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Permissive Service Credit

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A governmental defined benefit plan is a unit benefit plan with a 5% mandatory contribution feature. The Plan permits active participants who have at least 10 years of in-state participation to purchase up to 3 years of service credit for active status (not active service) in the state's national guard. "Active status" requres serving in the national guard unit one weekend per month and 2 weeks in the summer.

The amount of service credit which is purchaseable is based on the ratio of 5 years of active status to one year of available service credit. Therefore, an active member would need 15 years of active status in the national guard to purchase three years of service credit. Service purchases under this provision are not recognized for purposes of satisfying minimum service requirements for retirement or other benefits. The purchased service credit is recognized solely for determining the amount of benefit payable under the Plan's unit benefit formula: 2% of average final compensation times years of credited service.

For the example below, I would appreciate opinions as to the meaning of Internal Revenue Code Section 415(n)(3)(A)(ii) which provides that permissive service credit means service credit "which such participant has not received under such governmental plan".

Consider a full-time employee who is accruing service under a governmental plan based on his employment as a governmental employee. Simultaneously, he is in active status with the state's national guard. If between 1990 and 2004, the employee accrued 15 years of service under the plan as a state employee and during the same period, had 15 years of active status in the national guard, could he purchase 3 years of service credit for his active status in the guard, using the above described 5 years to 1 ratio?

One line of thinking would be that since he already accrued 15 years of service under the governmental plan between 1990-2004 as a state employee, he could not use his national guard service which occurred in the same period, even on the 5 to 1 ratio, to purchase 3 years of service credit without violating Internal Revenue Code Section 415(n)(3)(A)(ii).

Another line of thinking would be that the phrase service credit "which such participant has not received under such governmental plan" refers not to the specific time period 1990-2004 but rather to the type of service; specifically, the participant had not already received service credit under the plan for service related to active status as a member of the national guard. Further, he would receive credit for national guard time only by making an additional voluntary contribution. The period of 1990-2004 is only a yardstick to determine if the participant had 15 years of national guard service. If he individual is allowed to purchse three years of service, those 3 years are not credited to a specific calendar year(s). The additional 3 years are used merely to increase the participant's ultimate benefit.

If you agree with the first line of thinking, what would be your position on the purchase of 3 years of "air time" if for an individual's entire work history he accrued service credit under a governmental plan resulting from his position as a full-time state employee?

Thoughts, please?

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  • 3 years later...

My strong view is that purchasing the service is permissible in this situation. Note the following provision of 415(n)(3):

Such term [Permissive Service Credit] may include service credit for periods for which there is no performance of service, and, notwithstanding clause (ii), may include service credited in order to provide an increased benefit for service credit which a participant is receiving under the plan.

The stuff after the "(ii)" is the important part. By purchasing service, he is effectively increasing his benefit by 20% for the same 15 years of service. Besides, I think the second reading is the natural one, and your point about air time is bang on.

I am not an attorney, but I can pretend to be one on this message board.

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