One factor in the formula used to determine your pension is "years of credited service." The more years of credited service you have, the greater your maximum annual pension allowance will be when you retire. Based on your class of service, service credit is also used to determine when you vest in SERS and qualify for other benefits, like disability retirement.
There are specific situations in which the Retirement Code allows you to "purchase service" and increase the amount that is credited to your retirement account. You can only purchase service while you are an active, contributing SERS member; you cannot purchase service after you leave state employment or while you are on a leave without pay.
If you are interested in purchasing service, call your retirement counselor at 1.800.633.5461. Information here provides only a very broad overview. There are a number of specific situations - such as purchasing USERRA-covered military service, for example - that require special consideration and, in every instance, the cost of any purchase must be determined by SERS.
Types of Purchasable Service
Putting a Price on Time
While working in state service, both you and your employer contribute to SERS. Contributions are based on your class of service and are set as a percentage of your salary, so the dollar amount grows as your salary grows. We pool all employee and employer contributions and invest them to earn compounding returns. When properly funded, the amount contributed and the amount earned over your career is enough to ensure that your pension is fully funded when you retire.
The principle behind purchasing service is the same. There are different formulas for purchasing different kinds of service but, in general, they all include some consideration of your salary, the amount of time you worked, the amount of employer and/or employee contributions that would have been paid, and compound interest.
Purchasing service can involve significant sums of money. You have several options for making payments:
Lump sum - You can make one lump sum payment within 30 days of the invoice (see below) to avoid additional interest.
Partial lump sum, with installments - You can pay at least one-third of the total cost within 30 days of the invoice (see below), then pay the remaining balance by payroll deductions over one to six years. You will be required to pay the purchase amount plus statutory interest of 4%, compounding annually, over the length of time you are paying payroll deductions. Paying the balance early does not reduce the total principal and interest due.
Installment payments - You can make the entire purchase with no money up front, paying the total cost by payroll deductions over one to six years. You will be required to pay the purchase amount plus statutory interest of 4%, compounding annually, over the length of time you are paying payroll deductions. Paying the balance early does not reduce the total principal and interest due.
Actuarial reduction - You can choose to make no payments while you're working by asking SERS to credit your purchased service immediately, then reduce the present value of your benefit when you retire by the purchase amount plus statutory interest of 4%, compounding annually, over your entire commonwealth career. (Please see the exception related to USERRA-covered military service.)
Final & Binding Decision
Once you have entered into an agreement to purchase service with SERS, the agreement cannot be canceled even if events in your life unfold in such a way that the purchase does not increase your benefit at the time of retirement or death.
After you submit your service purchase form, we will send you an "Invoice of Amount Due." You have 30 days from the date of the invoice to select a payment option or to notify SERS that you no longer wish to purchase the service.
If you do not respond within 30 days, SERS assumes that you have elected the actuarial reduction option. We credit your account and establish an actuarial debt. At that point, an agreement between you and SERS has been established and cannot be canceled.
If you respond within the 30 days provided and notify us that you no longer wish to purchase the service, in most cases, you may purchase the service later as long as you are an active, contributing member of SERS. (Please see the exception related to USERRA-covered military service.)
While the contributions you make to SERS as an active, contributing member get preferential tax treatment, generally, the amounts paid to SERS to purchase service must be made on an after-tax basis. Please see IRS Publication 575, "Pension and Annuity Income," or contact a tax professional for more information.
If you have funds in another qualified plan, such as the deferred compensation plan, you may be able to rollover the amount needed to purchase service in SERS. Contact a tax professional to determine if this would be to your advantage.