Buying Creditable Service

ET-4121, Rev. 05/2006

This brochure describes the types of service you are able to buy, the benefits and restrictions on purchases, and how and when you can buy service.

Importance of Years of Service

When you retire from the Wisconsin Retirement System (WRS), we will calculate your monthly annuity two different ways to determine which will result in a higher benefit. The first calculation uses your creditable service in the WRS and the second is based on your WRS accumulated account balance.

Under Wisconsin Statutes, you may purchase certain types of service to increase your retirement benefit.

Forfeited Service

If you have taken a separation benefit (a lump sum withdrawal of your employee contributions), you forfeited the creditable service you earned before your separation benefit. If you meet certain conditions, you are eligible to "buy back" your forfeited service. The former State Teachers Retirement System, Milwaukee Teachers Retirement Fund and Wisconsin Retirement Fund were merged into the Wisconsin Retirement System (WRS) on January 1, 1982. If you forfeited creditable service in any of these retirement systems by withdrawing your contributions as a separation benefit, you may purchase your forfeited service regardless of your current employment category. The following conditions apply:

• The Department must receive your application and payment to purchase service before you terminate WRS employment.

• You must have three continuous years of service under the WRS since your return to covered WRS employment. This means that you have been employed in a position covered under the WRS for three complete consecutive annual earnings periods without a termination in employment of more than 90 days, and with some WRS service credited in each annual earnings period. Your three years of continuous service do not have to be full-time.

• The number of years you buy cannot be greater than the number of years of service you have earned since you returned to covered WRS employment.

• You may buy part or all of the forfeited service that you are eligible to buy.

• If otherwise eligible, you may purchase forfeited service twice during a calendar year.

Qualifying Service (Applies only to non-teaching employees)

Until January 1, 1973, participants in the Wisconsin Retirement Fund were required to serve a qualifying period (normally the first six months of employment). During the qualifying period an employee did not earn any creditable service, and no retirement contributions were made. If you served a qualifying period you can purchase creditable service for this period. If you are currently a teacher who previously served a qualifying period in non-teaching employment before becoming a teacher, you are eligible to purchase your qualifying service.

If you worked full-time and served a full six-month qualifying period you are eligible to purchase the entire six months. If you were a part-time employee, the qualifying service you are eligible to purchase is prorated based on your part-time status. If you took a separation benefit, you must purchase all of the forfeited service you are eligible to buy before you can buy your qualifying service.

Other Governmental Service

If you worked for a non-WRS public employer other than the military at the federal, state or local level, you may be eligible to purchase WRS creditable service for that employment. The following conditions apply:

• You must have three continuous years of service under the WRS as defined in the Forfeited Service section.

• The number of years you buy cannot be greater than the number of years of WRS creditable service you have earned at the time you apply.

• You can buy part or all of the Other Governmental Service you are eligible to buy at the time you apply, and you may make two purchases in a calendar year.

• You cannot purchase service that you are using to establish entitlement to any benefit paid by the federal, state or local government (other than Social Security, disability benefits, or benefits paid for service in the National Guard).

• You must pay the full actuarial cost of the benefit increase that the service will provide.

Other Uncredited Service

• Before July 1, 1957, teachers in Wisconsin public schools who were less than 25 years old were called "junior teachers." They could not become members of the State Teachers Retirement System (STRS) until after reaching age 25. Subsequent legislation granted creditable service for most junior teaching. However, employees who did not receive creditable service for junior teaching are eligible to purchase this service, providing that the teaching service can be documented.

• Employees who received a paid teacher improvement leave of absence from the Board of Regents of the Wisconsin state colleges between January 1, 1964, and August 31, 1967, may purchase up to one year of creditable service for the period of the leave.

• You may be eligible to purchase additional creditable service if you were employed after age 62 in an executive retirement plan position prior to May 3, 1988. Prior to that date, participants employed in executive retirement plan positions did not receive creditable service after age 62 for that employment.

What Purchasing Service Can Do For You

• Increase your creditable service. Higher creditable service can result in:

  • a higher retirement or disability benefit if your annuity is calculated as a formula benefit.

  • a higher special death benefit for beneficiaries if you die as an active employee.

  • eligibility for credit for active duty military service before January 1, 1974 that was not an interruption in your employment with a WRS employer. You can receive one year of military service credit for each five years of creditable service, up to a maximum of four years. Other Government Service is not included when determining your eligibility for this service credit. (NOTE: military service that interrupted your employment with a WRS employer may be credited under other legal provisions.)

  • a decrease in the age reduction applied to your annuity if you are taking early retirement.

  • eligibility to continue ETF-administered group insurance plans for your lifetime after you terminate employment. If you have 20 years of service, you can continue your group life insurance if you terminate employment before minimum retirement age (55, or age 50 for protectives). You can continue your group health insurance without taking an immediate annuity if you terminate after minimum retirement age and have 20 years of service.

  • putting you at your maximum benefit allowed by law. The maximum formula benefit is limited to 70% of your final average earnings. If you are a protective employee covered by Social Security, your maximum benefit is limited to 65% of your final average earnings. If you are a protective employee not covered by Social Security, your maximum benefit is 85% of your final average earnings
• Increase your WRS account balance. Any amount you contribute to purchase service is deposited in your employee-required account. Your employee-required account:
• increases your retirement or disability benefit if your annuity is calculated as a money purchase benefit.

• is refunded if you take a separation benefit.
• is paid to your beneficiaries if you die before beginning a WRS benefit

When You Can Buy Service

You are eligible to purchase service while you are actively employed in a position covered under the WRS, or on a leave of absence from a covered position. The Department must receive your application and payment to purchase service no later than the date you terminate WRS covered employment.

How to Pay For Service

You can pay for your service by submitting payment with your application, by transferring funds from your WRS additional account(s), through a plan-to-plan transfer of pre-tax monies from your qualified non-WRS retirement plan(s), or a combination of all three.

An application to purchase service is irrevocable once the Department receives payment.

The cost of forfeited and all other uncredited service (other than qualifying service and Other Governmental Service) must be paid by you.

The cost of qualifying service can be paid by you OR your employer. If you are a state employee, your employer can only pay for your qualifying service pursuant to a collective bargaining agreement.

Employers are not prohibited from paying the cost of Other Governmental Service, but if it is paid by the employer, this cost is considered taxable income to you in the year it is paid.

You may use your WRS additional contributions to pay for creditable service purchases (see Additional Contributions brochure, ET-2123).

Your WRS additional contributions are subject to the annual limits only in the year the Department receives them. They are not tested against the contribution limits again when you use them to purchase creditable service.

If you have monies in a qualified non-WRS retirement plan, you may be eligible to directly transfer pre-tax monies to buy WRS service. The Department can accept plan-to-plan transfers of pre-tax funds from retirement plans qualified under sections 401(a), 401(k), 403(b) and 457(b) of the Internal Revenue Code. Other plans, such as Individual Retirement Accounts (IRAs), are not eligible for direct plan-to-plan transfers. The outside plan(s) must agree to do the transfer. There is no immediate tax liability on the monies transferred from another qualified retirement plan(s) to buy WRS creditable service.

If you use the plan-to-plan transfer option, you must pay at least 10% of the total cost of the service at the time you apply. You may pay this 10% amount with a personal check or from your WRS additional contributions.

You must purchase all of your forfeited service that you are eligible to buy before you are eligible to buy qualifying service. This restriction does not apply to other types of service purchases.

Cost of Buying Service

Forfeited Service

The cost is based on your three highest annual earnings for fiscal/calendar years completed at the time you apply. (For teachers, judges, and educational support personnel, annual earnings are based on fiscal years that begin on July 1 and end the following June 30.) The cost will increase proportionately as your annual earnings increase.

Example: If your average annual salary is $25,000, purchasing three years of service at the general employment category contribution rate of 5% would cost approximately $3,750.

$25,000 x 5% x 3.00 years = $3,750

You may also complete this calculation online by using the Department's Forfeited Service Cost Calculator at etf.wi.gov. Simply enter your personal data and the amount of forfeited service you wish to purchase. The calculator will compute and display the estimated cost to purchase your forfeited service and an estimate of the monthly benefit increase.

You may buy part or all of the forfeited service that you are eligible to buy. See the worksheet, Calculating The Cost to Buy Part of Your Forfeited Service, at the end of this booklet to calculate the cost of buying any portion of your service.

Other Governmental Service

The cost to purchase Other Governmental Service is based on the projected amount needed to fund the increase in your benefit that the service purchase will provide. The cost will usually be much higher than the cost of the same number of years of forfeited service because no part of the cost of the benefit increase is funded from employer contributions.

For more detailed information, a brochure entitled Buying Other Governmental Service (ET-2207) is available.

Qualifying and Uncredited Teaching Service

The cost of buying qualifying service and uncredited teaching service is based on an employee contribution rate of 5% and your single highest annual earnings when you apply.

Example: If your highest annual earnings is $25,000, the cost of six months (.5 year) of qualifying service would be calculated as follows:

$25,000 x 5% x .5 year = $625

Rate of Return For Purchasing Service

The rate of return is based on an initial amount of your annuity in the "For Annuitant's Life Only" annuity option, with no age reductions for early retirement. If you retire before your normal retirement age and your service purchase decreases your age reduction, your rate of return could be higher than the rate shown. If your annuity is higher under the money purchase calculation than under the formula calculation, your rate of return would probably be lower.

The rate of return on a purchase of Other Governmental Service varies according to individual circumstances. The cost is calculated based on actuarial probabilities, and the intent is for your investment to be fully recovered over your anticipated lifetime.

If you are considering buying the service many years before your anticipated retirement date, or if you retire before reaching your normal retirement age, you can calculate approximately how long it will take to recover your investment by dividing the total service purchase cost by the annual benefit increase. Your annual rate of return would equal your annual estimated benefit increase divided by the cost.

You earn the highest rate of return when the purchased service would decrease your age reduction in addition to increasing the number of years of creditable service used in your formula annuity calculation.

The payback period may help you decide how long it would take to recover your investment. If your benefit increase would give you a 20% rate of return, you would recover your investment within five years after you retire. Unless you select an annuity for your life only, you and your beneficiaries will normally recover your investment. If you are concerned about the payback period, you may want to consider what you could earn by investing the money elsewhere. In this example, if you could invest the money elsewhere at 10%, the payback period would then be ten years.

Deciding What to Do

Factors to consider are:

• The cost.

• Loss of financial flexibility. When you make a payment to the WRS, that money is not available to you until you terminate employment, even in emergencies. Once you terminate WRS employment you may be limited to a monthly annuity rather than a lump sum benefit.

• The rate of return your monthly benefit increase represents. (Your service purchase application will provide an estimated amount that the service purchase will increase your retirement benefit.)

• Your present age and whether you intend to continue employment in a position covered under the WRS.

• If you purchase service and your WRS account is later divided by a divorce, (a Qualified Domestic Relations Order/QDRO), we also divide the purchased service. The Alternate Payee (your ex-spouse) gets a percentage of the purchased service as part of your WRS creditable service. If you purchase service after a QDRO, we do not split the purchased service and the total remains in your account.

You can estimate the cost to purchase most service (other than Other Governmental Service) based on information in this brochure. You may refer to our Calculating Your Retirement Benefits brochure (ET-4107), or go to our on-line Internet benefit calculators at etf.wi.gov, to estimate the increase in your monthly retirement benefit. This monthly amount multiplied by 12 would be your annual benefit increase.

Upon request, the Department will provide estimates of the cost to buy forfeited service, qualifying service, uncredited executive or teaching service and Other Governmental Service.

Worksheet for Calculating the Cost to Buy Part of Your Forfeited Service