Buying Military Service and Payroll Deductions

In 2000 NYS passed a law allowing NYCERS members to purchase wartime military service rendered before they joined NYCERS. (C.548/L.2000). The charge for this service is 3% times the years of service in the military (up to 3 years) times current salary. This amount can be paid in a lump sum or by payroll deductions. The most tax efficient way of paying this charge is by transferring the full amount from the member's Deferred Compensation 457 account, assuming the member has opened such an account. I highly recommend that every city employee opens a "457" account and puts as much money as possible into that account. One caveat, be very careful how you invest it. The investment world has radically changed since October, 2007. In 2007 NYS passed a law (C.627/L.2007) to allow payroll deductions paid to NYCERS for the payment of prior military service to be treated as tax deferred income for the purpose of federal income taxes, but only federal taxes and not state or city income taxes. While the intent of this law was to provide a tax benefit to members buying military service, members already had a more effective method available to them, the "457" transfer. Bottom line, use the "457" method to pay for this service. If you don't have enough in the "457" account, increase the contributions to the "457" plan (invest it conservatively) rather than pay it to NYCERS in payroll deductions. When there is enough money in the "457" account, then authorize the transfer to NYCERS from the "457" plan.