Edward A. Zurndorfer –
Mid-career federal employees – those employees covered by the Federal Employees Retirement System (FERS) and who generally between 10 years and 20 years of federal service – are highly encouraged to perform what is called a mid-career evaluation for the purpose of making sure they will be financially able to retire from federal service when they want to. It makes no difference when retirement from federal service is anticipated – in 10 or 20 or more years from now. These employees are encouraged to evaluate what they currently have and have accrued in federal retirement benefits and what they need to do during the remainder of their federal service in order be best financially prepared to retire.
A series of FEDZONE columns will present some of the most important actions and tasks mid-career federal employees should perform as they complete their federal service and prepare for their retirement. This column discusses making deposits for temporary time and for military service and why deposits for either or both types of service can be especially beneficial to employees covered by FERS.
Making a Deposit for Temporary Service
An employee covered by FERS may have had prior service with the federal government in which the employee was not contributing to any retirement system (CSRS or FERS. This is called temporary or “nondeduction” federal service. For example, the employee was serving in the Peace Corps or VISTA. Another example is a federal work-study program in which a current employee was in school and worked part-time in the afternoon and summers at a federal agency.
Upon becoming a permanent employee under FERS, an individual who had previous temporary service can “buy back” this temporary service by making a “deposit” and, in so doing, get credit for those years/months of temporary service for the purpose of eligibility to retire under FERS. Making a deposit for this temporary service would perhaps allow the employee to retire sooner than expected. The employee would also receive credit for any “bought back” temporary service in the computation of his or her FERS annuity (more years of service will result in a larger starting FERS annuity). But in order to get credit for this temporary service, an employee would have to make a full deposit, including interest charges, as will be explained below.
Types of Federal Service for which a Deposit may be Made
A deposit for temporary service for FERS retirement may be made for:
- Any period of creditable civilian service performed before Jan. 1, 1989 during which no retirement deductions were withheld from the employee’s paycheck;
- Any period of civilian service during which CSRS deductions were withheld from one’s salary and were then refunded to the employee based on an application SF 2802 (Application for Refund of Retirement Contributions) filed by the employee before he or she became reemployed in federal and covered by FERS. This assumes the new federal service will not be credited under CSRS rules.
- Certain periods of civilian service performed under other retirement systems for federal employees, other than CSRS or FERS; or
- Any period of Peace Corps or VISTA volunteer service, excluding training time, regardless of when the service was performed, provided that it was followed by a period of creditable FERS-covered service.
A deposit cannot be made for the following types of service:
- Temporary service after Dec. 31, 1988;
- Any federal service which is not creditable under FERS; or
- Time covered by a lump sum annual leave payment.
Amount to be Paid for a Deposit for Temporary Service
The amount of the deposit payment for most civilian service is 1.3 percent of the basic pay an employee earned during the period of temporary service, plus interest charges. The 1.3 percent rate applies regardless of whether deductions would have been taken at that rate (or higher or lower) at the time the service was performed. If there are separate periods of temporary service in which a deposit can be made, then the total amount due for each separate period of service must be paid in order to receive credit for FERS retirement eligibility and FERS annuity computations.
There are also interest charges on deposits for temporary service. Interest is charged starting from two years after the date the employee became a permanent federal employee under FERS at a variable rate by year, as shown in the following table:
FERS Interest Rates by Year for Temporary Service and Military Service Deposits
Interest charges are applied each year on the unpaid balance of the deposit. It needs to be emphasized that a FERS employee need not make this deposit for a period of temporary service he or she is eligible to make a deposit for. Making a full deposit for temporary service can only benefit a FERS employee for FERS eligibility to retire purposes and in the computation of the employee’s starting FERS annuity. But not making a deposit for temporary service will not take anything away from an employee’s existing service time and retirement benefits. The following examples will illustrate some of the advantages of making a deposit for temporary service under FERS:
Example 1. Nancy, age 58, has 27 years of federal service under FERS. Prior to entering federal service in 1993, Nancy spent three years in the Peace Corps. During those three years in the Peace Corps, Nancy was compensated a total of $40,000. Nancy’s current high-three average salary is $120,000. Nancy is not eligible to retire because she has less than 30 years of federal service under FERS. Nancy is eligible to make a deposit for her Peach Corps time. The following summarizes what Nancy owes and how Nancy will benefit by making a full deposit:
- She would owe 1.3 percent of $40,000 or $420, plus interest charges going back to 1995 (two years after Nancy started federal service as a permanent employee. Total interest equals $2,500 meaning that Nancy owes for her deposit a total of $420 plus $2,500 or $2,920.
- If Nancy makes the full deposit of $2,920, then: (1) Nancy will be able to immediately retire (two years earlier than expected); and (2) Nancy’s FERS annuity will increase by three percent (one percent per year for three years) of her $120,000 (her high-three average salary) or $3,600 per year for the rest of her life.
In other words, by making a full deposit of $2,920, Nancy will be able to retire immediately and get her money (deposit) back in less than a year after retiring.
Example 2. Jerry was employed in federal service between 1981 and 1984. He left federal service in 1985 and withdrew his three years of CSRS contributions. In 2003, Jerry re-entered federal service as a FERS employee. Jerry is 60 years old in 2020. Jerry is eligible to make a deposit for the three years of CSRS service and if he does, he will get credit for both eligibility to retire under FERS and in the computations of his FERS annuity. Since Jerry has 17 years of FERS service during 2020, he is not eligible to retire because he has fewer than 20 years of FERS service. If he does not make a deposit for the three years of withdrawn CSRS service, he will have to work until age 62 in order to retire. If he does make a full deposit, he can immediately retire at age 60.
How to Make a Deposit for Temporary Service
FERS employees who want to make a deposit for temporary service need to download Form SF 3108 (Application to Make Service Credit Payment) from here. The form must be completed and given to the agency’s Personnel or Human Resources Office because they must certify it.
An application to make a deposit for temporary service should not be filed if an employee plans to retire within the next six months. The employee’s Personnel or Human Resources office will send a completed SF 3108 to the OPM’s Retirement Operations center. OPM processes the application and will compute the amount of the deposit due including interest, sending a bill to the employee for the amount due. Instructions for making payment will be sent as soon as OPM processes the application.
Crediting Military Service Under FERS
Honorable active service in the Uniformed Services is a requirement for crediting civilian time under FERS. Uniformed service time includes service time in the Army, Navy, Air Force, Marine Corps and the Coast Guard. Also included is post-June 30, 1961 service in the Reserve Corps of the Public Health Service and in the Commissioned Officer Service of the National Oceanic and Atmospheric Administration.
Active duty is defined as duty performed on a full-time basis with military pay and allowances. Creditable military service time also includes active service in the reserve components of the Uniformed Services listed above. This includes time when an individual is called to active duty and service during the annual 15-day training camp or cruise that reservists are obligated to attend.
Honorable military service is defined as service time that was terminated under honorably conditions, including: (1) Separation because of hardship; (2) retirement because of age or disability; (3) general discharge under honorable conditions; and (4) death in action. Defense Department’s Form DD 214 displays the reason for an individual’s military discharge.
Any FERS employee receiving military retirement pay as a result of having retired from the military for active duty time will not be eligible to credit the military service for FERS retirement purpose unless: (1) He or she waives the military retirement pay; or (2) the military retirement pay was awarded as a result of a total disability incurred in combat.
Military service time will be credited for FERS retirement and survivor benefits if the service was performed before the employee retires from federal service and a full military deposit is made by the time the employee retires from federal service.
A FERS military deposit is equal to three (3) percent of the military basic pay earned during the employee’s military service plus interest charges if these charges apply (see below). A full deposit will result in the employee’s receiving credit for retirement, eligibility and in the computation of the employee’s FERS annuity. The following examples will help illustrate:
Example 1. Chester is 57 years old, his minimum retirement age (MRA). He has 23 years of FERS service and eight years of prior military service that he has not made a deposit for. If Chester makes a full deposit for his military service, then he will have 31 years of FERS service and, because Chester has reached his MRA, Chester will then be eligible to retire from federal service immediately. This is because Chester has reached his MRA and now has at least 30 years of service. His starting FERS annuity will be based on 31 years of service.
Example 2. Jan, age 62, has 18 years of FERS service and is eligible to retire immediately because she is age 62 and has at least five years of federal service. She has not made her military deposit for her two years of military service. If Jan were to retire without making a deposit for her military service, then her starting FERS annuity, not including any unused sick leave, would be computed as follows:
18 years of service times 1 percent/year of salary times high-three average salary
If Jan were to make a full deposit for her military service before she retires, then Jan’s FERS starting annuity will be computed as follows:
20 years of service times 1.1 percent/year of service times high-three average salary.
In other words, in addition to the two years used for computing the FERS annuity, Jan is receiving a 10 percent (permanent) bonus in her annuity (the accrual factor is increased to 1.1 percent from 1 percent). This is because a FERS employee who retires at age 62 or older and who has at least 20 years of service will have a 1.1 percent accrual factor, rather than a 1 percent accrual factor, used in the computation of his or her FERS annuity.
In terms of interest charges, the FERS law provides a three-year interest-free grace period on deposits. Interest for employees employed under FERS after Dec. 31, 1986 begin to accrue two years from the date first employed and subject to FERS.
Each year the Department of the Treasury announces the interest rate that applies to deposits for military service time. These interest rates are the same rates used for deposits for temporary time, as shown in the interest table above.
FERS employees who want to make a military deposit must obtain and submit to their Human Resource or Personnel Office: (1) Form SF 3108 (Application to Make Service Credit Payment) and Form OPM 1515 (Military Service Deposit Election), both of which can be downloaded from here. Once completed, both Form SF 3108 and Form OPM 1515 should be delivered to someone in one’s Personnel or Human Resources Office, who will send both forms to OPM. OPM will compute how much the employee owes for his or her military deposit. The deposit including any interest due may be made in a lump sum payment or in installment payments. The full deposit must be made by the time the employee retires from federal service.
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.