South Dakota Retirement System rules let a current member pay for prior service credit (years of past public service that were not previously covered) by lump sum or in level installments over up to 10 years. SDCL 3-12-83 says contributions can be made by the employee 'or have made on his behalf' by the employer. Does that 'on his behalf' authorization let employers make their prior-service-credit payments in installments too?
Plain-English summary
The South Dakota Retirement System (SDRS) operates under SDCL chapter 3-12. Members can buy back prior service credit (years of past South Dakota public service that had not generated retirement contributions, often because the prior employer was not covered or because the member had withdrawn contributions in a prior period). The buyback lets members get full retirement credit for their actual public-service tenure.
SDCL 3-12-83 sets the buyback mechanics. The member elects to make contributions, or to have them made on his behalf, at twice the current member rate for each year of prior service to be credited. The election had to be made before July 1, 1976 (a one-time window for the first wave of buyback elections).
SDCL 3-12-87 says payment of the deposit is determined at the time of election but the member has the option to pay over up to 10 years in level periodic installments, with the installment payments discounted for interest at the current effective rate to equal the lump sum due. If installments are not completed on time, the board may adjust the credited service, benefits, or payment schedule.
Mr. Asher posed the practical question: when the employer is making the buyback payment "on behalf of" the employee under 3-12-83, can the employer (not just the employee) pay in installments under 3-12-87?
AG Janklow said yes. The statutory text mostly addressed installment payments by the member. But 3-12-83's reference to contributions "made on his behalf" made it natural to read 3-12-87's installment option as also extending to the employer paying on the employee's behalf. SDCL 3-12-69 also recognized installment-payment arrangements by participating units, so the installment concept was not foreign to the system.
Janklow added one important condition: the employee had to consent. The buyback was technically the employee's election; the employer was acting on the employee's behalf. Without employee consent, the employer could not unilaterally take on the buyback obligation.
The opinion closed with a general principle: where the statutes leave some flexibility, the retirement system laws should be read to provide flexibility that benefits both the system and its members, as long as the reading stays within the law's confines.
Currency note
This opinion was issued in 1976 during AG William Janklow's tenure. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. SDCL chapter 3-12 (the South Dakota Retirement System) has been substantially amended since 1976, including changes to the buyback rules, contribution rates, and installment provisions. Modern questions about employer-paid prior service credit installments should be verified against current SDCL chapter 3-12 and any applicable SDRS board rules.
What the opinion meant at the time
For SDRS administrators, the opinion authorized accepting employer installment payments for prior-service buyback elections, as long as the employee consented and the SDCL 3-12-87 conditions (10-year cap, level periodic installments, current effective interest discount) were met.
For political subdivisions wanting to help long-tenured employees catch up on retirement service credit, the opinion provided a workable mechanism. The employer could finance the buyback over up to 10 years rather than needing a lump sum at the moment of election.
For employees with significant prior service in non-SDRS-covered roles, the opinion meant that affordability was not necessarily a barrier. Even if the lump sum was beyond the employer's capacity in a single budget year, the installment option made the buyback possible.
For public-pension policy designers, the opinion confirmed a flexible reading of statutes that did not perfectly anticipate all cooperative arrangements between employers and employees. Janklow's "interpret to achieve flexibility" framing was a guide for resolving similar ambiguities in retirement system administration.
Common questions
Q: What is "prior service credit"?
A: It refers to years of South Dakota public service that have not been counted toward the member's retirement benefit calculation. This typically happens when an employee worked for a public employer that was not yet covered by SDRS, or when the employee withdrew contributions during a break in service and now wants to restore that time. Buying back the credit increases the member's eventual retirement benefit.
Q: Why pay "twice the member rate"?
A: Because the original contribution was missed, so both the member's and the employer's shares need to be made up. By paying at twice the current member rate, the member (or the employer paying on the member's behalf) covers both portions of the missing contribution.
Q: What was the July 1, 1976 deadline?
A: SDCL 3-12-83 set that deadline for first-window elections. Members who did not elect to buy back by July 1, 1976 lost the right to do so under that section. The opinion does not address what happened in subsequent windows or later legislative changes.
Q: Why did the employee have to consent?
A: Because the buyback election under SDCL 3-12-83 is the member's right. The employer cannot unilaterally take on the obligation without the employee's agreement. The employee's consent locks in the deal between employer and SDRS.
Q: What happened if the employer missed an installment payment?
A: SDCL 3-12-87 gave the board authority to adjust the credited service, the benefits payable, or the schedule of payments. The cleanest cure was bringing the payment current. If payments couldn't be made current, the member's credited service might be partially reduced to match the actual payments received.
Q: Did this open the door to employer-funded buybacks generally?
A: The opinion addresses one specific scenario: an employer paying on the employee's behalf with employee consent under SDCL 3-12-83. It does not authorize broader employer purchases of retirement benefits beyond what the statutes specifically allow.
Q: Could the employer treat the installment payments as employee compensation?
A: The opinion did not address the tax or compensation classification. As a practical matter, employer payments on the employee's behalf for retirement benefits often had specific tax treatment under federal law (e.g., employer pickup of employee contributions under Section 414(h)(2) of the Internal Revenue Code). The state-law authority Janklow described did not resolve those federal classification questions.
Background and statutory framework
The 1970s were a period of significant restructuring for state public pension systems across the country. SDRS itself was substantially reorganized during this period, with various predecessor systems being consolidated. The prior service credit provisions in SDCL 3-12-83 and the installment mechanics in SDCL 3-12-87 reflected the need to give long-tenured public employees a path to integrate their prior service into the new system.
The "or have made on his behalf" language in SDCL 3-12-83 acknowledged an established practice in public pensions: employers often pick up some or all of the buyback cost as part of compensation packages or collective bargaining outcomes. The statute did not bar the practice; it explicitly contemplated it.
The installment option in SDCL 3-12-87 addressed the affordability problem. A buyback for many years of service could be a substantial cash obligation. Spreading the payments over 10 years, with the level-payment-with-interest-discounting structure, made the obligation manageable.
Janklow's reading bridges the two provisions. The text of SDCL 3-12-87 spoke directly to the "member" choosing installments. But 3-12-83's recognition of employer-funded buybacks made it natural to extend the installment option to employer payments too. Without that extension, the cooperative-funding arrangement contemplated by 3-12-83 would be limited to lump-sum employer payments, which would defeat much of the purpose.
The opinion's coda about flexibility ("if possible it is my opinion that the retirement system laws should be interpreted to achieve a flexibility which is desirable for both the system and its members, yet is within the confines of what the law allows") is a useful interpretive principle. Retirement-system statutes rarely cover every possible administrative variation; the AG's role in opinions like this is to permit pragmatic cooperative arrangements within the bounds of the statutory text.
Citations and references
Statutes:
- SDCL 3-12-83 (election to receive credited prior service)
- SDCL 3-12-87 (payment installments, up to 10 years)
- SDCL 3-12-69 (referenced as recognizing participating-unit installment payments)
Source
Original opinion text
Is an employer permitted by the South Dakota Retirement System to purchase prior service credit for his employees on an installment basis?
Dear Mr. Asher:
You have requested an opinion from this office in regard to the following question:
Is an employer permitted by the South Dakota Retirement System to purchase prior service credit for his employees on an installment basis?
SDCL 3-12-83 provides:
A current contributing member of the system may receive credited service by election to make, or have made on his behalf, contributions, based on his current compensation at twice the member rate, for each year of service for which he wishes to receive credit, if:
(1) The current contributing member of the system could have established credit for any South Dakota public service by making contributions under this chapter or any prior law; or
(2) The current contributing member was not permitted to establish credit for any South Dakota public service.
The amount of credited service and the rate of contribution shall be at class A rates unless the service for which credit is sought was rendered as a class B member in which case class B rates shall apply. In the event the member fails to make an election before July 1, 1976, his right to buy back such credited service will lapse.
SDCL 3-12-87 provides:
Payment of a deposit with the system for credited service pursuant to §§ 3-12-83 to 3-12-86, inclusive, shall be determined and due at the time the election is received by the system, but the member shall have the option to pay the amount due by periodic, level installments over a period of up to ten years, the value of which, when discounted for interest at the current effective rate, are equal to the amount due at the date of the election. In the event the periodic payments are not completed or paid when due, the board shall have the authority to make an appropriate adjustment to the credited service, benefits payable under this chapter, or schedule of payments to allow for default.
Although SDCL 3-12-87 does not specifically provide for the political subdivisions making such payments on behalf of an employee to make them on an installment basis, the concept of "installment payments" by a participating unit is not foreign to the system. (See SDCL 3-12-69.)
SDCL 3-12-83 recognizes that an employee may have contributions made on his behalf. If the political subdivision is making contributions on behalf of an employee under 3-12-83, it seems reasonable to argue that under 3-12-87 the member could choose to have the contributions being made on his behalf to be made on an installment basis as is allowed for his personal contribution under SDCL 3-12-87. Accordingly it is my opinion that a participating unit, with the employee's consent, can contribute money to the system for purchase of prior service credit for the employee credit on an installment basis, according to the conditions of SDCL 3-12-87.
The statutes are not altogether specific and clear in this matter, but if possible it is my opinion that the retirement system laws should be interpreted to achieve a flexiblity which is desirable for both the system and its members, yet is within the confines of what the law allows.
Respectfully submitted,
WILLIAM J. JANKLOW
ATTORNEY GENERAL
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