine if we sent the right amount?

MissionSquare will expect to receive contributions for members in an active status, but they will not validate the amounts received. Likewise, they will not expect contributions for someone in a separated status.

For dual-employment situations, if we are the non-covering employer, do we make DC contributions on behalf of the employee since the DC plan will be separate?

No, all retirement contributions only come from the employer covering the active hybrid plan member.

Are defined contribution deductions based on creditable compensation, or should they also come out of bonuses, overtime or leave pay?

Bonuses, overtime and leave payouts are not considered creditable compensation. The definition of creditable compensation is unchanged and applies to both defined contribution deductions and defined benefit deductions. Refer to the Creditable Compensation Job Aidfor a refresher.

If we are remitting contributions monthly for the defined contribution component, even if we have 24 payrolls, can we continue to remit monthly to MissionSquare?

No. Per IRS regulations, defined contribution deductions should be withheld and remitted each pay period to ensure timely investment of the member’s contributions. (Monthly remittance was permitted previously because the defined contribution rate was blended with the defined benefit rate.)

Is taking defined contributions 26 times a year versus the current 24 times a year optional or mandatory when the legislation goes into effect?

You do not need to change your payroll schedule; however, you should review how often you currently withhold defined contributions for Hybrid Retirement Plan members. Starting July 1, 2024, each and every time you run payroll, you should withhold defined contributions from hybrid plan members’ creditable compensation.

Will there be any impact to the employer processing of the 1% defined contribution (DC) employer mandatory contributions for hybrid members on long-term disability who are approved for Social Security Disability Insurance?

For this group of employees, VRS, or the employer with a comparable local disability plan, contributes the 1% mandatory employer DC contributions to MissionSquare monthly, according to the employee’s salary reported in myVRS Navigator. The procedure, which is based on the Code of Virginia § 51.1-1172, will not change following hybrid rate separation. VRS will continue to base the 1% employer mandatory contributions on the reported salary. Employers with a comparable local disability plan should do the same.

We hire employees on less-than-12-month contracts; does rate separation begin for this group on July 1, 2024?

For less-than-12-month contract employees, rate separation begins with the start of their next contract (e.g., September 2024). Rate separation does begin July 1, 2024, for all regular (12- month contract) employees.

When should new teachers – who are hired in the summer but don’t start work until September – be enrolled in myVRS Navigator?

Employers can enroll new hires in myVRS Navigator (either online or via batch) up to 60 days in advance of their start date. Employers don’t have to change the employment start dates or contract dates they typically enter in myVRS Navigator. Enrollment is a crucial step and allows MissionSquare to create the account so that payments can be accepted. Payments received for employees without a member record will be rejected with an error message.

Why should we enroll members early in myVRS Navigator since hybrid plan members can't designate voluntary contributions until the end of the quarter?

Enrollment in myVRS Navigator also establishes the account with MissionSquare. Without an account in place by the employee’s first paycheck, all defined contributions – including the mandatory 1% the employer makes on behalf of the member – will be rejected.

How often should employers send batch files?

VRS recommends sending batch files frequently; however, we recognize employers may not be in position to do so. Evaluate your hiring schedules and consider sending batch files weekly or bi-weekly, especially at the beginning of the school year when most new hires are coming on board, for school employers. Sending batch files more frequently than monthly can reduce contribution rejections and reconciliations.

If I report my teachers in 10-month contracts over 10 months, but I pay them over 12 months, do I need to start withholding and submitting defined contributions during their off-contract months?

Yes, you should withhold and submit defined contributions for hybrid plan members from every paycheck. If you pay a teacher over 12 months, you will withhold and submit defined contributions from each of those months. For example, a teacher on a 10-month contract who is paid over the 12 months would have defined contribution deductions withheld in the summer months.

If teachers are hired in August, but not enrolled until September, where do we send the contributions if we start the defined contribution deductions on their first payroll?

Defined contributions also begin with the first payroll, regardless of actual hire date. Employers can enroll employees in myVRS Navigator up to 60 days prior to the reported start date. MissionSquare will continue to receive enrollment and maintenance records from VRS every business day. Contributions can be remitted with the first check as long as the record is established in the MissionSquare system, which takes two to three business days after enrollment in myVRS Navigator.

Employers who enroll using a batch file should consider sending enrollment batch files more frequently to ensure the enrollment records are set up with MissionSquare before the employee’s first paycheck.

How will we reconcile our DC contributions if the information will no longer be available on the VRS snapshot?

Good news—with rate separation, there will no longer be a need to reconcile defined contributions for hybrid plan members with the monthly VRS snapshot. That’s because the expected hybrid contribution amount will no longer appear on the VRS snapshot. Defined contributions will simply be a percentage of creditable compensation for each pay period the employee receives a paycheck.

To prevent reconciliation issues with MissionSquare, employers should review hybrid member contributions each pay period to ensure that the percentages withheld are accurate and include the mandatory 1% from the employee, along with any voluntary contributions elected by the employee. In addition, you also should ensure that employer contributions, including the mandatory 1% and any match to members’ voluntary contributions are also paid timely.

Note Historical defined contribution component amounts will continue to be visible in myVRS Navigator for all snapshots that occurred before July 2024 and also maintained in the member’s historical record.

What is the impact to employees due to this change?

The hybrid rate separation will be seamless for most employees. Employers will deduct employee contributions for the defined contribution component of the hybrid plan from every paycheck, a practice already familiar to most hybrid plan members.

Teachers and higher education personnel on 10-month contracts paid over 12 months will have defined contribution deductions withheld in the summer months, which may be a change. Yet, the total contribution amount for the year is the same.

Employees who are paid 26 or 52 times per year will also have defined contributions deducted from every paycheck, which may be a change. Again, the total contribution amount for the year remains the same.

When will employers know the new defined benefit rates?

The VRS Board of Trustees has approved the contribution rates for FY 2025-2026 for the state and teacher plans; however, these rates require final approval by the General Assembly in the 2024 legislative session. Contributions rates for political subdivisions will be communicated to each employer in first quarter 2024.

Will the process for handling forfeited monies in defined contribution accounts change with hybrid rate separation?

There will be no change. Forfeited monies may be used to offset employer hybrid 401(a) contributions for the months of November and December.

When will VRS allow hybrid plan members to designate their voluntary contributions monthly rather than quarterly?

Contribution changes will be allowed monthly starting in January 2025, when VRS transitions to Voya as the third-party administrator for defined contribution plans.