Purchased Service

What Is Purchased Service?

Purchased service is the additional amount of service years that pensioners can purchase to be counted towards their pension account. Some retirement systems in the United States and Canada allow participants to purchase service time under certain conditions.

Typically, retirement plan participants would only be permitted to purchase service while they are an active participant contributing to the plan at that time, so they would not be able to purchase service time once they have already retired, stopped working, or otherwise separated from the retirement plan. 

How Purchased Service Works

Purchased service is a tactic that may be beneficial to a qualified individual for a variety of reasons. This option can help the individual meet the minimum time period required to qualify for retirement benefits, or allow them to step up from a level of partial benefits to the full benefit designation. In addition, this may be a way for the participant to increase their lifetime monthly payment amount.

Purchased service may also offer other advantages, such as allowing the person to be eligible for other benefits such as medical insurance premium reimbursement or to render them eligible to apply for disability benefits or other programs.

The price of purchased service may cost more than the required employee contributions under some circumstances.

Pensioners may purchase additional service time to cover service absences for reasons such as authorized leave without pay, including maternity or paternity leave, as well as absences related to other situations such as military service, a strike, or other hiatus from active work, or to cover a long-term disability waiting period.

Special Considerations

Pensioners may use purchased service to make up for lost contributions to pension plans in the event that they spent a period of time working in a service for which they were not eligible to receive pension benefits. Often, the cost of the purchased service is equal to the required employee contributions for the period of service being purchased; in some cases, the costs are higher. 

Purchases of service can occur as a lump sum payment, paid for by check, money order, or the direct transfer of funds from a Registered Retirement Savings Plan or other registered savings plan. Since this transaction can involve a significant amount of money, some plans will also allow for that lump sum amount to be broken up into installments that are due at specified increments over an extended period of time.

These purchases may also be made through payroll deductions, which would occur in addition to any regular pension contributions.