IRS Makes Service Credit Purchases Post-Tax


Prior to 2014, ACERA allowed members to purchase service credit through pre-tax payroll deductions for certain ineligible employment with our participating employers, as well as redeposit their contributions from prior memberships. For years, the IRS approved pre-tax service credit purchases through payroll deductions based upon the pre-tax provisions in Internal Revenue Code (section 414(h)(2)).

In late 2013, the IRS provided new guidance on using pre-tax payroll deductions for employee contributions which provides that pre-tax payroll deductions can only be used for mandatory contributions, not for voluntary contributions, like service credit purchases and redeposits. Therefore going forward, you can make pre-tax service credit purchases and redeposits by rolling over funds from an eligible pre-tax retirement account such as a 457 plan, a 401K, or an IRA, and you can make purchases with a lump sum payment or through monthly payroll deductions on a post-tax basis.

If ACERA did not implement the revenue ruling guidance, it could result in large economic risks to ACERA’s participating employers and/or to ACERA’s tax exempt status.

This change will apply to all service credit purchase contracts received by ACERA on or after January 1, 2014.