What Is the Difference in an Eligible & Ineligible Salary?

The terms "eligible" or "ineligible" apply to salary when calculating your income for retirement benefits. These terms are often used in calculating benefits for a pension fund where the future payment depends on current reported earnings. Eligible salary may be counted in your annual income to determine how much you earned this year or, in some cases, in a highest earning year, while ineligible salary is not reported.

Generally, eligible salary includes all regular wages and paychecks earned as part of a compensation agreement. For example, if you sign an employment contact that guarantees your salary will be $50,000 in a given year, your eligible salary is $50,000 for that year.

Ineligible salary may include any bonuses, special compensation or vacation compensation you received in a given year. For instance, if a public school teacher receives a signing bonus, this may be considered ineligible salary in her pension plan. The same may be true of specific bonuses given based on performance. Ineligible salary is compensation above and beyond the regular wages expected and paid based on an employment contract. Ineligible pay may include longevity pay, a lump sum for unused sick leave, wellness pay or workers' compensation.

Most pension plans use some form of "highest earning year" or "highest five earning years" calculation to determine future benefits. For example, if you are a teacher in a public school system, you may receive a percentage of income of your highest five earning years average for the remainder of your retirement. That average depends heavily on how much income you reported in your highest five earning years. If you earn bonuses and extra compensation during these years, you may be tempted to add this to your eligible income. It cannot be added with most pensions, but some private companies use a different system, so review the bylaws of your pension fund and applicable guidelines for your eligible salary calculation.

Assume a school teacher's salary this year was $65,000. She also received $1,000 in a lump-sum payment because she did not use her sick days and earned a $2,500 in bonus money because her class was named "Most Improved." Her total pay was $68,500; however, when it came time to report this to her pension fund, only the original $65,000 in eligible salary was reported. When calculating earnings for her highest five years, the sum entered for this year will be $65,000.