Former employees cannot purchase missed service credit

Plain-English summary

A county retirement plan had offered certain employees election periods to participate, but some employees said they were not explicitly notified and were defaulted into nonparticipation. After leaving employment without ever participating in the plan, they sought to obtain benefits for prior county service using after-tax payments, rollovers from other qualified plans, or transfers from section 403(b) or 457(b) plans. Section 415(n) permits participants in governmental defined benefit plans to purchase permissive service credit, but these former employees had never become participants. The IRS therefore ruled that their after-tax payments would not purchase permissive service credit, qualified-plan rollovers could not obtain the benefit, and 403(b) or 457(b) transfers would not qualify as permitted trustee-to-trustee transfers. All three requested rulings were denied.

Ruling snapshot

• Question: Could former employees who never joined the county plan fund prior-service benefits through payments, rollovers, or plan transfers?
• Outcome: Denied
• Key authorities: IRC §§ 402(c), 403(b)(13), 414(d), 415(n), 457(e)(17)

Full text (IRS public release)

 Internal Revenue Service                                     Department of the Treasury
                                                              Washington, DC 20224

 Number: 202344010                                            Third Party Communication: None
 Release Date: 11/3/2023                                      Date of Communication: Not Applicable
 Index Number: 415.00-00
                                                              Person To Contact:
 ------------------------                                     --------------------------, ID No. ----------------
 ------------------------------------                         -----------------
 -------------------------------------------------            Telephone Number:
 -------------------------------------------------------      --------------------
 -----------------------------------------------              Refer Reply To:
 ---------------------------------------------                CC:EEE:EB:QP3
 ---------------------------                                  PLR-103488-23
                                                              Date:
                                                              August 09, 2023




 County A                         = ------------------------------------------------------------------------------------------
 State B                          = ------------------------------------------------------------------------------------------
 Plan C                           = ------------------------------------------------------------------------------------------
                                    ------------------------------------------------------------------------------------------
 Category D Employees             = ------------------------------------------------------------------------------------------
                                    ------------------------------------------------------------------------------------------
 Date 1                           = ------------------------------------------------------------------------------------------
 Date 2                           = --------------------


Dear -----------------:

This letter is in response to correspondence dated February 14, 2023, as supplemented
by correspondence dated May 10, 2023, and May 17, 2023, submitted on behalf of
County A by its authorized representatives, in which a request for a letter ruling was
submitted with respect to purchase of permissive service credit in Plan C.

The following facts and representations have been submitted under penalties of perjury
in support of the request:

County A is a political subdivision of State B. Effective as of Date 1, County A
established Plan C, which is intended to be a tax-qualified retirement plan under section
401(a) of the Internal Revenue Code. Plan C is a defined benefit plan and is
represented to be a governmental plan under section 414(d). Plan C provides for
mandatory employee contributions. Plan C permits a participant to purchase permissive
service credit within the meaning of section 415(n)(3) and in accordance with the
requirements of section 415(n).

PLR-103488-23                                 2


In connection with the establishment of Plan C, County A provided a designated
election period for Category D Employees employed before Date 1 to elect to participate
in Plan C. On Date 2, the County provided an additional election period for Category D
Employees employed by the County before Date 1 to elect to participate in Plan C. Plan
C provides that Category D Employees hired on and after Date 1 automatically
participate in Plan C if otherwise eligible under the terms of Plan C.

Some Category D employees employed before Date 1 elected to participate in Plan C.
However, certain Category D Employees have stated that they were not explicitly
notified of the right to elect to participate in Plan C during those election periods, and
therefore did not make such an election. In accordance with the terms of Plan C, when
an employee failed to make an election to participate in Plan C, the employee was
defaulted to non-participation status.

Based on the foregoing, County A requests rulings that:

1. An election by a former Category D Employee who was not previously a participant in
Plan C to purchase prior service under Plan C with after-tax funds qualifies as a
purchase of permissive service credit under section 415(n).

2. An election by a former Category D Employee who was not previously a participant in
Plan C to transfer funds from another qualified plan to obtain a benefit under the Plan is
an eligible rollover distribution under section 402(c) and is not subject to the purchase of
permissive service credit rules under section 415(n).

3. An election by a former Category D Employee who was not previously a participant in
Plan C to transfer funds from a section 403(b) or 457(b) plan to obtain a benefit under
Plan C is an eligible transfer under section 415(n)(3)(D).

Section 415(n) generally provides that if a participant makes one or more contributions
to a defined benefit governmental plan (within the meaning of section 414(d)) to
purchase permissive service credit under such plan, then the requirements of section
415 shall be treated as met only if (1) the requirements of section 415(b) are met,
determined by treating the accrued benefit derived from all such contributions as an
annual benefit for purposes of section 415(b), or (2) the requirements of section 415(c)
are met, determined by treating all such contributions as annual additions for purposes
of section 415(c).

Section 415(n)(3)(A) defines “permissive service credit” as service credit –

1. recognized by the governmental plan for purposes of calculating a participant’s
benefit under the plan,

2. which such participant has not received under such governmental plan, and

PLR-103488-23                                 3


3. which such participant may receive only by making a voluntary additional
contribution, in an amount determined under such governmental plan, which does not
exceed the amount necessary to fund the benefit attributable to such service credit.
Permissive service credit may include service credit for periods for which there is no
performance of service, and notwithstanding (2), may include service credited in order
to provide an increased benefit for service credit which a participant is receiving under
the plan.

Section 402(c)(1) provides that if any portion of the balance to the credit of an employee
in a qualified trust is paid to the employee in an eligible rollover distribution, and the
employee transfers any portion of the property received in such distribution to an eligible
retirement plan, then such distribution (to the extent so transferred) shall not be
includible in gross income for the taxable year in which paid.

Section 403(b)(13)(A) provides that no amount shall be includible in gross income by
reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as
defined in section 414(d)) if such transfer is for the purchase of permissive service credit
(as defined in section 415(n)(3)(A)) under such plan.

Section 457(e)(17)(A) provides that no amount shall be includible in gross income by
reason of a direct trustee-to-trustee transfer to a defined benefit governmental plan (as
defined in section 414(d)) if such transfer is for the purchase of permissive service credit
(as defined in section 415(n)(3)(A)) under such plan.

Section 415(n)(3)(D)(i) provides that in the case of a trustee-to-trustee transfer to which
section 403(b)(13)(A) or 457(e)(17)(A) applies (without regard to whether the transfer is
made between plans maintained by the same employer), the limitations of section
415(n)(3)(B) shall not apply in determining whether the transfer is for the purchase of
permissive service credit.

The first ruling request involves elections by individuals who are not participants in Plan
C or employees of County A to purchase prior service under Plan C using after-tax
funds. These individuals would purchase service previously performed as employees of
a state political subdivision, which would have been earned under Plan C had these
individuals made a timely election. Section 415(n) applies to participants. The former
employees are not participants in Plan C and have never been participants in Plan C,
and therefore, we conclude that such a purchase would not be a purchase of permissive
service credit under section 415(n).

The second ruling request involves individuals who are not participants in Plan C or
employees of County A rolling over funds from a qualified plan to obtain a benefit of
prior service under Plan C and such transfer would not be subject to the permissive
service credit rules of section 415(n). Section 402(c)(1)(A) does not provide that an
individual who is not a plan participant or an employee of the plan sponsor may roll over

PLR-103488-23                                 4

funds to obtain a benefit for prior service performed. Therefore, we conclude that such
individuals would not be able to use a rollover from another qualified plan to obtain a
benefit calculated on service previously performed as employees of County A.

The third ruling request involves individuals who are not participants in Plan C or
employees of County A transferring funds from a section 403(b) or 457(b) plan to obtain
a benefit under Plan C. Section 403(b)(13)(A) and section 457(e)(17)(A) provide for a
direct trustee-to-trustee transfer to a defined benefit governmental plan only if such
transfer is for the purchase of permissive service credit under section 415(n). As
provided in the first ruling, section 415(n) applies to participants. The former employees
are not participants in Plan C and have never been participants in Plan C. Therefore, we
conclude that a transfer of funds from a section 403(b) or 457(b) plan would not be a
trustee-to-trustee transfer for the purchase of permissive service credit described in
section 415(n)(3)(D).

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party, as specified in Rev. Proc. 2023-1, 2023-1 I.R.B. 1,
section 7.01(16)(b). This office has not verified any of the material submitted in support
of the request for ruling, and such material is subject to verification on examination. The
Associate office will revoke or modify a letter ruling and apply the revocation
retroactively if there has been a misstatement or omission of controlling facts; the facts
at the time of the transaction are materially different from the controlling facts on which
the ruling was based; or, in the case of a transaction involving a continuing action or
series of actions, the controlling facts change during the course of the transaction. See
Rev. Proc. 2023-1, section 11.05.

Except as specifically set forth above, no opinion is expressed or implied concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter ruling.

This letter ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)
provides that it may not be used or cited as precedent.

PLR-103488-23                                             5


A copy of this letter has been sent to your authorized representatives in accordance
with a power of attorney on file in this office.


                                                 Sincerely,



                                                 Amy Moskowitz
                                                 Senior Technician Reviewer, Qualified Plans
                                                 Branch 3
                                                 (Employee Benefits, Exempt Organizations, and
                                                 Employment Taxes)


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