VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but not paid back

[itr674]

Question:

For NC Bailey Act purposes, is a federal employee, with 5 years vested service prior to 12 Aug 1989, still vested if withdrawn retirement funds are not paid back by 12 Aug 2989?

- NC DOR makes that specific requirement for state and local government employees, but not specifically for federal employees.  See below statements.

NCDOR Directive PD-99-1 dated March 4, 1999:

"Vesting" Period for Qualifying State or Local Retirement Systems

An employee in a qualifying State or local government retirement system who was vested prior to August 12, 1989, and who leaves employment remains vested if the employee later returns to work, provided the employee did not withdraw his or her contributions to the retirement system.
- If the employee withdrew his or her contributions, the employee is no longer vested in the retirement system, even if the employee subsequently buys back the service time, unless the employee returned to employment in time to become vested again before August 12, 1989.

"Vesting" Period for Qualifying Federal Retirement Systems

Generally, participants in the qualifying federal retirement systems listed above, including military retirees, are vested for purposes of the settlement if they had five or more years of creditable service as of August 12, 1989.
- The general rule, however, does not apply to the Thrift Savings Plan.

[SusanY1]

Yes, the Baily Settlement applies in the same manner for federal employees except for Thift Savings Plan distributions. 

[itr674]

But the question is:

For NC Bailey Act purposes, is a federal employee, with 5 years vested service prior to 12 Aug 1989, still vested if withdrawn retirement funds are not paid back by 12 Aug 2989?

The federal vesting statement does not have in it the "- If the employee withdrew his or her contributions, the employee is no longer vested in the retirement system, even if the employee subsequently buys back the service time, unless the employee returned to employment in time to become vested again before August 12, 1989. " part in it.

[DaveF1006]

No. Under the North Carolina Bailey Act, a federal employee who had five or more years of creditable service as of August 12, 1989, is considered vested for the purposes of the Act. This means that their retirement benefits are exempt from North Carolina state income tax, regardless of whether they have withdrawn and not repaid their retirement funds by August 12, 19891.

The key factor is having the required years of service by the specified date, not the repayment of withdrawn funds. So, if the employee met the service requirement by August 12, 1989, they would still be vested under the Bailey Act.

NCDOR

[itr674]

DaveF1006, thank you for replying!

BLUF: Would the only way to flesh this out be to hire a tax attorney?  If so, I could start working on it for next year.

2020 thru 2024 NCDOR  Personal Tax Bulletins all have the same vesting verbiage for the NC local/state government retirees vs Federal government retirees.  NC qualified plans are written to require the payback but the federal qualified plans paragraphs don't mention the payback.

I definitely meet the 5 year criteria, CSRS, Aug79 -Apr85, then then left for 11 months, and came back in May86, and finally retired in 2020.

Called NCDOR two weeks ago and after going through about 4 people and numerous phones calls I finally had a call back from an NCDOR expert, and they said the NC local/state government pay back requirement applied to the federal CSRS retirees..

I asked why are paragraphs in the state section and federal section are written differently?  Basically they did not know.