Refunds and Redeposits
The lowdown on some recent news about service credit payments and retirement contributions.
One of the hot topics discussed among federal benefits specialists over the holidays was civilian service credit deposits and redeposits. That's because there was some clarification from the Office of Personnel Management regarding redeposits of refunded retirement contributions for Federal Employees Retirement System participants and a resolution regarding processing problems for employees who have attempted to pay civilian service credit deposits.
Making a redeposit involves paying back refunded retirement contributions. This happens if an employee had a break in service and requested a refund of retirement contributions under FERS or its predecessor, the Civil Service Retirement System. Under CSRS, such refunds could be substantial, since CSRS employees generally contribute 7 percent of their base pay into the CSRS retirement fund. In 2011, if you are covered under CSRS and your salary is $70,000, you'll contribute almost $5,000 to the retirement system.
Under the FERS system, retirement contributions are much lower, generally 0.8 percent of base pay. (FERS employees also pay into Social Security and are expected to make contributions to Thrift Savings Plan accounts.) A FERS employee with a $70,000 salary this year would contribute only $560 toward into the retirement fund.
Employees can take a refund of these contributions when they leave federal service. If they later return to another federal job, can choose to pay back -- or redeposit -- these funds to the retirement system, with interest. The effect of paying back refunded contributions varies between CSRS and FERS and also could be affected by the date you apply for the refund and how much service the refund covers.
To make things more complicated, when FERS started in 1987, there was no provision for redepositing refunded FERS contributions. If an employee took a refund, credit for the service was permanently lost, both for retirement eligibility and computation of benefits. But the 2009 National Defense Authorization Act included provisions allowing employees to repay refunded FERS contributions.
But until recently, OPM provided little in the way of guidance about how to repay deposits and what would happen if an employee didn't. Now the agency has solved the mystery. Here are the new guidelines:
- Employees covered by FERS on or after Oct. 28, 2009, can redeposit any FERS deductions previously refunded to them. They also can redeposit any CSRS deductions previously refunded that covered CSRS service that is credited under FERS rules (this generally occurs if the refund covered less than five years of CSRS service and the employee does not have a CSRS component to their FERS retirement).
- Payment of the FERS redeposit allows the refunded service to be creditable for determining an employee's retirement eligibility and for computing the amount of an employee's annuity.
- Not paying a FERS redeposit only allows the refunded service to be creditable for determining an employee's retirement eligibility. It is not creditable for computing the amount of an employee's annuity.
- Employees wanting to make a FERS redeposit can complete the FERS Application to Make a Deposit, SF 3108. Employees must indicate on the application that the period of service was refunded and send the completed application through their agency for certification.
- Employees wanting to make a FERS redeposit for refunded service and a FERS deposit for non-covered service (i.e. payment for temporary service or seasonal government employment performed prior to Jan. 1, 1989, that was not initially covered by FERS contributions when the service was performed) will be assigned two service credit account numbers and will receive two separate statements based on each service credit account calculation. Payments must be submitted for each account separately.
Correcting Past Mistakes
There's an old Irish saying: "When mistrust comes in, love goes out." Due to some errors and mishaps with computer systems at OPM, there hasn't been a lot of love for this agency lately. We shouldn't forget that officials at OPM do a lot of things right. They manage to pay monthly retirement benefits to more than 2 million retirees and survivor annuitants on time. The 2010 Federal Employees Health Benefits Program open season has closed with almost 9 million individuals covered by one of the many different health benefit plans for another year.
OPM's problems seem to occur just before an employee retires or during the retirement processing period. The agency makes calculations to ensure the correct amount of money has been deposited into the retirement fund for a particular employee, and that he or she is credited with the correct amount of federal service. The computer systems OPM has previously implemented or attempted to implement to streamline these tasks have not been as accurate or efficient as hoped.
OPM is in the process of refunding overpayments to employees and retirees who have overpaid their redeposits and deposits of civilian service credit payments, and also collecting underpayments. This correction is necessary due to the problems with a computer program OPM had been using to compute the interest due on deposits and redeposits.
The good news is the computer issues are now corrected. Still, it's no surprise that affected individuals are concerned -- especially those who have been told they were paying too little.
Let's say, for example, that Alice applied for and received a refund of her CSRS contributions after a break in service in 1983. She returned to federal service and asked to make a redeposit of her refund in 2008. Here are the rules for applying interest to CSRS redeposits:
- If OPM received the application for the refund after Sept. 30, 1982, 3 percent interest is charged through Dec. 31, 1984, and after that a variable rate determined annually by the Treasury Department is charged, compounded on Dec. 31 of each year.
- If the refund application was received before Oct. 1, 1982, 3 percent interest would accrue daily and be compounded annually through the date the redeposit is paid or until the commencement date of the retirement benefit, whichever is earlier.
Apparently there was some confusion about when employees were grandfathered under the 3 percent rate, and when the variable rates should have applied. Thousands of people were affected by errors in making such calculations. Now OPM has notified them and recalculated their interest payments. They have until June 30 to pay any outstanding balances without accruing additional interest.
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.