Employee Contributions to Boost Pension?

[AndyH]

Employer would like to allow participants to "purchase" service credit to qualify them for early retirement subsidy that they would not otherwise qualify for. Employees are all NHCEs. Is there anything prohibiting this?

I'm not advocating it. I just would like a direct answer to the question: is there anything that would prohibit this?

Thanks for any comments.

[david rigby]

Is this "voluntary contributions"? If so, isn't that accounted for as if it were a separate DC plan?

(In 25+ years, I've never seen voluntary contributions; I could be wrong.)

[SoCalActuary]

Purchase of additional credits is a feature of the CALPERS and CALSTRS plans, among other governmental programs. A formula is provided that allows conversion of hard dollars into DB benefits, as a permanent change in the nature of the funds. This is similar to an annuity purchase, but not exactly the same.

This approach has been used by allowing transfer of pre-tax funds from an existing DC or 457 plan, or from a rollover account. If after-tax funds are allowed, the tracking of tax basis must be considered as well.

The formula may also be different during a time window, such as initial conversion into the system, than the rates that would apply for an ad-hoc change requested by the participant.

A warning: this can be used to unfairly enrich HCEs, who are more likely to have the funds available for the purchase of credits. The conversion rates can also be highly optimistic, based on interest and mortality factors that do not fairly price the added benefit. This may have an effect on the funding ratio of assets to liabilities, which will probably be measured on a different set of assumptions.

[AndyH]

Thanks for the comments.

This is not a governmental plan. It is a private single employer plan. I am familiar with such purchases in governmental settings. It is a union plan so the CBA would be an issue I understand. I didn't want that fact to create tangents though.

I omitted that the plan limits service to 30 years but some want to purchase service credit exceeding the cap.

So, yes, pax, it would be voluntary in a sense. I have never seen it either but the client wants to know if he could permit it.

Clearly there are funding issues, etc. but I don't see those as insurmountable.