Both this week and next I'll be examining a Top 10 federal retirement planning to-do list item -- service credit deposits. When I started this column in 2006, this was one of the first topics I felt compelled to write about. That's because during my 25 years of retirement counseling and training, I've discovered that many employees don't know what a deposit is and often are misinformed about whether they need to make one to maximize their retirement benefits.
This week, I'll explain the difference between the various types of deposits and how they are computed.
A service credit deposit is simply a payment to the federal retirement fund to receive credit for certain types of military and civilian service. You have the option to make a deposit if:
- There was a period of your civilian federal career when you didn't have retirement coverage. Examples of such situations (known as nondeduction service) include temporary service, seasonal work and intermittent or "when actually employed" service. If you are covered under the Federal Employees Retirement System, then you can only pay a deposit for nondeduction service performed before Jan. 1, 1989.
- You left the government and took a refund of your Civil Service Retirement System or FERS retirement contributions.
- You served in the military after 1956 and want to credit the service toward your federal civilian service for retirement eligibility and computation of your benefit.
If one of these situations applies to your situation, then you need to ask yourself two very important questions:
- How much do I owe?
- What happens if I don't pay the deposit?
This week, we'll look at the first question. Next week, we'll take up the second.
How Much?
If you're a federal employee under CSRS or FERS, then retirement contributions are deducted from your salary every two weeks and deposited into the Civil Service Retirement and Disability Fund. CSRS employees contribute 7 percent of basic pay (7.5 percent if covered under the special provisions for law enforcement officers, firefighters and air traffic controllers). For FERS employees, the contribution is 0.8 percent of basic pay (1.3 percent under the special provisions for law enforcement officers, firefighters and air traffic controllers).
For the kinds of service described above, however, retirement contributions were not withheld, or were refunded. If you want credit for such service toward your retirement benefit, then you must make a deposit to the retirement fund to compensate for the lost contributions.
How much you have to deposit depends on:
- Which retirement system you're under.
- When the service was performed.
- In the case of refunded contributions, when you applied for the refund.
Here's how the amount that you owe is computed:
- FERS Nondeduction Service: For deposits before Jan. 1, 1989, the amount owed is 1.3 percent of base pay earned during the period of service when the deposit were made. This applies whether or not deductions would have been taken at 1.3 percent if they had been taken at the time the service was performed.
- CSRS Nondeduction Service: Generally, you will owe 7 percent of base pay earned during the nondeduction service (6.5 percent if the service took place between Nov. 1, 1956 and Dec. 31, 1969).
- Refunded Contributions: You will owe the amount that you received as a refund. If you took a refund of CSRS contributions for less than five years of service and now are covered under FERS, then you will owe the smaller FERS deposit amount -- 1.3 percent of base pay earned during the period of service for which the deposit is being made.
- Military Service Deposit: Under CSRS, you'll owe 7 percent of the military base pay for each period of active service (not including allowances or combat pay). For FERS, the figure is 3 percent.
CSRS employees have long had the ability to get credit for refunded contributions. FERS employees recently gained the same treatment under a law that took effect at the end of October 2009. The Office of Personnel Management has not provided guidance yet to agencies on making payments for FERS redeposits. OPM will issue this information, along with the form needed to apply to pay the deposit, later this year.
Remember the Interest
If you're making a deposit, then you'll most likely owe some interest (in many cases, a lot of interest). Some deposits are charged a flat 3 percent interest rate, while others are charged a variable rate that changes every year and compounds on the amount that is owed from the previous year. The 3 percent interest is limited to CSRS deposits where the service was performed before Oct. 1, 1982, and CSRS refund applications filed prior to that date. The interest accrues and compounds on the unpaid deposit until the deposit is paid or until the employee retires.
For military service credit deposits, the interest is computed as follows:
- CSRS: There's an interest-free grace period until Oct. 1, 1985, after which interest is accrued and compounded annually at variable rates.
- FERS: There's a two-year interest-free grace period when you're hired, after which interest is accrued and compounded annually at variable rates.
For military service that interrupted a civilian federal career, the rules are different. To avoid interest, an employee should consider paying the military deposit within three years of re-employment after military discharge. The deposit will be the lesser of these two amounts:
- The retirement deposit that would have been paid on the civilian wages if the employee did not interrupt his or her civilian career for military service.
- The normal military deposit of 7 percent (CSRS) or 3 percent (FERS), based on the military basic pay.
An employee who uses military leave or annual leave to cover part of the period of separation will not owe a service deposit for this period.
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.