Service Purchases - KP&F
Types of Automatic Service Credit
Benefits
Advantages of Purchasing Sooner
Cost
Process
Lump-Sum Purchases
Payroll Deductions
Rollovers and Trustee-to-Trustee Transfers
Types of Service Purchases
Forfeited KP&F Service
Military Service
Forfeited KPERS Service
FORMS
KPERS-10 Employer Certification of ServiceKPERS-67 Service Credit Purchase Application
KPERS-67R Service Credit Purchase via Rollover
KPERS-67PS Application to Purchase Public Service
KPERS 67T Service Credit Purchase with a Trustee-to-Trustee Transfer
Service Credit
Service credit is one of the factors used to calculate a member’s retirement benefit.
Years of service x multiplier x final average salary = annual retirement benefit
Years of service include prior service, participating service and purchased service.
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Types of Automatic Service Credit
Credit for an employee’s service with an employer before the employer became affiliated with KP&F. Continuous service immediately before affiliation will be credited to the member.
Prior service has a multiplier in the retirement formula of 2.5.
To verify prior service:
- Complete an Employer Certification of Service form (KPERS-10).
- The designated agent where the prior service was performed must sign the KPERS-10 form verify prior service.
If a member leaves covered employment and withdraws from KP&F, the following applies:
- All service credit is forfeited. Prior service also is forfeited.
- The member may repurchase service once the member is a contributing member of KPERS again.
- Once the forfeited service is repurchased, all prior service will be credited.
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If a member is employed by a participating employer that affiliated for future service only, the member’s service before the employers’ KP&F entry date will remain in the KPERS system and the member will be entitled to receive a monthly retirement benefit from each system.
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Credit for an employee’s covered employment. It accrues by quarters and is granted for any quarter in which a member contributes to the Retirement System. Participating service is credited according to the agency’s period of service dates or payroll dates. Pay for service in the last week of December in some cases could result in service credit in the first quarter of the next year.
Participating service has a multiplier in the retirement formula of 2.5.
When a member retires, the participating service quarters are converted to years to determine the member’s participating service credit basis. At retirement, two quarters round up to the next full year of credit. For example, 23 years and two quarters of service rounds up to 24 years.
If a member has participated in one or more of the retirement systems administered by the KPERS Board of Trustees, combined service credit can be used to determine eligibility for retirement.
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Purchasing Service Credit
Purchasing service credit has no affect on final average salary for retirement purposes.
- Increases a member’s years of credited service
- Increases a member’s retirement benefit
- Possible earlier retirement
- Spousal eligibility for survivor benefits may be enhanced
- Purchasing by payroll deduction lowers a member’s adjusted gross income for income tax purposes
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Advantages of Purchasing Sooner
- Cost increases with member’s age
- Cost becomes higher as salary increases
- Only active members may purchase service credit
- Lump-sum purchases have certain per-year dollar limits under qualified plan requirements, and the purchase may have to be spread over more than one year
- A last minute purchase could delay retirement
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Cost is based on the actuarial value of the service being purchased. The value is established in part
by using the higher of the following:
- The member's current annual salary (hourly rate of pay multiplied by the number
of hours of work the position requires per year) or - The amount of compensation the member earned in the last 12 months
(this would include overtime, etc.) or - The member's final average salary
The cost is also based on the member's age at time of application.
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- Employee contacts designated agent or KP&F to see if past service is eligible.
- If service is eligible, designated agent or KP&F will tell employee which form to complete.
- Employee completes an application to purchase service credit and gives it to his or her designated agent.
- Designated agent completes the rest of the form and sends it to KP&F.
- KPERS calculates the final cost and sends a letter to the designated agent to deliver to the employee.
- The employee signs the necessary paperwork, arranges for payment and returns both to KP&F.
- KP&F receives the money or payroll deduction commitment.
- KP&F adds service credit to the employee’s record after the purchase is completed.
If purchasing by lump sum, the member has 45 days from the date of the letter to send the payment to KP&F.
If purchasing by payroll deduction, the member has 21 days from the date of the letter to send the salary reduction authorization to KP&F. The employer should not begin additional payroll withholding for a service purchase unless the member has sent the salary-reduction authorization to KP&F.
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Members can make lump-sum purchases by personal check, money order or Discover Card with post-tax dollars.
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A member may purchase service credit over time by making additional payroll contributions under a payroll-reduction agreement between the employer and the member. Purchases by this method are made with pre-tax dollars.
This method can either double the regular contributions (to purchase an extra quarter of credit in each payroll quarter), or triple the regular contributions (to purchase an extra two quarters of credit in each payroll quarter). Note: The doubling or tripling of the contributions may be "modified," or made larger, based on the actuarial cost of the service credit. This is referred to as the "modified double- or triple-deduction method." An age actuarial table is used to determine the percentage that is to be taken from the member’s gross wages during the period of the purchase. This period is equal to the number of quarters being purchased.
Examples:
- Purchasing Two Years by Double Deduction (flat or modified): If the member is doing a double deduction to purchase two years of service, the salary reduction will continue for two years (eight quarters).
- Modified Triple Deduction (flat or modified): If the member is doing a triple deduction to purchase two years of service, the salary reduction will continue for one year (four quarters).
Purchase method cannot be changed once payroll deductions have been authorized. This is a fundamental qualified plan requirement for governmental plans selling service credit on a pre-tax basis. KP&F is not allowed to authorize any exceptions. However, if the member is ending employment or applying to retire the remaining service to be purchased may be paid for by lump-sum.
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Rollovers and Trustee-to-Trustee Transfers
Moving money from a current employer’s 457(b) or 403(b) plan to KP&F is called an in-service trustee-to-trustee transfer. Moving money from a former employer’s retirement plan is called a rollover. Both are by lump sum with pre-tax dollars.
Trustee-to-trustee transfers:
There are three requirements for an in-service trustee-to-trustee transfer to purchase KP&F service credit:
- The 457(b) governmental or 403(b) plan must allow an in-service trustee-to-trustee transfer. The State of Kansas deferred compensation plan permits transfers. The employee needs to contact his or her plan administrator to determine if that plan allows the transfers.
- The amount of money transferred to KP&F can be no more than the service purchase cost.
- Only permissive service may be purchased with a trustee-to-trustee transfer.
Rollovers:
Rollovers can be from a member’s traditional IRA or a former employer’s eligible retirement plan. An eligible plan is one qualified under section 401 of the Internal Revenue Code.
- 401(a) tax qualified plan (including a Keogh plan that meets additional requirements)
- 401(k) plan, profit-sharing plan, defined benefit plan, stock bonus plan and money purchase plan
- 403(a) annuity plan
- 403(b) tax-sheltered annuity
- 408(a) individual retirement account
- 408(b) individual retirement annuity
- 457(b) plan maintained by a governmental employer
KP&F can also receive the amount from the member if it was originally distributed to the member from an eligible retirement account and is rolled over to KP&F within 60 days of that distribution. The member's check must be accompanied by proof of rollover eligibility.
With rollovers, the employee must rollover all of the money in his or her account and then close the account after the transaction. Employment with this employer has ended. KP&F will return to the employee any money over the service purchase cost. KP&F can also roll over any excess into an eligible retirement plan to keep the money’s tax-deferred status.
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Types of Service Credit That May Be Purchased
Different service purchases have different criteria. Some are based on state law. Others are based on federal qualified-plan requirements. State law provides that some types of service may be purchased by lump sum only (on a post-tax basis) and others may be purchased either by lump sum or by payroll deductions (on a pre-tax basis) over the number of quarters being purchased. No matter how they are purchased, service purchases have no effect on a member’s final average salary for retirement purposes.
The following service credit may be purchased either by lump sum, trustee-to-trustee transfer, rollover or payroll deduction:
- Forfeited KP&F service – service credit previously forfeited by withdrawal from the System
- Military service
The following types of service may be purchased by lump sum only:
- Forfeited KPERS service
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Service the member had under KP&F that has been withdrawn following a previous separation from service. KP&F will look up the forfeited records to determine the amount of service available to be purchased. Member must purchase all of the service that was forfeited.
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- Active service in the armed forces
- Reserve service to fulfill the initial service obligation
- Service in the commissioned corps of the U.S. Public Health Service
Credit for this service is limited to six years, five of which may be granted at no cost if surrounded by public employment. The amount of service eligible to be purchased is determined by a member’s original obligation, or initial service obligation, on member’s DD-214 military papers (member may submit a photocopy). A member may purchase quarter for quarter for periods of active duty, and one quarter for one year of reserve time. Military service credit cannot be purchased to meet age and service requirements for retirement.
If the member’s application to purchase military service by salary reduction was received in the KP&F office between July 1, 1993 and October 20, 1995, this purchase involves credit for which the actuarial cost was not charged at the time. Payment for this service must be completed at least five years before retirement. If payment is complete but a member retires before five years, either:
(a) the member must pay the full actuarial cost of the service
in a lump sum before retirement to keep the service, or
(b) the member must delay retirement until the end of the five-year period
For salary-reduction military service-purchase applications received after October 20, 1995, this five-year rule does not apply because the purchase price is already based on actuarial cost.
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Service the member had under KPERS that has been withdrawn following a previous separation from service. Forfeited KPERS service may only be purchased by lump sum. This service is added to your KPERS record, not your KP&F record. Forfeited KPERS service is computed at 1.75 percent at retirement.
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IRS Compliance
KPERS is a “qualified plan” under federal tax provisions. Our members contribute on a pre-tax basis, where interest and entitlements accrue without current taxation. KPERS must observe federally mandated restrictions on some transactions. The restrictions limit either the years of service that may be purchased or the amount of money that may be put into the plan in a single calendar year.
Members whose membership date is earlier than January 1, 1999, have been "grandfathered" under federal law and will retain permanently (unless they withdraw) all the service-purchase opportunities that existed under the plan in August of 1997.
Members whose membership date is January 1, 1999, or later may be subject to certain restrictions on their service purchases. Without regard to membership date, any new types of service that are added to the purchase opportunities in the plan after August 1997 are subject to federally imposed restrictions.
The amount of after-tax money that a member may contribute to a qualified plan each year is limited. Please contact the Retirement System for the current year limits. Members cannot avoid paying FICA tax on their contributions. Because of this, it is sometimes not feasible to deposit the full allowed percentage into the retirement plan. This restriction applies only to post-tax contributions, not to regular KPERS withholding or tax-free rollovers into the plan.