Informed Investor: Deciding on survivor annuity benefits, Part V: Death in service (FERS)

This fifth of six columns on survivor annuity benefits discusses spousal survivor options and death benefits for employees covered by the Federal Employees Retirement System (FERS) who die in service. If the employee’s death was job-related, workers’ compensation benefits may also be paid to the surviving spouse.

Death in service occurs when: (1) an employee dies while making FERS contributions via payroll deduction; (2) an applicant for disability retirement dies before final adjudication by the employing agency; or (3) an applicant for immediate retirement dies before the commencing date of the FERS annuity, even though separation from service has occurred.

A FERS monthly survivor annuity is payable to the spouse of a deceased employee if the employee had completed at least 10 years of total creditable service. Creditable service includes: (1) prior  FERS service for which employee retirement contributions were made and remain in the FERS retirement and disability fund; (2) prior service time included in a CSRS annuity component applicable to “Trans” FERS employees; (3) non-deduction (seasonal or temporary) service prior to Jan. 1, 1989, regardless of whether a deposit for such service was made; (4) prior military service for which a full deposit was made; and (5) refunded employee FERS retirement contributions for which a full redeposit was made.

The FERS spousal survivor annuity is computed as if the deceased employee retired optionally on the date of death with no age-related penalty, equal to 50 percent of the deceased employee’s “basic” annuity calculated based on the deceased employee’s length of service and high-3 average salary on the date of death. Under a change of law that took effect Oct. 28, 2009, unused sick leave is also included in length of service for FERS annuity computation purposes. If a FERS employee dies before Jan. 1, 2014, then 50 percent of the unused sick leave on the date of death will be added to length of service for FERS annuity computation purposes, while 100 percent of the unused sick leave on the date of death will be used if the employee dies after Dec. 31, 2013.

A surviving spouse’s FERS survivor annuity becomes effective on the day after the employee’s death. The exception is a surviving spouse whose entitlement to a survivor annuity depends on the birth of a posthumous child. In this case, the survivor annuity becomes effective on the day after the child is born.

A survivor annuity paid to a widow or widower ends on the last day of the month preceding the month in which the widow/widower: (1) dies; or (2) remarries prior to age 55 (or age 60 if the remarriage occurred before Nov. 8, 1984). For remarriages occurring after Jan. 1, 1995, if the widow/widower remarries before age 55 and was married for at least 30 years to the individual on whose service the survivor annuity is based, then the survivor annuity will not be terminated.

Basic employee death benefit (BEDB)

 The BEDB is a benefit payable to the spouse of a deceased FERS employee who met the following eligibility requirements on the date of death: (1) completed at least 18 months of creditable civilian service; and (2) died in service while contributing to FERS.

 The BEDB is equal to: (1) $15,000 increased by all CSRS cost-of-living adjustments (COLAs) beginning Dec. 1, 1987. For 2013, the BEDB amount is $31,416.46 plus 50 percent of the deceased employee’s gross salary as shown on his or her current SF-50 (Notice of Personnel Action) or high-3 average salary if larger.

 The survivor spouse has two options for receiving the BEDB: (1) one lump-sum payment that can be rolled over to a traditional IRA; or (2) 36 monthly payments including interest. A surviving spouse who elects monthly payments can terminate the payments and then receive a lump-sum payment of the remaining BEDB balance.

 If the survivor spouse who elects to directly transfer the lump-sum BEDB payment to a rollover traditional IRA, then no taxes will be withheld from the BEDB. BEDB payments paid directly to a spouse or former spouse either in a lump sum or monthly are subject to mandatory 20 percent federal income tax withholding.

Effect of former spouse on survivor annuity and BEDB

 If a deceased FERS employee was married to a former spouse for at least nine months while in federal service and there is a court order giving full survivor annuity benefits and the BEDB to the former spouse, then the current spouse may not be eligible for a survivor annuity benefit or the BEDB.

Non-deduction and military service deposit and redeposit

 A surviving spouse can make a deposit for pre-Jan. 1, 1989, non-deduction (seasonal or temporary) service and/or any military service for which the deceased employee did not make a full deposit. In so doing, the surviving spouse will get credit for this time in the computation of the FERS survivor annuity. Also, the surviving spouse can make a redeposit of refunded employee FERS contributions resulting in the service time covered by the refunded service time being used in the FERS survivor annuity computation.