January 23, 2009In these tough economic times, wouldn't it be nice to have some "found" money? In my weekly seminars, I try to teach people things that will boost their current income, or provide more retirement income later. Isn't that why you read this column, too?
This week, I'll provide some examples of actions you could take that will increase your own bottom line. Each is based on the experiences of actual employees whom I have met from agencies across government.
Carol wants to have Lasik surgery this year to free herself from a lifetime of wearing glasses. The average cost is more than $2,000, and it's not covered by federal health insurance plans. If you have vision coverage, you might qualify for a discounted procedure, but the cost still would be more than $1,000.
If Carol is an approved candidate for Lasik, she can choose to contribute the cost of the surgery to her health care flexible spending account. (The belated open season for opening an FSA ends Jan. 31.) Suppose the surgery will cost $2,340. She can set aside about $90 biweekly (depending on exactly when she has the procedure) to pay for it. She can have the surgery early in the year and be reimbursed shortly after submitting the claim. She will pay for the surgery over 11 or 12 months with no interest, and the true cost will be reduced by $647.01 in tax savings. That includes 6.2 percent in FICA and 1.45 percent in Medicare taxes, and 15 percent in federal and 5 percent in state income taxes (these will vary) that she will not pay because the $2,340 is in her FSA account and no longer subject to income taxes.
If you want to do something like this, hurry -- open season ends in eight days. For more information, check out fsafeds.com.
Jim served four years on active duty in the Air Force prior to his employment with NASA. He is covered under the Federal Employees Retirement System. He has decided to pay his military service deposit for his active-duty service so this time can be added to his length of service for retirement eligibility, and also in the computation of his future FERS retirement benefit. Under FERS, every year of creditable service is worth 1 percent (or 1.1 percent if you retire at age 62 or later with at least 20 years of creditable civilian and/or military service) of your highest three years' average salary.
Jim makes $65,000. So in today's dollars, the four years of active duty added to his future FERS retirement would increase his retirement income by $2,600 per year (four times 1 percent times $65,000 equals $2,600). The amount that he has to deposit equals 3 percent of the base pay he received while serving in the military, plus interest that began accruing after his third anniversary under FERS.
Jim was hired six years ago and recently found out from his human resources office that he owes $1,500. Jim decided to pay his deposit over the next 30 pay periods by making a payroll allotment of $50. On his next anniversary, he will owe some additional interest on the remaining deposit, but this year's interest rate is at a low 3.875 percent. In this case, getting an extra couple hundred dollars a month in his retirement check will cost him a little now, but will pay off many times over throughout what he hopes will be a long retirement (and also will increase the value of any survivor's benefit). He decided to pay this sooner rather than later to avoid additional interest on the deposit.
Less Life Insurance
Martha carries five multiples of her salary under Federal Employee's Group Life Insurance Option B. Her salary is $49,200 and Option B equals five times her salary rounded to the next highest $1,000. Martha has $250,000 (five times $50,000) worth of additional coverage. She also has basic FEGLI worth $52,000. Martha has decided to cancel her optional coverage because when she turned 55 last year, the cost of this coverage increased to 28 cents per $1,000 biweekly. She had been paying 14 cents per $1,000 from age 50 to 54. This increased her withholding for FEGLI Option B from $35 biweekly to $70, meaningshe will save $1,820 per year.
Martha's children are grown. If she were to die before her husband, he would be entitled to her basic FEGLI as well as a lifetime Civil Service Retirement System survivor's annuity equal to 55 percent of her earned retirement. The additional FEGLI coverage is no longer needed to provide for Martha's family. You must complete a Life Insurance Election form (SF 2817) to cancel your life insurance.
If Martha decides to continue some additional insurance coverage, she could shop around for a private term insurance policy that would be much less expensive, as long as she is insurable. She checked out WAEPA, a non-profit association that offers life insurance to federal employees, and found that $250,000 worth of insurance could be had for a little more than $35 biweekly at age 55 -- half the price of FEGLI Option B.
Martha also looked at SAMBA Federal Employee Benefit Association She found that at her grade level she could get $100,000 worth of coverage for $8 biweekly. The plan includes an accidental death benefit that would provide her $200,000 worth of coverage.
Sam took advantage of the belated health insurance open season to evaluate the relatively new high-deductible option in his Government Employees Health Association health plan. For years, Sam has been enrolled in the GEHA high-option family plan, but noted that the employee premium this year is $185.34 biweekly. Even though this reflects a 10-cent reduction, it's still among the most expensive FEHBP options. The GEHA High Deductible Health Plan family option will cost $100.36 biweekly.
Sam will set up a health care savings account (HSA) instead of contributing to a flexible spending account. The annual limit this year for HSA contributions is $5,900. Sam will receive a contributionfrom GEHA of $1,440 this year, so he will contribute the maximum to his HSA to achieve the highest possible tax break. He plans to contribute $4,460 to his HSA in pretax salary to help fund his out-of-pocket medical expenses. Sam hopes that his family stays healthy this year so that even though he has fully funded his HSA, he can keep the money in his account and continue to add to it in years to come.
Unlike an FSA, the balance in an HAS belongs to you and does not have to be spent each year. For dental and vision expenses, Sam set up a limited expense FSA account for additional tax savings and will contribute the out-of-pocket costs for his family's annual dental and vision expenses so that these expenses also can be paid with pretax dollars. To learn more about high-deductible health plans and HSAs, visit this OPM site.
Julia loves her job and has no intention of retiring. But she recently realized that since she is now past the full Social Security retirement age (for her it is 66), she can apply for Social Security retirement benefits even though she is fully employed. Julia's benefits will continue to increase since she is still working and adding taxable wages to her Social Security record. Employees under any of the federal retirement systems can apply for Social Security retirement benefits at their full Social Security retirement age (65 to 67, depending on their birth date) as long as they have at least 40 credits of coverage (or are qualified as a spouse, former spouse or widow). Check out the fact sheet available from the Social Security Administration to learn more.
Julia is covered under CSRS Offset and has paid Social Security taxes on her salary since returning to her government career 15 years ago. She learned that even though she now is entitled to $1,200 per month in Social Security benefits while she is working, she will be affected by the Windfall Elimination Provision when she retires. Since a portion of her federal career was exempt from Social Security taxes when she worked under "pure" CSRS from 1970 to 1985, the WEP will cause her Social Security benefit calculation to be modified when she begins to receive her CSRS retirement benefit. This also would be true if she were covered under "pure" CSRS or if she had transferred to FERS with more than five years under CSRS.
Her Social Security benefit will be reduced by $186 per month because of the WEP, but not until after she retires and begins receiving her CSRS retirement benefit. The reduction could be as much as $372 per month, but she is partially exempt from the WEP because she has more than 20 years of Social Security-covered substantial earnings during her career. If she works long enough under Social Security, the WEP will no longer cause a reduction when she retires. Social Security offers a fact sheet on the WEP.
These are just a few examples of how learning more about your retirement and insurance benefits can provide significant savings and increase your bottom line. In these situations, employees had to take action to find the savings or reap the benefits they were entitled to. In many cases, unless you are aware of your entitlements, you could be missing out on opportunities to increase your income now or in retirement. If you have an example of how you increased your income by unlocking one of your federal benefits, please share your story in the comments section below.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
January 23, 2009