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November 07, 2008
Do Contributions to Retirement Accounts Count as Earnings?
When an injured North Carolina employee applied for workers' compensation benefits, he wanted the commission to include his employer's contributions to his two retirement accounts in his average weekly wage. Was he correct?

What happened. "Nicholas" worked as a fleet service worker for U.S. Airways. He participated in two retirement programs. The first was a 401(k), into which Nicholas deposited a certain percentage of income; U.S. Airways matched 50 percent of his contributions up to two percent of Nicholas's eligible compensation. The second retirement program was a pension plan funded entirely from contributions by U.S. Airways.

In 2000, Nicholas hurt his back while lifting luggage. He applied for workers' compensation. U.S. Airways reported his average weekly wage as $825.55. This amount did not include U.S. Airways' contributions to either of Nicholas's retirement accounts. In the previous 52 weeks, U.S. Airways had contributed $1,798.33 to Nicholas's pension plan and $899.17 to Nicholas's 401(k). Including those amounts would have increased Nicholas's average weekly wage by $51.87.

Nicholas requested a workers' compensation hearing because he and U.S. Airways could not agree on whether or not U.S. Airways' contributions to his retirement plans should have been included in his average weekly wage. After a hearing, a deputy commissioner decided that the contributions should not be included. Nicholas appealed to the full North Carolina Industrial Commission, which affirmed the deputy commissioner's decision. The Commission concluded that the contributions were not earnings, but were instead fringe benefits.

Nicholas appealed. The Court of Appeals reversed the Commission's decision. This time it was U.S. Airways' turn to appeal--to the state Supreme Court.

What the court said. The question before the court was whether the employer's contributions to Nicholas's two retirement accounts should be included in Nicholas's "average weekly wage" as defined by the Workers' Compensation Act, (NC Gen. Stat. Sec. 97-2(5)). The law provides several methods for calculating average weekly wage, but the explanation of the most common method states that 'Average weekly wages' shall mean the earnings of the injured employee in the employment in which he was working at the time of the injury during the period of 52 weeks immediately preceding the date of the injury divided by 52."

The case turned on the meaning of the word "earnings." Nicholas argued that retirement contributions were earnings because they represented economic gain to him and valuable consideration for his employment. U.S. Airways argued that they were not earnings because the law does not specifically include fringe benefits.

The state Workers' Compensation Act does not define the word "earnings." The Act was adopted in 1929, at a time when few employers paid fringe benefits. Since the law was passed, the language describing method for calculating average weekly wages has remained essentially unchanged. The only real change to the language was a 1947 amendment including subsistence allowance paid to war veteran trainees in "earnings." At no point has the state legislature ever mentioned fringe benefits in its amendments of the law.

The Supreme Court concluded that the legislature has never intended to include fringe benefits in earnings. This interpretation is similar to that of the U.S. Supreme Court in Morrison-Knudsen Constr. Co. v. Dir., Office of Workers' Comp. Programs, U.S. Dept. of Labor,No. 81-1891 (1983), the Supreme Court's leading case on the issue of fringe benefits in the federal workers' compensation system.

In that case, the Court concluded that an employer's contributions to an employee's health and welfare pensions are not part of wages when calculating workers' compensation benefits. The North Carolina Supreme Court therefore reversed the Court of Appeals' decision and held that U.S. Airways' contributions to Nicholas's retirement accounts did not count as earnings. Shaw v. U.S. Airways, Inc., Supreme Court of North Carolina, No. 580A07 (2008)

Point to remember. An employer's contributions to an employee's retirement account are not considered earnings for the purposes of calculating workers' compensation benefits.

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