Edward A. Zurndorfer –
There are federal employees who, at some point of their federal service, decided to leave federal service. At the time they separated, they elected to withdraw their retirement contributions to either the Civil Service Retirement System (CSRS) and/or to the Federal Employees Retirement System (FERS). These employee retirement contributions were made via payroll deduction during the years of the employee’s federal service.
Many of these employees subsequently returned to federal service. Upon returning to federal service, these employees had the option of redepositing the CSRS or FERS contributions they elected previously to withdraw. This column discusses redeposits for both CSRS and FERS employees, including: (1) which employees can make a redeposit; (2) the cost of making a full redeposit under both CSRS and FERS; and (3) the advantages for making a redeposit under CSRS and FERS.
Redeposits for CSRS and CSRS Offset employees
In general, redeposit service under CSRS is any period of creditable service for which CSRS contributions were deducted from a CSRS-covered employee’s paycheck (approximately 7 percent of the employee’s gross salary) are refunded to the employee in accordance with law and regulation upon an employee’s separation from federal service. The employee subsequently returned to federal service and had the option of redepositing the withdrawn CSRS contributions.
It should be emphasized that a CSRS or CSRS Offset employee need not make a redeposit in order to include the years of service covering the withdrawn contributions towards determining the employee’s eligibility to retire. But depending on when the contributions were withdrawn (before March 1, 1991 or after February 28, 1991) a redeposit may be required for the service time covering the withdrawn contributions be included in the computation of the employee’s CSRS annuity. This will be explained in more detail below.
Who can make a CSRS redeposit?
Payments for CSRS redeposit service may be made only by: (1) an employee who is currently covered by CSRS or CSRS Offset (2) a separated employee with title to an immediate annuity; (3) a former employee with title to a deferred annuity; (4) a spouse of a deceased employee who is entitled to a survivor annuity benefit; or (5) a former spouse of a deceased employee who is entitled to a CSRS annuity benefit.
Note that a redeposit may be made prior any time up to the final adjudication of an individual’s claim for retirement or survivor benefits.
Amount of a CSRS redeposit
The amount of a redeposit equals the amount of the refunded CSRS contributions received plus accrued interest. CSRS Offset employees who are making redeposits for CSRS Offset service also pay the amount of the refunded contributions – generally based on deduction of 1.3 percent of salary paid in 1984, 1985, 1986 and 1987, or 0.94 percent of pay in 1988 and 1989, and 0.8 percent beginning in 1990, plus interest charges.
Interest charges on a CSRS redeposit
If the refund was based on a CSRS redeposit application received by the employing agency or OPM before Oct. 1, 1982, interest of three percent accrues daily, beginning on the date the refund of CSRS contributions was paid and is charged through the date the redeposit is made, or to the commencing date of the CSRS annuity, whichever is earlier.
If the refund was based on an application receive by the employing agency or OPM after Sept. 30, 1982, interest is charged on the redeposit beginning on the date the refund was paid, at the following rates, compounded annually: (1) three percent through Dec. 31, 1984 and (2) a variable rate determined by the Department of the Treasury beginning Jan. 1, 1985. The variable rates are shown in the following table:
Interest Rates by Year (1985 – 2020) Imposed on Redeposits Under CSRS and FERS*
*Source: Office of Personnel Management Website
Effect of making a CSRS redeposit – refunded contributions for CSRS service time before March 1, 1991
In general, the effect of making a redeposit for refunded CSRS retirement contributions depends on whether the refunded service ended before March 1, 1991 and whether the employee’s nondisability CSRS annuity commences after Oct. 29, 2009. If a CSRS or CSRS Offset employee received a refund of CSRS contributions anytime before March 1, 1991, then upon re-entering federal service the employee does not have to make a redeposit in order to receive credit for both CSRS eligibility retirement purposes and in the computation of the employee’s CSRS annuity. In other words, any retirement contributions covering years and months of service prior to March 1, 1991 that were refunded will count towards both CSRS retirement eligibility and in the computation of the CSRS annuity, whether a full redeposit is made or not. But if a redeposit is not made, then while full credit will be allowed for retirement eligibility and in the computation of the CSRS annuity, the CSRS annuity will be actuarially reduced, as is now explained
The actuarial reduction to the CSRS annuity is based on the amount of the redeposit (refunded contributions plus accrued interest) divided by a present value factor in the chart below, using the employee’s age on the date of retirement.
Present Value Factors (CSRS)*
|Age at Retirement||Present Value Factor||Age at Retirement||Present Value Factor|
*Source: Office of Personnel Management (OPM) Retirement Handbook here.
The following example illustrates the actuarial reduction:
Mary entered federal service initially in Mary 1978 and left at the end of April 1985. At the time she left, she requested a full refund of her CSRS contributions. Mary reentered federal service in May 1994 as a CSRS Offset employee and retired in April 2019. When she retired, Mary had not made a redeposit equal to $45,000 which includes her refund of her CSRS contributions during the period 1978 to 1985 ($14,000) plus $31,000 of interest.
The following is a summary of Mary’s federal service:
- Years of service used for CSRS retirement eligibility: 32 (1978-1985; 1994-2019)
- Years of service used to compute CSRS annuity: 32 (1978-1985; 1994-2019)
- Age at retirement: 62
- High-three average salary at retirement = $100,000
- Unused sick leave hours on retirement date: 2087 hours (one year)
- Redeposit owed: $45,000 (Not made)
Step 1. Computation of starting CSRS annuity:
33 years of service (incudes one year of unused sick leave)
–> Accrual Factor = .6225
.6225 times $100,000 (high-three average salary)
= $62,250 (starting CSRS gross annuity)
Step 2. Compute reduction to CSRS gross annuity for not making redeposit of $45,000:
$45,000/214.6 (present value factor, age 62)
= 209.69 per month or $2,516.30 per year
Step 3. Mary’s recomputed CSRS annuity as a result of not making a redeposit of $45,000:
$62,250 – $2,516 = $59,734
The question now becomes: Should Mary have made the redeposit? Before answering the question, it is important to note the following: (1) whether or not Mary made a redeposit, Mary gets credit for the seven years covering the refunded service (1978 -85) for both retirement eligibility and in the computation of Mary’s CSRS annuity; and (2) if Mary does not make a redeposit, her CSRS annuity will be reduced each year by $2,516 for the rest of her life. If Mary is giving a survivor annuity, then upon Mary’s death, the $2,516 reduction ceases. In other words, a survivor annuity is not subject to the same reduction, as a result of non-redeposit, that the regular annuity is subject to.
If Mary were to make a full redeposit of $2,516, then it would take 214.6 months or 17.88 years to “get her money back”. If Mary retires at age 62 and lives to age 79 years and 10.5 months, then Mary will get her redeposit money back. In other words, Mary would have made the right decision in making a redeposit. If Mary dies between age 62 (when she retires) and age 79 years and 10.5 months, then Mary would have made a mistake in making a redeposit.
Another factor: How many years of service beyond 41 years and 11 months will a CSRS or CSRS Offset employee have? If an employee works beyond 41 years and 11 months – including all years and refunded years – then the employee’s agency will continue to deduct 7 percent from the employee’s paycheck to be contributed to the CSRS Retirement and Disability Fund. Once the employee retires, the “excess” CSRS contributions (beyond 41 years and 11 months of service) will be applied towards any deposits or redeposits the employee owes. In other words, depending on the amount of the redeposit owed and the number of years a CSRS or CSRS Offset employee works past 41 years and 11 months, a redeposit may not have to be made, or at least only a partial payment is needed in order to complete a full redeposit.
Effect of making a CSRS redeposit – refunded contributions for CSRS service time after February 28, 1991
As stated above regarding the effect of making a redeposit for refunded CSRS retirement contributions, a CSRS or CSRS Offset employee for the purpose of retirement eligibility does not have to make a redeposit no matter which years the refunded service covers. However, for the purpose for CSRS annuity computation, it does make a difference as to which years the refunded service covered. If the refunded years ended before March 1, 1991, the refunded years do count towards CSRS annuity computation, as explained in the previous section.
On the other hand, for any refunded service covering years that end after February 28, 1991 including service time that started before March 1, 1991 and that continues passed February 28, 1991, a CSRS or CSRS Offset with refunded service must make a redeposit in order to get credit for those years for purposes of CSRS annuity computation.
The question therefore becomes for a CSRS or CSRS Offset with refunded contributions for service time ending after February 28, 1991 – Is it worth making a redeposit? Consider the following example.
Jerry was initially hired into federal service on Aug. 30, 1979, with CSRS coverage. He separated on Aug. 29, 1999 and received a refund of all of his CSRS contributions. Jerry was rehired on Jan. 3, 2000 under CSRS Offset and worked another 20 years, retiring on Jan. 2, 2020.
1. Jerry has 40 years of total service for purposes of retirement eligibility, whether or not he makes a full redeposit for the refunded 20 years of service.
2. If Jerry makes the redeposit to recredit the refunded service, then Jerry’s CSRS annuity will increase by:
20 years times 2 percent/ (year of service) x high-three average salary.
If the high-three average salary is $100,000, then by making a full redeposit Jerry’s CSRS annuity will increase by:
20 years times 2 percent x $100,000, or $40,000 per year.
Should Jerry make the redeposit? The redeposit could be substantial due to the fact that 20 years of CSRS contributions were refunded, plus interest charges over 20 years.
If for example Jerry owes a redeposit of $80,000, then by making a redeposit it will take Jerry:
$80,000/$40,000 = 2 (years)
or two years to get his money back. If Jerry is giving the maximum CSRS survivor annuity to a spouse, then the survivor annuity will increase by as much as:
.55 times $40,000 or $22,000 per year.
Does a full redeposit have to be made?
Redeposits can be partially paid to lessen the reduction as in the case of redeposit for refunded contribution covering service before March 1, 1991 in order to lessen the reduction to the retirement benefit while retaining some of the money for other use. The actuarial reduction will be based on the unpaid balance.
How would a CSRS or CSRS Offset employee know he or she owes a redeposit?
A CSRS or CSRS Offset employee would know he or she owes a redeposit by checking his or her Official Personnel File. If the employee did previously request a refund of employee contributions CSRS, then a copy of form SF 2802 (Application for Refund of Retirement Contributions) should be in the Personnel File. Also, a CSRS or CSRS Offset employee would realize he or she owes a redeposit when he or she receives a retirement estimate a few years before retiring, as illustrated here:
|Date of Birth||08/20/1959|
|Age at Retirement||61 Years 4 Months|
|Spouse’s Date of Birth||N/A|
|FEHB Plan Code||E32|
|Dental Insurance Plan Type||None|
|Vision Insurance Plan Type||None|
|Retirement System||CSRS Regular|
|Date of Retirement||01/03/2021|
|Date of Separation||N/A|
|High-3 Average Salary||$148,600|
|Sick Leave Hours||3317|
|Survivor Benefit Base Elected||100%|
|Unpaid Pre 10/01/1982 CSRS Deposit||$0.00|
|Unpaid Pre 03/01/1991 CSRS Redeposit||$45,000.00|
|CSRS Lump-Sum Credit||N/A|
How to make a CSRS redeposit
Step 1. Employee needs to obtain form SF 2803 (Application to Make a Deposit or Redeposit) from here.
Step 2. Employee completes the front of SF 2803 and returns the application to the Personnel or Human Resources office.
Step 3. Agency completes the back of SF 2803.
Step 4. Agency forwards the application to OPM’s Retirement Operation Center in Boyars, PA.
Step 5. OPM contacts employee and tells the employee what he or she owes in a redeposit and how to pay the bill.
Until October 28, 2009, a FERS employee who left federal service and at the time of separation withdrew his or her FERS contributions (0.8 percent of the employee’s wages deducted each pay period) and who subsequently returned to federal service, could not redeposit the withdrawn contributions. This is because FERS redeposits were not permitted. The departed employee therefore permanently lost credit for the years covered by the withdrawal of contributions for both the purpose of eligibility retirement and for FERS annuity computation.
But Congress passed legislation that changed the rules. Effective October 28, 2009, FERS employees who previously left federal service and withdrew their FERS contributions and subsequently returned to federal service after October 27, 2009 were allowed to make redeposits. The redeposit is equal to the withdrawn FERS contributions, plus interest charges that go back to the day the FERS were refunded. Interest rates vary by year and are the same interest rates for CSRS redeposits, as presented in the table above. Note that a FERS employee who owes a redeposit for previously withdrawn FERS contributions must have returned to federal service in order to make a redeposit.
If a current FERS employee does in fact owe a redeposit, the question becomes is it worth it for the employee to make the redeposit? The answer in almost all cases is yes – especially if the redeposit covers at least three years of withdrawn FERS contributions. Note that making a full redeposit means that a FERS employee gets credit for both retirement eligibility and in the computation of the employee’s FERS annuity. Perhaps the largest benefits resulting from making a full FERS redeposit: The employee (1) could retire possibly earlier than expected; and (2) receive a larger FERS annuity throughout retirement, and if applicable, give a larger survivor annuity, usually to a spouse.
How would a FERS employee know he or she can make a redeposit? Unless someone in the employee’s Personnel or Human Resources office mentions to the employee that the employee is eligible to make a redeposit, the employee will probably not know he or she is eligible to do so. This is likely not going to happen.
A more likely reason a FERS employee would know he or she is eligible to make a redeposit is because there should be a copy of a form in the employee’s Official Personnel File – Form SF 3106 (Application for Refund of Retirement Deductions – Federal Employees Retirement System).The signed form is proof that a FERS employee requested at some time a refund of his or her FERS contribution when the employee left federal service.
How to make a redeposit for refunded service under FERS
A FERS employee who wants to make a redeposit for refunded FERS contributions may do so by downloading Form SF 3108 (Application to Make Service Credit Payment) at www.opm.gov/forms. The employee should fill out as much of Form SF 3108 as possible and then give it to his or her Personnel or Human Resources Office who will process it and send the completed form to OPM’s Retirement Operations Center in Boyars, PA. OPM will then contact the employee, explaining what the employee owes for the redeposit. Payment options will also be discussed.
The case studies presented are for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.
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.