Purchase of Service in Governmental Plan and its impact on 403(b) cont

[Guest DianeC]

State retirement plan allows for purchase of service through payroll deduction on a pre-tax basis. The election to participate is irrevocable when made. Retirement system says that these contributions together with contributions to a 403(B) cannot exceed $30,000 annually. If this is being done on a pre-tax basis I thought thatit would be a 414(h) contribution and that it does not impact the 403(B) contribution this way. Can someone give me some ideas on this. If it is true can you explain and if not any code cites, plrs, etc. on this.

[Carol V. Calhoun]

Oh, this one is a real can of worms! Short answer:

1. If the amount used to purchase the service credit consists of amounts previously distributed by the plan, plus interest, it is totally excluded from 415 calculations by I.R.C. § 415(k)(3).

2. To the extent that the amounts go beyond that, the rules of section 415(n) apply. Those rules distinguish between amounts purchased relating to (1) "qualified service" (i.e., any service exempted from nonqualified service under 415(n)(3)©), and/or (2) not more than 5 years of nonqualified service, and as to which the other requirements of 415(n)(3)© are met. In the case of such purchases either 415(B) (maximum limits on benefits) or 415© (the $30,000 limit on contributions) can be used to calculate the maximum contribution/benefit under the retirement system. However, this would affect the 403(B) plan only if (1) the retirement plan is also a 403(B) plan, or (2) the participant makes an election to calculate the maximum limits on contributions under the special rules described in section 415©(4)© (a "C election").

   [*]It is not entirely clear what happens if a plan permits purchases of service credit which do not meet the requirements or It is not entirely clear what happens if a plan permits purchases of service credit which do not meet those requirements of 415(k) or (n)--whether the 415 limits are automatically treated as exceeded, or whether the participant merely loses the election and is stuck with one or the other of the regular limits (perhaps dependent on whether the contributions are picked up or not?). In either event, though, this would be more of a problem for the retirement plan itself, than for the 403(B) plan.

Hope this helps!