Could Kentucky teachers buy retirement service credit before retiring and pay in installments in 1999?

Plain-English summary

Kentucky's teacher retirement law then allowed an active contributing member with at least 20 years of service credit to buy up to five additional years of eligible credit at full actuarial cost. A legislator asked whether the retirement system could limit that purchase to members about to retire, require one lump-sum payment, or withhold retiree medical benefits when purchased credit helped establish retirement eligibility.

The Attorney General answered no to each proposed restriction. The statute allowed a qualifying active member to buy credit regardless of when that member planned to retire, and it expressly offered lump-sum or installment payment. The opinion also concluded that an otherwise qualified retiree could not be denied the medical coverage the system provided simply because purchased credit counted toward retirement. It distinguished the statutory coverage rule for retirees age 65 or older from coverage the board had chosen to provide for qualifying retirees under 65.

Currency note

This opinion was issued in 1999. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Did a teacher have to be ready to retire before buying service credit?
A: No. Under the law examined, an active contributing member with at least 20 years of credit could purchase eligible additional credit regardless of the planned retirement date.

Q: Could the retirement system require the entire purchase price at once?
A: No. The opinion said the statute gave members a choice between a lump-sum payment and installments under KRS 161.597.

Q: Could bought service credit count toward retirement but not retiree medical coverage? A: The Attorney General said the system could not deny medical benefits to an otherwise qualified retiree on that basis. The opinion did not decide how the system should fund those medical benefits.

Q: How much additional credit did the statute allow a qualifying member to buy? A: It allowed up to five years of eligible credit at the full actuarial cost, for an active contributing member who already had at least 20 years of service credit.

Background and statutory framework

KRS 161.5465 supplied the eligibility, cost, and payment terms for purchasing credit. The opinion read it together with the retirement and medical-insurance provisions and a regulation under which the board had elected to cover certain service retirees younger than 65. It reasoned that the retirement system could not narrow statutory or regulatory benefits by internal policy, citing KRS 13A.130. The source text later refers to a differently numbered service-credit statute in several places; its quoted provision and its stated questions identify KRS 161.5465 as the subject of this opinion.

Citations and references

Statutes: KRS 161.5465; KRS 161.597; KRS 161.675(1)(b); KRS 13A.130.

Case: Jones v. Board of Trustees of Kentucky Retirement Systems, 910 S.W.2d 710 (1995).

Source

• Landing page: https://kdla.access.preservica.com/uncategorized/IO_068626d0-d086-4936-96ea-1e512b8dc4b6/
• Original PDF: https://kdla.access.preservica.com/download/file/IO_068626d0-d086-4936-96ea-1e512b8dc4b6

Original opinion text

OAG 99-7
October 14, 1999
Subject:

Implementation of KRS 161.5465 by the Kentucky
Teachers’ Retirement System

Requested by:

Representative John Arnold, Jr., Chairman
Administrative Regulation Review Subcommittee

Written by:

Christina L. Bradford, Assistant Attorney General

Syllabus:

Members of the Kentucky Teachers’ Retirement System who purchase service credits pursuant to KRS 161.5465 are entitled to medical insurance benefits, if otherwise qualified may purchase such service credits if not retiring, and may pay for such service credits either by lump sum payment or installment payment

Statutes construed:
KRS 161.5465, KRS 6.696, KRS 161.220, KRS
161.230, KRS 161.420, KRS 161.515, KRS 161.525,
KRS 161.540, KRS 161.550, KRS 161.597, KRS
161.600, KRS 161.620, KRS 161.655, KRS 161.661,
KRS 161.675, KRS 161.714, KRS 13A.130, 102 KAR
1:100, 102 KAR 1:135
OAGs cited:

81-416 and 78-4

Opinion of the Attorney General
Introduction

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This is in response to your request regarding the implementation
of KRS 161.5465 as it relates to health insurance benefits by the Kentucky Teachers’ Retirement System (“KTRS”). KRS 161.5465 provides as follows: On or after August 1, 1998, a member of the Teachers’ Retirement System in active contributing status who has a minimum of twenty (20) years of service credit may purchase up to a maximum of five (5) years of service credit that is not otherwise purchasable under any of the provisions of KRS 161.230 to 161.716 and that meets the definition of nonqualified service as provided in Section 1526 of the Federal Taxpayer Relief Act of 1997. The member shall pay the full actuarial cost of the service credit as determined by the Teachers’ Retirement System. The payment shall not be picked up by the employer as described in KRS 161.540(2), and the member’s payment shall be credited to the member’s contribution account and shall be considered accumulated contributions of the member. Payment by the member may be by lump sum or by installment payments as provided in KRS 161.597. Your first question is, regarding members who purchase service credit pursuant to KRS 161.5465 and who qualify for retirement pursuant to KRS 161.600, whether the KTRS must provide medical insurance benefits to those members for those years purchased. Based upon our review of the applicable law, it appears to us that the answer is “yes.” In addition, you ask whether the purchase of service credits pursuant to KRS 161.5465 can be restricted to only those members who are retiring, and also whether the payment for the purchase of such service credits can only be by lump sum payment. The answers to both of these questions appear to be “no.” Funding for Member Retirement Benefits

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The KTRS was established for the sole purpose of providing retirement allowances to teachers, as well as to their beneficiaries and survivors. KRS 161.230. The assets held by the KTRS are divided into the following seven (7) different funds: 1. 2. 3. 4. 5. 6. 7.

The Expense Fund;
The Teachers’ Savings Fund;
The Guarantee Fund;
The State Accumulation Fund;
The Allowance Reserve Fund;
The Medical Insurance Fund; and
The School Employees Annuity Fund.

The Expense Fund is funded from an amount lesser of equal to
4% of the income earned from investments the immediate past fiscal
year. The purpose of this fund is to defray the administrative expenses
of the KTRS. See KRS 161.420(1).
The primary benefits for retired members are ultimately paid out
of or from the Allowance Reserve Fund and the Medical Insurance
Fund.1
Generally speaking, these retirement benefits are funded
through monetary contributions (hereinafter “contributions”) from
three sources:
1.
2.

By the members while in active service;
Through state appropriations/employer contributions;

3.

From interest and income from investments.

and

Members are statutorily required to contribute a fixed percentage of
their annual compensation into the KTRS (9.855% for all members except for university faculty members, who contribute 8.375%). See KRS 161.540(1). Out of this total contributed amount, an amount equal to 0.75% of the gross annual income of all contributing members is di1The School Employee Annuity Fund consists solely of funds voluntarily contributed by the member pursuant to Internal Revenue Code Section 403(b). See KRS 161.420(7).

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verted into the Medical Insurance Fund. See KRS 161.420(5). The remainder of the contributed amount is deposited into the Teachers’ Savings Fund. See KRS 161.420(2). Then, when a member undergoes a change in status (e.g., death, retirement, or disability), that member’s contributions and accrued interest in the Teachers’ Savings Fund are transferred into the Allowance Reserve Fund. See KRS 161.420(2) & (4). The contributions of a member to the Teachers’ Savings Fund, plus accrued regular interest, are defined as “accumulated contributions” of the member. See KRS 161.220(14). In addition, state appropriations and employer contributions are made into the Allowance Reserve Fund and the Medical Insurance Fund. First, employers are required to contribute an amount equal to that contributed by an employee (e.g., either 9.855% or 8.375%). Second, employers must contribute an amount equal to 3.25% of the total salaries of its employees who are members. See KRS 161.550. Out of this second amount, an amount equal to 0.75% of the gross annual income of all contributing members is diverted into the Medical Insurance Fund. See KRS 161.420(5). In addition to these mandatory contributions, the Board has the authority to deposit into the Medical Insurance Fund an amount equaling up to 1.65% of the amount contributed by the employer which represents 3.25% of the total salaries of its employees who are members. See KRS 161.420(5). The amount of state appropriations/employer contributions which remains after the amounts are deducted for deposit into the Medical Insurance Fund is then deposited into the State Accumulation Fund. See KRS 161.420(3)
& (4). When a member experiences a change in status, the amount
deposited into the State Accumulation Fund on behalf of that member
is transferred into the Allowance Reserve Fund. Id.
Additional funding for the Allowance Reserve Fund and Medical
Insurance Fund derive from the Guarantee Fund through interest which
is earned on investments made by the KTRS. See KRS 161.420(6) and
102 KAR 1:135. Further, the Board may, at its option, deposit up to 4%
of the income earned from investments during the immediate past

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year from the Guarantee Fund into the Medical Insurance Fund. See
KRS 161.420(6).2
Retirement Conditions
A member of the KTRS qualifies for service retirement by meeting one of the following conditions: 1.

Reaching the age of sixty (60) and
completion of five (5) years of Kentucky service;

2.

Reaching the age of fifty-five (55)
years and completion of a minimum of five (5) years of Kentucky
service with an actuarial reduction
of the basic allowance of 5% for
each year the member’s age is less
than sixty (60) or for each year the
member’s years of Kentucky service is less than twenty-seven (27),
whichever is less; or

3.

Completion of twenty-seven (27)
years of Kentucky service.

See KRS 161.600(1)(a)-(b). Service credit in other state retirement
systems may be used to meet the above requirements, as may out-ofstate service earned in accordance with KRS 161.515(2). See KRS 161.600(1)(c) and (3). Payment of Monetary Benefits to Members 2Although KRS 161.420(6) provides that the Board may transfer from the Guarantee Fund into the Medical Insurance Fund an amount equal to 4% of the income earned from investments during the immediate past year, it is our understanding that such a transfer has been interpreted by the Board as violating the Internal Revenue Code and, thus, is not an option currently exercised by the Board.

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After a member retires, monetary benefits are paid to that member from the Allowance Reserve Fund. See KRS 161.420(4) and 161.620. Death benefits are also made from this fund to the member’s heirs or dependants pursuant to KRS 161.520 (payments upon death of either an active member or a member retired for disability), KRS 161.525 (payments upon death of active member who was eligible to retire), and KRS 161.655 (payments upon death of retired member). Qualified members who have retired for disability receive monetary benefits in accordance with KRS 161.661. Provision of Health Insurance Benefits to Members Health insurance benefits for members are funded by the KTRS via the Medical Insurance Fund. See KRS 161.420(5). Pursuant to KRS 161.675(1(a), the Board is required to provide health insurance coverage for all retired members who have reached the age of sixty-five (65). This health insurance coverage must provide for both hospital and medical insurance coverage for the retired member. Id. It is the option of the Board to provide insurance coverage for members who have retired for service but have not yet attained the age of 65 (or are disabled, etc.). See KRS 161.675(1)(b). However, the Board has legally chosen to provide such insurance coverage to such members (including, but not limited to, hospital room and board, drugs, medications, doctor fees, nursing care, and convalescent hospital care). See 102 KAR 1:100. KRS 161.5465 and Retirement Health Benefits As previously noted, the KTRS was established for the sole purpose of providing retirement allowances to teachers, as well as to their beneficiaries and survivors. KRS 161.230. Further, the benefits provided to members of the KTRS pursuant to KRS 161.220 through 161.710 constitute an inviolable contract of the Commonwealth, except for the terms of KRS 6.696 (which relates to the forfeit of retire ment benefits by legislators convicted of a felony). See KRS 161.714. See also OAG 81-416 and OAG 78-4. In addition, those benefits cannot be subject to any reduction or impairment “by alteration, amendment,

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or repeal.” Id. This inviolable contract is in consideration of the contributions of members of the KTRS and also in consideration of the benefits received by the Commonwealth from the member’s employment. Id. Contributions made by employers on behalf of members are considered deferred compensation to the members. KRS 161.550. KRS 161.675 provides that the KRTS must provide medical coverage for those retirees who have reached the age of 65. Further, the KTRS has agreed to provide medical coverage for retirees who have retired for service but are under the age of sixty-five (65). See KRS 161.675(1)(b) and 102 KAR 1:100. There is nothing in the applicable statutes and regulations which permit the KTRS to refuse to provide medical benefits to members who purchase service credits pursuant to KRS 161.5465 for those years of purchased service credit. Further, it would be improper for the KTRS to modify the applicable statutes and regulations or limit a right therein via the use of “internal policy, memorandum, or other form of action.” See KRS 13A.130(1). Any such improper policy, memorandum, or other form of action is “null, void, and unenforceable.” See KRS 13A.130(2). In addition, if the KTRS were to refuse to provide medical insurance benefits to members for those service credit years purchased pursuant to KRS 161.5675, such action may constitute a substantial contractual infringement and violate Section 19 of the Kentucky Constitution. See Jones v. Board of Trustees of Kentucky Retirement Systems, Ky., 910 S.W.2d 710, 713 (1995), where the Kentucky Supreme Court held that members of the Kentucky Retirement System have a contractual right to benefits which they were promised upon retirement, and further indicated that any “reduction or demonstrable threat” to such promised benefits might violate Kentucky Constitution Section 19. Nor do the provisions of KRS 161.5645 justify the position that the KTRS may refuse to provide medical benefits to retirees who have purchased service credit under KRS 161.5645 until such member normally would reach the retirement age of age sixty-five (65) or twentyseven (27) years of service. Although that statute requires that the purchasing member “pay the full actuarial cost of the service credit,” there is nothing in the language of the statute limiting the provision of

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medical insurance benefits to a retiree who has purchased service
credits under its provisions.3
KRS 161.5465 and the Purchase of Service Credits
KRS 161.5465 provides that any member of the KTRS who is in
active contributing status and who has a minimum of twenty (20) years
of service credit is entitled to purchase up to five (5) years of the eligible service credit offered pursuant to that statute. Further, the member may choose to pay for the purchase of such service credits either by lump sum payment or by installment payment. Id. KRS 161.5465 does not grant the KTRS the discretion to limit the purchase of service credits under it to only those members who are retiring. Any member who is in active contributing status and who has the minimum twenty (20) years of service credit is entitled to purchase eligible service credits, regardless of when that member is retiring. The KTRS may not modify the clear terms of KRS 161.5465 by internal policy, memorandum, or other form of action. See KRS 13A.130. Further, KRS 161.5465 does not grant the KTRS the authority to limit a member‘s payment for the purchase of service credits to lump sum payment only. The clear statutory language of KRS 161.5465 specifically grants the member the choice in paying for such service credits either by lump sum payment or by installment payments, as provided in KRS 161.597. The KTRS does not have the authority to deny members the right to pay by installment payments for the purchase of otherwise eligible service credits. See KRS 13A.130. 3Although this opinion does not address how medical benefits to members who purchase service credits pursuant to KRS 161.5645 are to be funded in the KTRS, it should be noted that the statute provides that the member’s payment be credited to the member’s contribution account and be considered the member’s “accumulated contributions.” “Accumulated contributions” are specifically defined as the member’s contributions “to the teachers’ savings fund.” KRS 161.220(14). There is no mention in KRS 161.5645 regarding any specific contributions to the Medical Savings Fund, from which all claims for medical benefit coverage under KRS 161.675 must be paid. See KRS 161.420(5).

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Conclusion
It is our opinion that, as the statutes currently provide, the KTRS
is required to provide medical benefits to a retiree even if the service
credits entitling the member for retirement were obtained by purchase
under KRS 161.5645. Further, the KTRS may neither restrict the purchase of service credits under KRS 161.5465 to only those members who are retiring, nor prohibit members from paying for such service credits in installment payments pursuant to KRS 161.597. Albert B. Chandler III Attorney General

Christina L. Bradford
Assistant Attorney General
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