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Enhanced benefit

Ken Davis

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Since beginning work at the university a group of faculty members also began work at a related 501©(3) organization, and received compensation from both employers. The "dual" employees will soon leave the 501©(3) and become 100% university employees. Their university compensation in the future will equal 100% of their present combined compensation from the university and the 501©(3).

The state teachers' retirement system has told us the faculty members will retain their creditable years of service for purposes of calculating retirement benefits. But, without the faculty members buying enhanced benefits, the compensation on which their retirement benefits will be calculated will be proportionately equal to the ratio of their university compensation to total combined compensation, calculated immediately before their move to the university.

I read PLR 200229051, which said that a voluntary purchase of enhanced benefits would not come under 415(n). The benefit would be equal to 2% for each year of service, up to 80% of compensation. As understand it, the reason given by the IRS was that the enhanced benefits related to years for which service credits were already been received, and this is not allowed under 415(n)(3)(A)(ii).

But the ruling doesn't say what the effect would be if a participant made a voluntary contribution to purchase enhanced benefits. Can someone help me out with the effect? Does it mean that the plan must meet 415©, and can't use 415(B) [as would normally be available when voluntary contributions are made to purchase permissive service credits]? Any other effect?

There are a couple of possible sources of funds for the purchase - aftertax cash and rollovers of qualifying distributions from existing 403(B) accounts (the 501©(3) doesn't sponsor either a 403(B) or a 457(B) plan). I assume trustee-to-trustee transfers from 403(B) and 457(B) accounts would not be available because the enhanced benefits do not meet the definition of permissive service credits. Correct?


Ken Davis

Univ. of South Alabama

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