Methods for repurchase of service credit

[Guest Brad Goodsell]

We're looking for some guidance on the following issues from those who may have already addressed them.

Facts:

DB plan provides for optional repurchase of service credit where former member (who received a separation benefit) is again employed by a plan employer.

DB plan permits repurchase to be made by means of an irrevocable salary reduction agreement (ISRA), which qualifies as picked-up contributions under IRS Code section 414(h)(2).

Because of interest rate changes, some ISRAs now provide for payments that are inadequate to satisfy even current interest charges.

Issues:

1. Can members execute an additional or multiple ISRA(s) to increase their repurchase payments, so long as the amount or percentage deducted each pay period under the original ISRA is not reduced?

[At least one PLR (9741049) seems to indicate that this is permissible.]

2. May a member make a direct lump-sum payment to either reduce or eliminate the balance owned, so long as the amount or percentage provided under the original ISRA is not reduced?

[This would appear to have the same effect on the original ISRA as additional ISRAs (issue 1), that is, to reduce the amount of time the original ISRA will be in effect; it does not change the terms of any ISRAs. Once the repurchase amount has been paid, all ISRAs would expire.]

[Guest Ralph Amadio]

Is your presumption that all "buyback" service credit amounts are 414(h)(2)?

If so, I would apply for a plr to affirm, particularly if lost service credit was allocable to years before the inception of 414(h)(2)

As to the other issue, it would seem prudent to tie the interest rate in the buyback agreement to a current funding or earnings index of some sort, otherwise you may be creating a fiduciary problem of sorts.

[Guest CVCalhoun]

By the way, for anyone who missed PLR 9741049, you can click here to see a National Association of State Retirement Administrators ("NASRA") news release which includes a summary of it.

[Note: This message was edited by CVCalhoun]