Understanding Purchased Service Credit and the Division of Early Retirement Subsidy

When navigating the complexities of pension plans, particularly during divorce or separation, two significant concepts often arise: purchased service credit and early retirement subsidies. Understanding these elements is crucial for ensuring fair and equitable distribution of retirement benefits

Purchased Service Credit

Purchased service credit refers to the ability of employees to buy additional years of service for pension purposes. This often applies to individuals who want to enhance their retirement benefits by purchasing credit for past service, military service, or other eligible periods not covered by their employer’s pension plan. Purchasing additional service credit can significantly boost retirement benefits, often leading to increased monthly pensions or eligibility for early retirement.

Division of Early Retirement Subsidy

An early retirement subsidy is a financial benefit offered by pension plans to employees who retire before reaching the normal retirement age. This subsidy is designed to provide a financial incentive for earlier retirement, often resulting in increased monthly pension payments. One such early retirement subsidy is the “30 and out” provision offered by many public retirement systems around the country. This provision allows a member to retire early without reduction if they have accrued 30 years of service (variations such as the “Rule of 85” and similar provisions also include an early retirement subsidies).

If a member’s purchase of additional “optional” years result in their meeting the “30 and out” threshold, the benefit can be payable immediately without reduction for early retirement (i.e. the subsidy). Enter the Zamudio case…..

Marriage of Zamudio and Ochoa, 2019 IL 124676

Marriage of Hunt, 78 Ill. App. 3d 653, 397 N.E.2d 511 (Ill. App. Ct. 1979)

In summary, the Zamudio case determined that if additional years of service credit are purchased during marriage, regardless of when the years may have been attributable, the purchased years are marital property. But what if the addition of the purchased years now puts the participant over the “30 and out” threshold?

(a) Does this mean the marital estate now owns the additional purchased years PLUS the entire early retirement subsidy? Or;

(b) Does the marital estate own the additional purchased years but the early retirement subsidy is to be apportioned based on the standard “Hunt formula”?

Ultimately it is up to the court to determine what is equitable regarding the apportionment of any early retirement subsidy, but having a conversation about the effects of purchased service credit and the impact of any early retirement subsidy/incentive is a worthwhile endeavor in my opinion!

If you have any questions on the valuation of any Illinois public retirement system, or the need for a non-marital tracing in a defined contribution plan such as a 401(k), please feel free to contact me at [email protected].