What Is a Deposit and When Is It Required?
Any period of civilian service performed before Jan. 1, 1989 during which FERS contributions (normally, 0.8 percent of an employee's after-taxed wages) were not deducted from an employee's wages is called nondeduction service. Nondeduction service under FERS also includes service credited under the FERS rules in which deductions were made under another retirement system (such as CSRS or CSRS-Offset) but were refunded before the employee became subject to the FERS retirement rules.
The following are the rules regarding making a deposit for nondeduction service for FERS employees who have no prior federal service under another retirement system:
Jody had three years of temporary federal service between 1984 and 1987. She was not covered by any pension system during that time. On March 1, 1988, Jody started full-time federal service under FERS. Her annual leave SCD is March 1, 1985, meaning that she immediately accrued six hours of annual leave every pay period upon her starting full-time federal service. But unless Jody makes a deposit for her three years of temporary federal service, her SCD for retirement purposes will be March 1, 1988.
For those employees who transferred from CSRS-Offset service to FERS:
The CSRS-Offset service is credited according to the FERS service credit rules.
If, as of the date of transfer to FERS, the employee has performed:
For those employees who transferred from full CSRS coverage to FERS:
A deposit for FERS service may be made only by:
A deposit for eligible nondeduction service under FERS may be made at any time prior to the final adjudication of the individual's retirement claim.
The deposit under FERS for nondeduction service is equal to 1.3 percent of the basic pay earned during the nondeduction service, plus interest. The 1.3 percent applies regardless of when the service was performed or whether deductions would have been taken at 0.8 percent, if they had been taken at that time. Consider the following example:
Jay was employed under CSRS from 1973 to 1975. He resigned, applied for and received a refund of his 7 percent CSRS contributions from his wages. He returned to federal service in 1987 and was automatically covered by FERS. Since his service from 1973 to 1975 is now credited under FERS rules, Jay's deposit (if he chooses to make one for his years of service under CSRS) is equal to 1.3 percent of his basic pay from 1973 to 1975, plus interest.
Interest is charged from the midpoint of each period of nondeduction service. Interest accrues annually on the outstanding balance on December 31 of each year and is compounded annually until the outstanding balance is deposited. Interest is charged from the date of deposit or the commencing date of the FERS annuity, whichever is earlier. The rates are assessed at three percent interest, accrued daily and compounded annually through Dec, 31, 1984, and after Jan.1, 1985 at a variable rate determined annually by the Department of the Treasury and presented below:
Why should a FERS-covered employee with pre-Jan. 1, 1989 nondeduction service consider making a deposit? What effect will it have on the employee's FERS annuity? Consider this example:
An employee earned $25,000 during one year of nondeduction service before Jan. 1, 1989. If the employee chooses to make a deposit for the one year of nondeduction service, the employee owes a deposit equal to $25,000 times 1.3% plus $1,200 of interest, or $1,525. The employee's high-three average salary is $75,000.
By making the full deposit, the employee's FERS annuity will be permanently increased by 1 percent times $75,000, or $750 per year if the employee retires before age 62, or by 1.1% times $75,000 or $825 per year if the employee retires after age 62 with at least 20 years of FERS service. It will take the employee less than two years receiving a higher annuity benefit to equal the amount of the $1,525 deposit. In other words, where could the employee invest $1,525 and be guaranteed an annual return of $750 or $825 for the rest of his or her life?
FERS-covered employees who wish to make a deposit for pre-Jan. 1, 1989 nondeduction service need to complete form SF 3108, Application to Make Service Credit Payments for Civilian Service. This form may be obtained at the employee's Personnel or Human Resource Office. The form may also be downloaded from OPM's website at www.opm.gov. Deposits are made directly to OPM in a single lump or in installments no smaller than $50.00. When an employee makes partial payments, OPM sends the employee a receipt showing the new balance due, including updated interest charges. Once the deposit has been paid in full, OPM should send an acknowledgment that a deposit has been paid in full. Employees should keep the acknowledgment as the official notification that a deposit was paid in full.
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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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