What Is a Deposit and When Is It Required?
CSRS and CSRS-Offset
Edward A. Zurndorfer, CFP
Any period of creditable civilian service during which retirement contributions
are not deducted from a federal employee's wages is called deposit or
"nondeduction" service.
Generally, nondeduction service includes non-career time such as temporary
service or service that was not considered federal employment at the time it was
performed. This article discusses whether a CSRS or CSRS-Offset covered employee
is required to make a deposit for such service and the consequences if a deposit
is not made.
Nondeduction service is creditable toward eligibility for CSRS retirement,
whether or not a deposit is made. The service computation date (SCD) for both
retirement and annual leave purposes will therefore be adjusted backwards from
the time an employee started full or part time service under CSRS. Consider the
following example.
Sarah entered federal service on Oct 1, 1980 as a full time employee.
From June 1, 1969 through Aug. 31, 1969, Sarah was a temporary employee with the
National Park Service. As a seasonal employee, nothing was deducted from her
salary to pay into CSRS. As a result of three months of temporary service,
Sarah's SCD for both annual leave and retirement purposes is adjusted backwards
to July 1, 1980.
Any nondeduction service performed before Oct 1, 1982 is creditable in the
annuity computation. However, if the employee does not make a deposit to cover
the service, the annual annuity is permanently reduced by the amount of the
deposit due. Any nondeduction service performed after Sept. 30, 1982 is not
creditable for CSRS annuity computation purposes unless the employee pays the
deposit in full. This means that the employee could lose as much as two percent
of his or her high-three average salary for the CSRS annuity for every year of
non-deduction service that the employee does not make a deposit.
Deposits for CSRS nondeduction service may be made only by: (1) an employee
who currently is covered by CSRS or CSRS-Offset; (2) a separated employee who is
entitled to an immediate annuity; (3) a former employee whose annuity has not
been finally adjudicated and who retains retirement rights based on separation
form a position in which retirement deductions were properly withheld and remain
in the CSRS Retirement and Disability Fund; (4) the spouse of a deceased
employee who is entitled to a survivor annuity; and (5) the former spouse of a
deceased employee who is entitled to a survivor annuity. A deposit may be made
at any time prior to the final adjudication of the individual's application for
retirement or survivor benefits.
The amount of a CSRS deposit is the sum of the CSRS deductions that would
have been withheld from an employee's basic pay during the period of
nondeduction service had the employee been covered by the retirement system plus
interest. The CSRS deductions are based on a percentage of basic pay. The
percentages that apply for different periods of service are shown in the table
below. Different deduction percentages may apply to nondeduction service
performed by Congressional employees, members of Congress, bankruptcy judges,
U.S. Magistrates and judges of the Court of Military Appeals.
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Interest is computed on the deposit as explained below from the midpoint of
each period of nondeduction service. For service performed before Oct. 1, 1982,
three percent interest is charged, accruing daily and compounding annually
through the date the deposit is paid, or the commencement date of the retirement
benefit, whichever is earlier. For service performed after Oct.1, 1982, three
percent interest is charged, accruing daily and compounded annually through Dec.
31, 1984. After Jan. 1, 1985, interest is charged at a variable rate determined
annually by the Department of the Treasury, as shown in the following table for
the years 1985 through 2009.
Depending on when nondeduction service was performed, the interest charges
could exceed the actual deposit charges. This raises the question whether a CSRS
or CSRS-Offset is better off making a deposit or instead investing the funds
into something like an IRA. In other words, how important is making a
deposit?
The answer to this question depends in part on whether the nondeduction
service was performed before or after Oct. 1, 1982. It does not matter whether
an employee is covered by CSRS or by CSRS-Offset.
Nondeduction federal service performed before Oct. 1, 1982 in which an
employee does not pay the deposit prior to the adjudication of his or her
retirement claim: (1) counts toward eligibility for retirement; and (2) is used
to compute the CSRS annuity; but (3) the CSRS annuity and, if applicable, a
survivor CSRS annuity is reduced by 10 percent of the total deposit owed,
including interest.
The following example is pre-Oct 1, 1982 nondeduction service which shows the
consequences of not making a full deposit.
An employee earned $8,000 during two years of nondeduction service in
1970 and 1971. As of March 1, 2009 the employee has 35 years of service,
including the two years of nondeduction service. The employee's high-three
average salary is $80,000. With interest of $850, the deposit owed is 7 percent
of $8,000 plus $850, or $560 plus $850, or $1,410. The employee's CSRS annuity
is computed as 66.25 percent times $80,000, or $53,000. If a deposit is not
made, the annuity will be permanently reduced by 10 percent of $1,410, or $141
per year. This reduction would also reduce a spouse's survivor benefit.
If the employee makes the deposit, it will take 10 years of unreduced
annuity payments to equal the deposit. The employee has to ask the question:
"Where can I invest $1,410 and get a guaranteed annual return of 10 percent for
the rest of my life?"
What about nondeduction service performed after Sept. 30, 1982? Does
it make financial sense to make a deposit? As discussed earlier, if an
employee does not pay the deposit owed, including interest, prior to the
adjudication of his or her retirement claim, then the nondeduction service
counts towards eligibility for retirement but is not used in determining the
total creditable service for computation purposes.
The following example illustrates post-Sept. 30, 1982 service in which a
deposit is required:
An employee earned $25,000 for one year of nondeduction service from Nov.
1, 1982 through Oct. 31, 1983. The employee becomes full-time as of Nov. 1, 1983
and would like to retire on Nov. 1, 2009 at the age of 60, with 26 years of
service. The employee owes a deposit for the year of nondeduction service which
equals 7 percent of $25,000 plus $3,200 of interest, or $1,750 plus $3,200 or
$4,950. The employee's high-three average salary is $80,000. Does making a
deposit of $4,950 make financial sense?
The nondeduction of one year will not be considered in the CSRS annuity
calculations unless a full deposit, including interest, is made. By making a
full deposit of $4,950 the employee is able to add one full year to his or her
years of service for the purpose of CSRS annuity calculations. If the employee
makes a full deposit and has a high-three average salary of $80,000, the
employee is able to add to his or her annuity two percent of $80,000 or $1,600
for the rest of his or her life. The $1,600 will be subject to cost of living
allowances each year that CSRS annuitants receive. In specific numbers, if the
employee makes the deposit of $4,950, he or she will be able to recoup the
investment in slightly more than three years (three times $1,600 equals $4,800,
slightly less than $4,950).
The question then becomes: Where can the employee find an alternative
investment in which he or she can invest $4,950 and receive a guaranteed minimum
annual return of $1,600 for the rest of his or her life?
Another reason for CSRS or CSRS-Offset employees to consider making a full
deposit for nondeduction service is that those employees who wish to participate
in the CSRS Voluntary Deposit Program may do so only if they do not owe any
deposits or re-deposits. An article discussing redeposits will be presented on
My Federal Retirement in March 2009.
Those CSRS or CSRS-Offset-covered employees who believe they owe a deposit
for nondeduction service should contact their personnel or human resource
offices to obtain an estimate of what they owe.
If they wish to make a deposit they must fill out and submit form SF 2803,
"Application to Make Deposit or Redeposit" Civil Service Retirement System, to
their personnel or human resource office. This form is available for download
and completion at www.opm.gov/forms/pdf_fill/SF2803.pdf .
Helpful Flowcharts Related to This
Article:
About the Author
Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent
in Silver Spring, Maryland. He is also a registered representative with
Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also
located in Silver Spring, Maryland
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Overview - CSRS
