February 11, 2011Getting credit for civilian and military service toward federal retirement is among the least understood of all retirement topics. Since length of service is one of the two main factors that determine the value of retirement benefits, understanding service credit is an important issue for every employee. Along with simply documenting your service history for retirement eligibility and computation, service credit deposits can be a related concern.
Service credit deposits are payments employees make to the federal retirement fund that enable them to receive credit toward their retirement benefit for certain types of previous government service. If all your federal service was covered by retirement deductions, if those deductions never were refunded to you, and if you never served in the military services, then you probably don't have to think about paying a service credit deposit.
But for others, deposits can be a big issue. That's why I'm going to cover them in columns during the next three weeks. Let's start with military service credit.
If you have performed honorable, active-duty service in the uniformed services, you can get credit for it toward retirement eligibility and computation of benefits under either the Civil Service Retirement System or the Federal Employees Retirement System. But since you weren'tmaking contributions to the civilian federal retirement system during such service, you might have to pay a deposit to get the credit.
To figure out how much you owe, you can request an estimate of your military basic pay from the branch of the military in which you served, using Form RI 20-97. When you receive the estimate, a retirement specialist at your agency can compute the amount of your deposit and give you options for making payments by personal check or payroll allotment. You'll also have to file an official deposit application using Standard Form 2803 for CSRS, or Standard Form 3108 for FERS. Key Issues
There are several important issues youhave to consider about military service credit. First of all, was any of your military service performed before 1957? If so, you'll receive credit toward CSRS and FERS, with no payment required.
If your service was performed after 1956, then a different set of provisions applies. If you were first hired before Oct. 1, 1982, and covered by CSRS, CSRS Offset or have a CSRS component to your FERS retirement, then:
If you were first hired after Sept. 30, 1982, and covered by CSRS, CSRS Offset or do you have a CSRS component to your FERS retirement, then:
If you were first hired after 1983 and enrolled in FERS, or rehired after 1983 with less than five years of federal service before Jan. 1, 1987 (with automatic FERS coverage), then:
Before paying a military service credit deposit, be sure to find out what happens if you don't. In most cases, it makes sense to pay the deposit, because it might mean you can retire earlier and/or receive a larger benefit. But as you can see, some people don't even have to pay a deposit to get credit for their service. And remember, different rules apply for military retirees.
Once your military deposit has been paid in full, you should request OPM Form 1514 as proof of payment. This is especially important if you paid by personal check, or before agencies implemented electronic payroll processing. In many cases, the deposit payment will be noted on your leave and earnings statement. This will serve as proof of payment, along with a completed copy of Form RI-20-97. Keep a copy of any document related to your military service credit payment for your own records. It's also a good idea to keep a copy of the canceled check if you paid by personal check.
Questions and Comments
Here are some recent reader comments and questions regarding military service deposits: Pay it off early, or suffer like I did. I initially owed about $12,000. After 23 years, I owed about $30,000!
Interest does accrue on deposits. The interest doesn't date back to your military service time, but to a date sometime after you were first hired into civilian service. You're given a two-year interest-free grace period when you are first hired. For those employees hired before Oct. 1, 1982, the interest began to accrue in 1985. If you paid the deposit before Oct. 1, 1985, then you didn't pay any interest. (In those days the interest rate was as high as 13 percent. The interest rate for military deposits for 2011 is 2.75 percent.)
Following 12 years of military service I went to work full time for a Health and Human Services agency under FERS. I was aware that I could use my military time to "buy my retirement," but I knew that retirement eligibility for me required 20 years service. I decided to wait eight years, when my total time was 20 years. Granted, I would have saved a lot of interest with an immediate buy-in. But if I quit before serving the remaining eight years, it would have been money down the hole. That wait gave me a sure thing.
The military service can be used to compute a deferred retirement benefit, as well as an immediate one. You can pay a military (or civilian) service credit payment only while you are employed by the federal government. So I might have recommended paying the deposit even if you didn't stay for a full career. If you later chose to take a refund of your retirement contributions instead of receiving the deferred retirement, you would have been paid a refund of your deposit as well. A deferred retirement is available to employees who separate from federal service with a minimum of five years of civilian service. The only advantage to waiting until later in your career to pay the deposit is your decision remains open. There could be future changes in the law that could affect the decision. You also might be able to invest the amount that you owe at a rate of return greater than the amount of interest being charged. But keep in mind that with greater returns you will have greater risk.
Is it possible to retire without paying service credit? I am retired military. If I want to work in government for 30 years and not get my military time added to my civilian retirement, is this illegal?
Paying for a service credit deposit is always optional. If you're retired from the military and have determined that it doesn't make financial sense to combine your military service with your civilian service, then there is no need to pay the military service deposit.
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.
February 11, 2011