Case of the week: purchase of service credits in a defined benefit plan


The ERISA Consultants at the Retirement Learning Center Resource Desk receive regular calls from financial advisers on a wide range of technical topics related to IRAs, Qualified Pension Plans, and other types of Retirement Savings Plans. We bring you Case of the Week to highlight the most relevant topics affecting your business.

A recent call with a Minnesota financial advisor is representative of a joint investigation related to government plans. The counselor asked:

“My client has a job with the government. She asks me about the purchase of service credits in her pension plan. Can you explain what she might be talking about?

Highlights of the discussion

Typically, service credit is credit for work performed for which your client can earn a benefit under a defined benefit pension plan. Many states allow their public employees to purchase permissible service credits for previous years of service that would otherwise not count towards the pension. This usually happens when an employee terminates a government job before it is acquired, but later becomes employed in another government position. [IRC §415(n)]. To purchase the service credit, the employee must pay an additional voluntary contribution, in an amount determined under this government plan, which does not exceed the amount necessary to finance the benefit attributable to this service credit. [IRC §415(n)(3)(A)(iii)].

Whether a government employee can purchase service credits depends on the particular pension system. If eligible, the pension system determines the cost. The plan generally limits the number of years of service credit a member can purchase. The retirement system typically offers different payment options, which may include the following:

  • A lump sum payment for the total cost;
  • Payroll deductions over a period of time; and
  • Direct rollovers or trustee-to-trustee transfers of amounts from a qualified plan (including a 401 (k) plan, 403 (b) plan, or 457 plan).[1]


Since the ability to purchase service credits in a government defined benefit plan depends on the particular pension system, reviewing the plan’s specific documentation and forms is essential to determine if the option is available, what payment methods can be used and how to request the purchase.

Any information provided is for informational purposes only. It cannot be used for the purpose of avoiding penalties and taxes. Consumers should consult their tax advisor or lawyer about their particular situation.

© 2019, Retirement Learning Center, LLC. Used with permission.

[1] The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) expands the third option to allow the transfer of funds from the 403 (b) and 457 plans on a pre-tax basis to purchase service credits, or to repay previous withdrawals benefits, in government defined benefit plans. Previously, these transfers were only allowed from qualifying plans, such as 401 (k) plans.


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