Saturday, February 21, 2009

Tier 4 members and 10 year cutoff of 3% contributions

As of 2000 the Tier 4 pension law was changed with respect to the required time period that a member must contribute 3% of each paycheck to the pension system NYCERS, TRS, and BERS. The old 30 year time frame was changed to a 10 year period of "credited" service or 10 years as a member (strange, but that is the wording in the law). Credited service includes paid employment (in "city service") as a member of the retirement system and any prior service that was purchased or that was transferred from another N.Y.S. pension system. Purchased military service also counts towards credited service.

A member of the pension system can purchase service at anytime while he/she is a member of the pension system but that service is only credited to the member after he/she has earned two years of membership service.

The reason I am raising this issue is that if a member postpones buy back prior service, he/she may wind up paying more money into the pension system than he/she has to.

For example: a member, with two years of membership service who buys back eight years of prior service with a lump sum payment, no longer has to pay the standard 3% Tier 4 payroll contribution as of the date of the deposit of the lump sum.

The cost of the purchased service is 3% of the original payroll earnings brought forward with 5% interest.

A member may purchase prior service by payroll deductions. It is, however, more complicated to nail down the exact date on which a member has ten years of credited service. The pension system is required to make that determination.

If that same member waits until he/she has been a member for ten years (anniversary date), he/she will pay a higher cost for the purchased service because of the higher interest charge due to the longer time period. More importantly that member will also have paid 3% of his/her earnings for the eight years of membership service and the additional eight purchased years.

The clear lesson is buy the service as quickly as possible. For tax purposes you should use the "457" Deferred Comp plan option to make the lump sum payment. Generally you should try to save some money in the "457" plan offered by NYC (there is also a "401k" plan) but be very careful with the investment options.

One caveat: Once you are credited with ten years of service, your vested benefit is locked in and you can not withdraw your 3% contributions from the pension system if you resign from "city service". You can still transfer to another N.Y.S. pension system.

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