The recent partial Federal government shutdown has prompted many employees to consider retiring from federal service earlier than planned. The frustration and hardship of missed paychecks has resulted in much bitterness and disappointment among thousands of employees. But those employees who are not eligible to retire, either because of young age or insufficient years of service, leaving federal service may be their only option. This column discusses an option available to federal employees called deferred retirement in which an employee leaves federal service before his or her eligible retirement date and, at a later date, receives his or her retirement benefits. The column discusses all the particulars of deferred retirement for FERS-covered employees including eligibility requirements and annuitant and survivor benefits. The reason deferred retirement is not presented in this column for CSRS or CSRS Offset employees is because it is assumed that given the average age and service time of CSRS or CSRS Offset employees, almost all of these employees are currently eligible for immediate retirement.
A FERS-covered employee who leaves Federal service is eligible to receive a deferred FERS annuity if: The employee: (1) is not eligible for an immediate retirement and a FERS annuity within one month of separation; (2) meets the minimum civilian service requirements of at least five years of civilian service; (3) does not take a refund of FERS retirement contributions he or she has made over the years via payroll deduction; and (4) has reached minimum retirement age (MRA) with at least 30 years of service; has reached age 60 with between 20 and 30 years of service; or has reached age 62 with at least five years but fewer than 20 years of creditable FERS service. Note that MRA is age 55 to 57 depending on which year an employee was born, as shown in the table below.
A departed employee must have at least 5 years of creditable civilian service in order to be eligible for a deferred retirement. Creditable civilian service for this purpose includes: (1) Service for which full FERS contributions via payroll deduction were made and not refunded to the employee. For most employees, the contribution is 0.8 percent of an employee’s wages deducted each pay date. For employees hired during 2013, the contribution amount is 3.1 percent of an employee’s wages deducted each pay date; and for employees hired after Dec. 31, 2013, the contribution amount is 4.4 percent of an employee’s wages deducted each pay date; (2) non-deduction (temporary or intermittent) service performed prior to Jan. 1, 1989 if a full FERS deposit was made and not refunded; and (3) service for which full Social Security (FICA) and full or reduced CSRS deductions were taken (sometimes called CSRS Interim or CSRS Offset service) if the CSRS deductions were not refunded. Any unused sick leave to the departing employee’s credit at the time of separation is not creditable for any purpose. This includes retirement eligibility for time in service and FERS annuity computation in a deferred FERS retirement.
Procedures and Benefits Associated with a FERS Deferred Retirement
A departing employee from Federal service under FERS will be eligible for a deferred FERS annuity under certain conditions. In particular, the employee: (1) Has at least five years of creditable civilian service; (2) did not receive a refund of FERS retirement contributions; and (3) is not eligible for an immediate/voluntary retirement. The deferred annuity’s starting date will depend on the separated employee’s completed years of service, as summarized in the following table:
|Years of Completed FERS Service||FERS Annuity Commences the Month the Departed Employee Becomes….|
|At least 30||Minimum Retirement Age (MRA)1|
|At least 20 but fewer than 30||60|
|At least 5 but fewer than 20||62|
1 MRA depends on the employee’s year of birth, as presented in the following table:
|Year of Birth||MRA|
|Earlier than 1948||55|
|1948||55+ 2 months|
|1949||55 + 4 months|
|1950||55 + 6 months|
|1951||55 + 8 months|
|1952||55 + 10 months|
|1965||56 + 2 months|
|1966||56 + 4 months|
|1967||56 + 6 months|
|1968||56 + 8 months|
|1969||56 + 10 months|
|Later than 1969||57|
FERS employees interested in deferred retirement need to be aware of the procedures involved in effecting a deferred retirement. Employees wishing to leave federal service must notify their agencies of their intended departure date and fill out necessary forms. Subsequent actions will then be performed as follows:
- Departed employees will need to file with OPM’s Retirement Office Form RI 92-19 (Application for Deferred Retirement-FERS) (downloadable here) about two to three months before the intended FERS annuity commencing date as shown in the above table. Note that it is the departed employee’s responsibility to file Form RI 92-19 at the appropriate time. If a departed employee does not fill out and submit Form RI 92-19, then OPM will not compute and send the departed employee’s FERS annuity.
- OPM’s Retirement Office calculates the deferred annuity based on the employee’s length of service and high-three average salary as determined on the employee’s date of separation from Federal service. Unused sick leave at the time of separation is forfeited and not used for FERS annuity calculation purposes as is done for FERS employees who retire under an immediate retirement or early retirement (VERA or VSIP) option. Any unused annual leave the departed employee had at the time of his or her departure from Federal service will be paid to the departed employee in a lump sum payment. The deferred annuity can include a survivor annuity option (maximum or less than maximum) with a reduction to the annuity of 10 percent or 5 percent, depending on the amount of the survivor annuity chosen.
- Those departing FERS employees with post-1956 military service and who want to make a full deposit for their military service must do so before separation from Federal service in order to receive for the military service in the computation of their deferred FERS annuity.
- No survivor annuity is payable to a departed employee’s spouse, former spouse or children, if the departed employee dies before applying for, his or her deferred FERS annuity via Form RI 92-19. The only benefit payable in that case would be a lump sum payment of the deceased employee’s FERS retirement contributions without interest paid to the person(s) listed on Form SF 3102 (Designation of Beneficiary – FERS) which was hopefully previously properly filled out and submitted to OPM’s Retirement Office in Boyars, PA.
Deferred Retirement and the Effect on Employee Benefits
Upon separating from Federal service, a departed employee permanently loses his or her Federal group health insurance (FEHB) and Federal group life insurance (FEGLI) benefits. These benefits are not restored once the deferred annuity commences.
Long-term care insurance, offered through the Federal Long-Term Care Insurance Program (FLTCIP), may be retained in a deferred retirement. This is assuming the departed employee had been approved for coverage as of the day of leaving federal service. But a departed employee with FLTCIP coverage must arrange with the LTC Partners (who run the FLTCIP) for making premium payments. This is because FLTCIP premium payments are normally deducted from an employee’s paycheck or an annuitant’s annuity check, both of which a departed employee waiting to receive a deferred annuity will not be receiving until the deferred annuity commences.
Those departing employees with Thrift Savings Plan (TSP) accounts may leave their TSP accounts alone upon leaving Federal service. Departed employees may not contribute directly to their TSP accounts but they can make interfund transfers and the accounts will likely grow over time. Departed employees can make indirect contributions to their existing traditional TSP accounts through direct rollovers or transfers of traditional IRAs they may own and also qualified retirement plans (such as 401(k) plans) that they participate in. These indirect contributions to the TSP are done using form TSP 60 (Request for a Transfer Into the TSP). There is no frequency nor dollar limitation as far as how much can be transferred into one’s traditional TSP account. But there are also no tax benefits – no deduction from gross income – for the amount of the direct rollover or transfer into one’s TSP account.
Those employees who depart federal service before age 55 must wait until they are at least age 59.5 to withdraw their TSP accounts in order to not be subject to a 10 percent early withdrawal penalty.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.