Edward A. Zurndorfer
Those federal employees who are covered by the Civil Service Retirement System (CSRS) are most likely eligible to retire. These employees were hired before Jan. 1, 1984 and most likely have more than 30 years of federal service and have reached their 55th birthday, meaning they are eligible to retire. There are also CSRS Offset employees who were initially hired into federal service before Jan. 1, 1984, left federal service with at least five years of CSRS service, and then returned to federal service as CSRS Offset employees. Many CSRS Offset employees are eligible to retire because they have also fulfilled the minimum age and service requirements.
Some of these CSRS and CSRS Offset employees who are still in federal service and may have had previous temporary (“nondeduction”) federal service prior to their being hired as permanent employees. When they were temporary employees, they did not contribute to the CSRS retirement system or any other retirement system. They received a paycheck in which federal and state income taxes, FICA (Social Security) and Medicare Part A (Hospital Insurance) payroll taxes were withheld, but nothing withheld for contributions to CSRS. Nevertheless, the temporary service did in all cases result in the employee’s receiving retirement eligibility credit for the years of temporary service. This column discusses whether these employees are required to make a deposit for their temporary (“nondeduction”) service for the purpose of crediting the temporary years for CSRS annuity computation.
Examples of temporary (“nondeduction”) service
- Prior to being hired as a permanent federal employee, an individual served in the Peace Corps or VISTA.
- An individual, while in high school, was enrolled in a federal work study program.
- An individual was in high school or college and was hired by a federal agency to work over the summer in an internship program.
- An individual was hired by the U.S. Postal Service during the month of December to deliver holiday mail.
- An individual was hired by IRS for four months in the spring (January through April) to help out in the busy tax filing season.
General rules regarding deposit service
In general, temporary or “nondeduction” service performed before Oct. 1, 1982, is always creditable for CSRS retirement eligibility purposes with no deposit required. The service is also creditable (used) in the calculation of the CSRS annuity, also without a deposit. However, if the employee does not make a full deposit to cover the temporary service time, the employee’s CSRS annuity will be permanently reduced annually, by 10 percent of the deposit due. As will be explained below, for CSRS temporary time purposes, a deposit is equal to seven percent of the employee’s total salary earnings as a temporary employee, plus interest charges.
Any temporary service performed after Sept. 30, 1982 is also creditable for CSRS retirement eligibility purposes without any deposit required. But nondeduction service after Sept. 30, 1982 will only be creditable for CSRS annuity computation purposes if and only if a full deposit is made.
These general rules about CSRS deposits therefore generate the following questions: (1) Should every CSRS or CSRS Offset employee with prior temporary service make a deposit?; (2) when does a deposit for temporary service not make sense?; (3) If a deposit is made, is there a “breakeven” point and if so, how is breakeven point determined? These questions will be answered below.
Who can make a deposit?
Deposits for temporary or nondeduction service can only be made by:
- An employee who currently is covered by CSRS or CSRS Offset;
- A separated employee who is entitled to an immediate CSRS annuity;
- A former CSRS employee whose CSRS annuity has not been fully adjudicated who retains retirement rights based on a separation from a position in which CSRS retirement deductions were properly withhold and remain in the CSRS Retirement and Disability Fund;
- The spouse of a deceased employee who is entitled to a CSRS survivor annuity; and
- The former spouse of a deceased employee who is entitled to a survivor annuity.
How would an employee know about the need to make a deposit as a result of prior temporary service?
A CSRS or CSRS Offset is normally not aware of the need to make a deposit, nor is the employee informed by his or her Human Resources or Personnel Office about the need to make a deposit. The employee will be informed about the need to make a deposit for prior temporary service when he or she receives his or her retirement estimate (normally given to the employee within three years of the employee’s retirement date). Consider the following example (presented below) of a CSRS employee who recently his retirement annuity estimate.
The CSRS retirement annuity estimate is for an employee (call him “Robert”) whose retirement service computation date (SCD) is 9/22/1980. Robert intends to retire on 1/03/2021. Note that Robert has an unpaid “pre 10/1/1982 CSRS deposit” equal to $6,361. Under “pre 10/1/1982 deposit” the printout states that the employee had temporary service between 9/22/1980 through 7/7/1982 and as a result, owes a deposit of $6,361. This includes a CSRS contribution of $1,987 (equal to 7 percent of Robert’s wages as a temporary employee) and total accrued interest of $4,374 for a total of $6,361. This example is further explained and discussed below.
- Pre-10/01/1982 interest rules were used in computing accrued interest on refunds received BEFORE 10/01/1982.
- Post-09/30/1982 interest rules were used in computing accrued interest on refunds received AFTER 09/30/1982.
- Pre-10/01/1982 Deposit service cases: If deposit is NOT made or the Alternative Form of Annuity (AFA) is NOT elected, employee’s annual annuity will be reduced by an amount equal to 10 percent of the deposit owed.
- Post-09/30/1982 Deposit Service cases: If deposit is NOT made or the Alternative Form of Annuity (AFA) is NOT elected, the deposit service will NOT be used in computing employee’s annual annuity.
Amount of the deposit for temporary service
The amount of a deposit is the sum of the CSRS deductions that would have been withheld from an employee’s basic pay during the period of temporary service had the employee been covered by the retirement system, plus interest.
The deductions are based on a percentage of basic pay. The percentages that apply for different periods of service are shown in the table below:
|If the temporary service was performed………..||then the percentage deductions from Basic Pay Are|
|From July 1, 1948 to October 31, 1956||6.0%|
|From November 1, 1956 to December 31, 1969||6.5%|
|January 1, 1970 –||7.0%|
Note: For CSRS Offset employees the amount of the deposit calculated using the appropriate rate listed in the preceding table.
Interest is computed on the deposit and computed on the deposit starting in the midpoint of each period of nondeduction service. In the example above, the individual’s period of temporary service was 9/22/1980 through 7/7/1982. The midpoint of that period Aug. 14, 1981. Interest is charged each year on any unpaid balance of the deposit. The interest rate is 3 percent per year through Dec. 31, 1984. A variable rate determined annually by the Department of the Treasury began Jan. 1, 1985 and is summarized in the following table:
CSRS Interest Rates by Year (1985 -) Imposed on Deposits for Temporary Service
What is the effect of making a deposit for temporary (“nondeduction”) service?
The effect on retirement benefits of a deposit for temporary service depends on whether the temporary service was performed before Oct. 1, 1982 or was performed after Sept. 30, 1982. It does not matter whether an employee has only CSRS coverage, or a combination of CSRS and CSRS Offset coverage.
Temporary service before Oct. 1, 1982
If a CSRS/CSRS Offset employee does not pay the deposit prior to the final adjudication of his or her CSRS retirement claim, then: (1) the temporary service counts toward eligibility for retirement; and (2) the temporary service time is included in computing the CSRS annuity; but (3) the CSRS annuity is reduced by 10 percent of the total deposit owed, including interest.
It is useful to help understand the effect of making or not making a deposit for temporary service through an example. Recall the example above. Robert owes a total deposit including interest of $6,361. Robert had a period of temporary service from 9/22/1980 through 7/7/1982. On 7/8/1982, Robert was hired as a permanent CSRS employee. Robert is getting credit for his one year, nine months and 15 days of service (9/22/1980 through 7/7/1982) for both CSRS retirement eligibility and in the computation of his CSRS annuity without his making a full deposit. But if he does not make a full deposit, his CSRS annuity, computed to be $116,244, with be reduced by 10 percent of what he owes in a deposit. Specifically:
$116,244 Robert’s starting gross CSRS annuity
Less: (636) 10% of what Robert owes for his deposit ($6,361)
$115,608 Reduced CSRS gross annuity (if a full deposit is not made)
If he makes the full deposit of $6,361, then Robert’s starting gross CSRS annuity will be $116,244.
The question for Robert: Is it worth making the full deposit? Here are some considerations:
- If Robert is giving a survivor annuity to his spouse and he does not make a full deposit, then upon Robert’s death the $636 annual reduction will continue and be applied to the survivor annuity.
- If Robert makes a full deposit, then if he lives at least 10 years after he retires, then he will “get his money back”, or if Robert dies within 10 years after he retires and he is giving a survivor annuity to his spouse, then if his spouse lives until at least 10 years from the day that Robert retired, then the full deposit would have been recovered.
- If Robert works past 41 years and 11 months, then once Robert retires any CSRS deduction (the 7 percent of his paycheck) that are deducted every pay period, will be applied towards the deposit owed. This means that if Robert works to 42 years, 11 months and he earned $100,000, then 7 percent of $100,000, or $7,000, would be more than enough to pay his deposit so that he would not have to pay the deposit.
Temporary service after September 30, 1982
If a CSRS/CSRS Offset employee had temporary service after Sept.30, 1982 and did not make a full deposit including interest prior to the final adjudication of his or her retirement claim, then: (1) the temporary service counts toward eligibility for retirement; and (2) the temporary service salary may be used (if it is to the advantage of the employee) in the computation of the high-three average salary; but (3) the temporary service time is not used in the computation in the CSRS annuity.
The following example illustrates:
Sally: Hired into federal service May 1975 and worked through April 1986 at which time she left federal service.
She returned to federal service in January 1987, worked 11 years as a temporary employee, and in 2001 was hired as a permanent employee
and wants to retire in December 2020.
Total Service: May 1975 – April 1986 as a permanent employee – 11 years
January 1987 – December 1997 as a temporary employee – 11 years
January 2001 – December 2020 as a permanent employee – 20 years
Without a deposit for the 11 years of temporary service, total service time used for CSRS retirement eligibility = 11 + 11 + 20 = 42 years
Without a deposit for the 11 years of temporary service, total service time used in CSRS annuity computation = 11 + 20 = 31 years
Deposit owed for 11 years of temporary service, including interest = $82,000
Should Sally make the deposit?
Assume Sally’s high-three average salary is $100,000, then according to the CSRS annuity percentage tables, 11 years of additional service results in a two percent per year times 11 years, or 22 percent (of the high-three average salary) permanent increase of the CSRS annuity. With a high-three average salary of $100,000, that means by making a deposit of $82,000, Sally will receive an extra 22 percent of $100,000, or $22,000 per year for the rest of her life. In other words,
$82,000/$22,000 or 3.73 (“breakeven” point in years)
This means that 3.73 years after Sally retires from federal service, Sally will “get her money back” that she paid for her deposit. It is probably well worth the money for Sally to make this deposit in full.
How to make a deposit for temporary under CSRS or CSRS Offset
In order to make a deposit for temporary service under CSRS or CSRS Offset, an employee would have to download form SF 2803 (Application to Make Deposit or Redeposit) (downloadable here), fill out as much of the form as possible, and then take the form to his or her Personnel or Human Resources Office. No deposit is made with the form. That office in turn will send it to OPM’s Retirement Processing Office who will contact the employee regarding the total amount of deposit owed and options for paying the deposit.
The following chart summarizes deposit service for CSRS and FERS employees, including how they should be aware of temporary service as well as a need to make a deposit.
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.