February 24, 2006In the last two columns, we looked at two of the three different kinds of service credit deposits (additional payments employees make into their retirement funds to get credit for previous federal service): nondeduction service credit payments and redeposits of CSRS refunded contributions. This week, in the last of our three-part series, we'll look at military service credit deposits.
Deposits for military service credit work differently from civilian service credit payments. They must be paid by an employee's retirement date, because initial payment processing occurs in each agency's payroll system before the funds are transferred to the Office of Personnel Management. If you might be making both civilian and military deposits, it's important to understand the distinctions between how the two are handled.
The first thing to remember is that military service credit deposits only apply to service that took place after 1956. Military service performed prior to 1957 is creditable under CSRS and FERS without a deposit.
In 1956, Congress enacted a law requiring that CSRS retirees with annuities that included credit for military service performed after 1956 would lose that credit when they became entitled to Social Security benefits. This law coincided with a change in Social Security requiring that military wages be subject to Social Security taxes starting in 1957. Years later, as these laws began to cause recalculations of CSRS annuities, Congress passed another law to address the issue. This statute, passed in 1982, allows federal employees who were also veterans with post-1956 military service an opportunity to pay deposits into the retirement system to avoid the loss of their military service credit.
Here's how it works:
Deposits for post-1956 military service consist of payments to the employing agency equal to 7 percent (in the case of those in CSRS) or 3 percent (for those in FERS) of military basic pay earned during the period of military service. The payment transfers to the Office of Personnel Management when the employee retires (or changes payroll offices). Be sure to keep a record of this payment. Interest on military deposits begins to accrue on a specific date that is at least two years from the date of your first appointment to a civilian position. Your retirement coverage and the date you were hired determine your interest accrual date. Most CSRS employees will have interest accrue on Oct. 1 each year. Most FERS employees will have interest accrue on the anniversary of the date they started in government. The interest rate for 2006 is 4.125 percent. Interest has been as high as 13 percent in 1985. Now let's look at how the rules affect various groups of employees.
Employees hired after Sept. 30, 1982, must pay a military service credit deposit in order to receive credit for time spent on active duty. Unless the deposit is paid, this service will not be creditable toward retirement eligibility or in the calculation of CSRS or FERS retirement benefits. Interest continues to accrue until the deposit is paid or retirement is effective.
Here's an example:
Now for employees hired before Oct. 1, 1982. In this group, CSRS employees and trans-FERS employees with a CSRS component may continue to receive full credit for their military service without a deposit if they are 62 at retirement and are not qualified for Social Security. Most people need 40 credits (equal to 10 years of work) to qualify for Social Security benefits. Employees who retire before age 62 who will not be qualified for Social Security by the time they reach 62 also don't need to pay the deposit. Employees who already have enough Social Security credits to be qualified will not receive credit in the computation of their CSRS benefit if they have not made the deposit. So, for example:
If you postpone the decision to pay your military service deposit, be sure to revisit this issue prior to your retirement. If you have already paid your military service deposit, maintain a record of this payment.
February 24, 2006