What Is a Deposit and When Is It Required?
FERS and "Trans" FERS
This article discusses deposits for "nondeduction" service and when a deposit is required for those employees covered by the Federal Employment Retirement System or FERS. FERS-covered employees include those who have transferred to FERS from CSRS, sometimes called "Trans" FERS employees.
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:
- A FERS employee may make a deposit to get credit for any nondeduction service performed prior to Jan. 1, 1989. Nondeduction service performed prior to this time will not count for retirement eligibility or FERS annuity computation purposes unless such a deposit is made prior to the final adjudication of the employee's retirement claim. Any nondeduction service prior to Jan. 1, 1989 will nevertheless be credited for annual leave purposes without a deposit. The employee's service computation date (SCD) for annual leave purposes will therefore be adjusted accordingly, whether or not a deposit is made. Consider the following example.
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.
- Nondeduction service performed on or after Jan. 1, 1989 generally is not creditable for retirement purposes under FERS.
- Service performed on or after Jan. 1, 1989 under another retirement system for federal employees is not creditable under FERS for any purpose. The exception is creditable service under the Foreign Service Pension System (FSPS), provided that the employee waives credit for the service under the FSPS and makes a deposit for the service.
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:
- less than five years of civilian service creditable under CSRS rules (not counting any CSRS-Offset service) then the CSRS service also becomes subject to FERS service credit rules. Employees who were subject to full CSRS payroll deductions -normally 7 percent of after-taxed wages - are entitled to a refund of any deductions that exceed the full FERS payroll deductions which is 0.8 percent of after-taxed wages.
- more than five years of civilian service creditable under CSRS rules (not counting any CSRS-Offset service), the employee remains subject to the CSRS service credit rules for the years under CSRS. This means that the employee could be eligible for two annuities - one based on CSRS service and the other based on FERS service.
For those employees who transferred from full CSRS coverage to FERS:
- If, as of the date of the transfer, the employee has performed five or more years of civilian service under CSRS rules, then all of the service performed before the employee's effective date of transfer to FERS counts towards the employee's eligibility for a CSRS annuity. This means that the employee could be eligible for two annuities - one based on CSRS service and the other based on FERS service.
- If, as of the date of the transfer, the employee has performed less than five years of civilian service creditable under CSRS rules, then all service becomes subject to the FERS service credit rules. Employees are entitled to a return of CSRS payroll deductions, normally 7 percent of an employee's after-taxed wages that exceed the FERS payroll deductions required for that period which is 0.8 percent of an employee's after-taxes wages.
A deposit for FERS service may be made only by:
- a current employee who is subject to FERS;
- a retiree who is entitled to an immediate annuity and whose annuity has not been fully adjudicated;
- a former employee whose annuity has not been fully adjudicated and who is eligible for a deferred annuity because he or she had at least five years of paid civilian service at the time of leaving federal service;
- the spouse of a deceased employee who is entitled to a survivor annuity;
- the former spouse of a deceased employee who is entitled to a survivor annuity; and
- the surviving former spouse of a deceased former employee who is eligible for a survivor annuity.
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, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD -- and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD. Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.