Defined benefit plans that permit the repurchase of refunded service credit typically require that the member repay the refunded account balance and also require that the member pay an interest payment or withdrawal fee. That payment or fee is typically not credited to the member's account and will not be repaid to the member if the member subsequently refunds his account balance before retirement. Assuming the plan accepts rollovers of eligible rollover distributions to be used to repurchase the refunded service, is it also permissible for the plan to accept a rollover to pay the interest payment or withdrawal fee?

I can find no guidance on this issue. You may want to refer to IRS publication 575 regarding the taxation of pension and annuity income.

My guess is the Publication 575 is irrelevant. Since this is a governmental plan, the relevant issues probably are the plan provisions and the state or local statute which permits the purchase of service credit.

For purposes of this question assume that the plan permits such a rollover or at least is silent on that particular issue. My question is whether there is a federal tax reason for not permitting the use of a rollover in such a fashion. I have seen at least one commentator express reservations about the use of such a rollover given that there may a fact situation in which that part of the rollover is never taxed because it will not be distributed in the event of a refund.

Why would Pub. 575 be irrelevant? The participants fees and contributions toward the service credit purchase may be after-tax?

Correct.

Pub 575 is not irrelevant, the Pub just does not address this narrow issue.