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80469209159 11/16, '99 17:15 N0.752 02/!4 Memorandum April 21.1999 Adminisu'~ve Heads of Selected Political Subdivisions From: William H. Leighty. Director Subject: House Bill 133--Purchase of Prior Service Credit on a Tax-Deferred Basis Legislation enacted by the I998. Session of the General Assembly (HB I33): allows eli~ble VRS members to purchase prior senice crediz on a ta.x4et~rred basis. VRS has applied for and received a. private Ieuer raling from the IRS that makes it possible to be~n offering ta-x4eferrad pureh~.~ of prior service '~ith ',he pa.vrolI period beginning May 1. 1999. I999. provided certain conditions are met Enclosed. in question and answer format, is an analysis of the benefits to employees ofpuxchasing prior service erectit on a tax-deferred basis. [n order.for a VR$ employer to offer the oFion of purchasing prior service credit on a tax- lkferred basis. the emplp.ver's gOverningbody must elect to pick up the m~nber's eonlribution · to VRS bas~'a/l the'~:~6f'ii'~~ra~"~lection under Section 414(h)(2) of th= Internal Revenu~ Code by submitting the'enclo'.sect r~Solution of"Authorization to Pick-up the '~ Empioyee's Contn'bution to VR$ for Past ServieeCP,,dit Under SectiOn 4I 4(h) 0f the Internal RC*venue Code'. If the employer is not.etu'rently picking-up itS employees' 5% ma~e~story · contn'bufions to the VRS. the employer must elect to do .so and also submit the enclosed resolution of "Authorization to Hck-up the Employee' s Contribution to VKS Under Seelion 414(h) of the Internal Revenue Code". ~ resolutions must be adopted in their.enlirety as 5- written. There is a.potential tax consequence. to the employee under Section 415 Con~bufion Limits of the Internal Revenue Cod~ when the employer picks up an employee's contribution to VRS for the purchase of prior service crecliL Under this section, annual additions for an employee under all of an .employer's plans. such as a tax-sbelte~.-d or tax-defen~ annuity plan under IRC Se~on:403Co), deferred eompensafi0nplan under IRC Seelion 457, any 401(k) plan, premium conversion or before-tax welfare plan. may not exceed the lesser of 25% of taxable .~ compensation (employee:s .W-2 Form),0r $1011)00. :The 'emapl0yer, s pick-up of an.emp!0yee's. eont~bufioas to VRS will r~luce {he".~ploye~s taXable compensation by the atomrot of the pick-up.