- Should I Consider Purchasing Out-of-State Service?
- Frequently Asked Questions
A state employee or teacher may establish retirement eligibility credit for previous service rendered as a full-time state employee or public school teacher in a state other than Tennessee or for overseas teaching service with the U.S. Department of Defense. Out-of-state service is credited for establishing service retirement eligibility only–no benefit is paid on such service. The following conditions apply:
- The member must be vested (usually 5 years of service, but is determined by entity).
- The member must not be receiving or entitled to receive any retirement credit in any other retirement system for this service.
- The amount of out-of-state service established cannot exceed the amount of in-state creditable service earned.
- At the time the service is claimed, you must establish either all the years of out-of-state service that you have requested or the number of years which you expect to need to meet the 30 year retirement requirement.
- The service and salary must be certified by the employer or state in which the service was rendered.
When establishing out-of-state service, a member must make a lump-sum payment. If the out-of-state service was rendered on or before June 30, 2000, the payment must equal: (i) the sum the individual would have contributed had they been a member of the TCRS during the period of the out-of-state service; (ii) plus the employer contributions which would have been made in accordance with the TCRS contribution rates in effect during the period in which the service was rendered; (iii) plus interest on both at the rate of 7.5 percent compounded annually. If the out-of-state service was rendered after June 30, 2000, the payment must equal 10 percent of the member's earnable compensation during the period of the out-of-state service plus interest at the rate of 7.5 percent compounded annually.
Who Should NOT Consider Purchasing Out-of-State Service
Since out-of-state service can only be used to qualify for service retirement, you should not purchase it if you will qualify for service retirement without it. Group I members qualify for service retirement at age 60 or with 30 years of service, whichever comes first. Therefore, you should NOT purchase out-of-state service if:
- You are already age 60 or if you will be age 60 before you retire, OR
- You already have 30 years of service credit or if you will have 30 years of service credit before you retire. (Remember that unused sick leave will count toward your service credit.)
Other Points to Consider in Your Decision
- Out-of-state service is most valuable when it is used to qualify with 30 years prior to age 55. It is of lesser value if you will be retiring after age 55 but before age 60.
- Consider the economic value of the increased benefits resulting from the elimination of the early reduction. If the difference in benefits will fund the cost of purchasing the service in 6 years or less, it may be worthwhile to consider. If the payment can be recouped in 6 to 9 years, it may be of marginal value. If it will take 9 years or more to recover the payment, you may want to consider another use for your money because any lifetime value would probably be minimal.
- You may want to consider waiting to make the payment until you know when you are going to retire. Otherwise, you do not know how much service to buy or whether you will need any of the service to meet the service retirement requirements.
- Consider any leave balances when purchasing out-of-state service. For example, if you have qualifying unused sick leave, that credit can reduce or eliminate the need to purchase out-of-state service. If accumulated leave reduces the amount of service needed, you may wish to notify your assigned TCRS specialist of this fact so that an appropriate invoice can be prepared.
- If you make a mistake and pay for the service, TCRS will be happy to refund all or part of the payment at retirement if the service will not increase your benefit.
What to Do If You Think You Want to Purchase Out-of-State Service
When you believe that you will be under age 60 with less than 30 years in TCRS at termination of employment and the out-of-state service will complete the 30-year requirement, follow these steps:
- Obtain an Application for Retirement Credit for Service Rendered Out of State from the TCRS Internet site at www.tn.gov/treasury/tcrs or contact TCRS for a form.
- Complete the member information section on Part 1 of the form and send it directly to the out-of-state employer that can certify your service on Part 2 of the form.
- The form should then be forwarded by the out-of-state employer to the retirement system in which you participated. Most of the retirement system addresses and telephone numbers are available from the Internet at www.nctr.org for teachers and www.nasra.org for state employees. That system should certify the withdrawn service on Part 3 of the form and submit it directly to TCRS.
TCRS Invoice Process
Upon receipt of the completed Application for Retirement Credit for Service Rendered Out of State, TCRS will calculate the lump sum cost for the out-of-state service. TCRS should only bill you for the period needed to attain 30 years in TCRS. For example, if you have 29 years in TCRS and 4 years of withdrawn service from Mississippi, you should only be billed for the one year needed to attain 30 years.
The invoice amount includes employee and employer contributions that would have been made, plus interest. Remember, just because you are invoiced does not mean that you are required to purchase this service.
Ways to Pay for the Service
The payment must be made in a lump sum. Although this service is not eligible for the installment payment plan, you are welcome to use the following tax sheltered plans to fund all or part of the cost:
- 401(k) plans
- 457 plans
- 403(b) plans (commonly known as teacher tax sheltered annuities)
- 401(a) plans (similar to TCRS)
If you will not be retiring soon after TCRS bills you for the service, consider accumulating the funds necessary in a tax-sheltered vehicle sponsored by your employer. While the TCRS interest charges continue to accumulate, this strategy will be similar to an installment payment plan because of payroll deduction of contributions and it lets you control the money until you are sure that the purchase of the service is best for you.
- I am getting experience credit for my out-of-state teaching toward my Tennessee salary schedule. Why do I not automatically have that credit for retirement?
These are separate issues. The experience steps relate to the value the employer places on an experienced teacher over one with less experience.
The pension credit must be specifically authorized in the law and it must be funded. Tennessee only authorizes credit toward eligibility and the member funds the cost. When considering this limited provision, the General Assembly had serious reservations about funding the pension liability for employment rendered to other entities.
- If I establish out-of-state service credit for retirement benefit qualification purposes, will that service then count as years of service for retiree insurance premium calculation purposes?
No. Out-of-state service is only used to qualify for an unreduced TCRS benefit. There is no authorization to count out-of-state service for the calculation of insurance premiums.
- I have service with a private school system. Why doesn't it qualify for credit?
TCRS is a pension plan for public employees.
- If I am paying the employer and employee contributions, why do I only receive credit for service retirement eligibility?
Even with no accrual of credit and with full payment of the employee and employer contribution plus interest, there is a cost to the system if the member makes good decisions and lives a normal life expectancy. Even though benefits are not actually paid on the credit, employees will usually purchase the service only if it will be to their financial benefit. The lifetime financial benefit over the amount paid by the member is an employer liability.