Under the MERS Defined Benefit Plan, participants earn service credit for each month of eligible work. With the approval from the employer, participants can purchase service credit to help them meet early retirement eligibility or increase their pension. Unlike MERS-to-MERS or Act 88 time, purchased service credit cannot be used to reach vesting. Here are some general points to remember:
- The governing body for the employer must approve all purchases. For the purposes of streamlining service credit purchase approvals, a blanket resolution (or administrative order) may be on file with MERS. This agreement provides uniform approval of employee service credit purchases for a specific situation (e.g., all military time, or requests to purchase time where the employee was hired before a specific date) without the approval by the municipality’s governing body every time this situation is present.
- Minimum purchase is one month.
- Purchased service credit cannot be used to meet vesting requirements.
- Hybrid participants are not eligible to purchase service credit.
- Service credit purchases may be paid for by the employee, employer or both.
- Participants may be able to transfer assets from other accounts to make a payment for the purchase, such as: 457 Deferred Compensation Plans; 401 plans; 403(b) plans; and some IRAs (traditional, Roth, and SIMPLE).
There are three different types of service credit available for purchase; there is no difference in cost:
- May purchase a maximum of five years.
- Generic service is counted for benefit and eligibility purposes, but is not counted for vesting.
- This service type may be purchased before the participant is vested.
Other Governmental Service Credit
- May be purchased if the participant worked full-time for another governmental agency (federal, state, local, or federally recognized Indian tribal government) and is not going to receive a retirement benefit from them.
- Participant must provide verification of service from the governmental entity.
- May purchase up to the full number of years worked (e.g., if you’ve worked 10 years, you can purchase up to 10 additional years).
- Cannot purchase service credit after a break from previous employment of more than 20 years.
- If hired prior to July 1, 1997, may use purchased service time for vesting requirements.
- MERS enrollment must predate 7/1/1997 to purchase military time.
If you choose not to provide employees the opportunity for service credit purchases, you will need to complete and return a Service Credit Purchase Provision Form (DB-004), so that MERS is aware of your decision.
If you already have a blanket resolution on file regarding service credit purchases, the purchase can be approved by an authorized signer.
Is there any difference in cost between the three types of service?
No, there is no difference in cost between the three types of service.
For what length of time can an Application for Additional Service Credit Purchase be calculated for?
The application can only be calculated for the exact number years/months that a participant anticipates purchasing.
How long are calculations valid?
Calculations provided expire two months from the calculation date.
Are service credit purchases refundable?
No, they are not refundable.
The cost to purchase service credit is based on many factors and, similar to the Annual Actuarial Valuations, cannot predict the exact cost of the benefits. This is because assumption are for the long-term and actual plan experience will not exactly match the actuarial assumptions (except by coincidence).
Below is a description of the key data and assumptions that impact the calculation of the cost/liability for service credit purchases:
Projected Earliest Eligible Retirement Date
The earliest date the participant would be eligible for retirement is projected both before and after the purchase of service credit and is used in this calculation. These two dates are calculated using:
- The participant’s date of birth
- The amount of service credit reported by the municipality
- Other service credit that we have on record (such as MERS-to-MERS or Act 88 time)
Incomplete or inaccurate data can affect the cost estimate. We encourage employers to validate participant data through their MERS Employer Portal on a regular basis.
The projected earliest eligibility retirement date can also be affected if the employer adopts different benefit provisions in the future and the participant becomes eligible to retire earlier. In addition, if the participant chooses to retire on a date that is different than the projected earliest eligible retirement dates, this will change the projected cost.
Projected Final Average Compensation (FAC)
Using the participant’s current FAC, we project increases in FAC out to the participant’s earliest eligible retirement dates before and after the purchase. Based on the most recent five-year Experience Study, the MERS Retirement Board recently adopted a 3.00% future annual increase assumption.
The projected FAC is dependent on the wages reported by the municipality to MERS. If the assumed increases end up being lower or higher than actual future increases, it may increase/decrease the actual cost of the purchase of service.
Projected Service Credit
Projected service credit is also used in this calculation using the service credit reported by the municipality to MERS. The participant may not earn service credit for every month from the current date to the earliest eligible retirement date before and after the purchase of service credit, as assumed. This could result in the participant not being eligible to retire on the dates assumed and could affect the cost projection.
The current benefit plan provisions are used to calculate the cost of purchasing service credit. If the participant transfers into a different division and is eligible for a benefit plan with different provisions, then the cost may differ from the initial calculation. Likewise, costs may differ if the municipality adopts different benefits in the future for any participant that has purchased service credit. These changes will be reflected in the actuarial valuation required to adopt any benefit increase.
The Retirement Board approved a 6.35% investment return assumption based on the most recent five-year Experience Study. The actual cost of purchasing service credit will be different if this assumption is not met.
Assumptions are made on the expected lifetime of the participant and their surviving beneficiary. If the date of the participant’s or beneficiary’s death is earlier or later than assumed, there may be a decrease/increase in the actual cost.