Congress enhances public pension portability with new service credit rules.

• Author: Spain, Catherine

Federal tax law provisions affect many aspects of state and local government retirement system administration. Recently, organizations representing public pension systems began to focus on the need to modify Internal Revenue Code Section 415 to facilitate the purchase of service credit by public employees. At the Government Finance Officers Association's (GFOA) annual conference in Fort Lauderdale last June, a policy statement was adopted putting the association on record in support of these efforts so that public employee retirement systems could achieve the maximum portability permitted by state laws and pension plan provisions.

What Is Pension Portability?

Pension portability refers to the ability of workers to carry their pensions with them when they leave their employer. In general, there are three kinds of portability - portability of benefits, portability of assets, and portability of service.(1) Portability of service refers to the ability to count years of service earned under the pension plan of a prior employer when determining the pension benefits to be provided under the pension plan of a more recent employer. Portability of service may make a substantial difference in retirement benefits in a defined benefit plan where a formula that takes into account the years of service of the retiree with the current employer is used to determine the benefit amount of a retiree.

Public employee retirement systems frequently provide for portability of service between systems by allowing employees to purchase service credit. Credit may be provided for a number of reasons, including employment in another government within a state or out of state, service in the same occupation (such as prior teaching or police service), leaves of absence, and repurchases of credit previously earned, but forfeited. Employees may even be permitted to purchase a number of years of service with no particular requirement attached in order, for example, to obtain enough years of service to meet vesting requirements.(2) In some instances, retirement systems permit employees to transfer rather than purchase service credit from a previous employer. These arrangements take various forms and the practice is known as reciprocity.

Some advocates of enhanced pension portability argue that the purchase of service credit is less desirable than other approaches because it puts the burden on the final employer to provide the benefits lost from prior service rather than to build portability into retirement plans where service occurs. Building portability into a system can be accomplished by adopting shorter vesting periods, maintaining benefit values by indexing the defined benefit, or broadening Social Security coverage by extending coverage to more state and local...