Edward A. Zurndorfer, CFP

This column will discuss the payment of employee contributions to the Civil Service Retirement System (CSRS) when the employee leaves federal service before he or she is able to retire.

The column will explain: (1) the concept of the lump sum credit; (2) the content of a refund; (3) the requirement that an employee must meet to be eligible for a refund; (4) the effect of spousal/former spouse notification requirements on the payment of a refund; (5) the effect of court orders on the payment of a refund; (6) the effect of debts due to the U.S. on the payment of a refund; (7) the procedures for obtaining a refund; and (8) the options available to an employee with respect to a refund upon separation from federal service.

A lump sum credit is defined as the "unrefunded amount" of an employee's contributions to the Civil Service Retirement and Disability Fund (the CSRS fund). This lump sum credit consists of:

• Retirement contributions deducted from basic pay -- approximately 7 percent of an employee's after-taxed wages;
• Deposits and/or redeposits, including deposits for post-1956 military service; and
• Interest payable under law.

The following individuals are eligible for a lump sum credit: (1) a separated employee or an employee who is no longer covered by CSRS or FERS; (2) the beneficiaries of a deceased annuitant or a survivor annuitant if the full amount of retirement contributions had not been paid out in the form of an annuity or survivor annuity at the time of death; and (4) the beneficiaries of a deceased former employee.

A refund is a lump sum payment to a former employee or to an employee who is no longer covered by CSRS or FERS of the amount to his or her lump sum credit. A refund payment includes payment of any and all: (1) retirement contributions deducted from basic pay, including CSRS Offset contributions for individuals covered under CSRS Offset; (2) deposits and/or redeposits; (3) military service credit deposits; (4) voluntary contributions to CSRS under the voluntary contribution program; and (5) interest payable under the law.

Interest is payable on refunded contributions covering at least one year of CSRS service but fewer than five years of CSRS service. Interest is payable at three percent compounded annually.

What is the effect of a CSRS refund?

When a CSRS refund has been properly paid, all annuity rights based on service covered by the refund are void unless the former employee is later reemployed in a position subject to CSRS or FERS deductions. If the reemployment is under FERS, it may be necessary to make a deposit to cover the service before any credit for the service is restored.

Service for which the employee received a refund is creditable in determining whether a current employee has service for the required number of years to be eligible for a CSRS annuity. But such service may be used for annuity computation purposes only in the following circumstances:

• If the individual applies for a non-disability annuity commencing after Dec. 1, 1990 and the refunded service ended before Oct. 1, 1990. The refund does not have to be repaid in order for the individual to receive credit for the service. Full credit will be allowed for the length of the refunded service, but the annuity will be actuarially reduced by an amount equal to the reduction for an alternative form of annuity lump-sum in the amount of the redeposit.
• If the individual applies for a disability annuity or the refunded service ended after Oct. 1, 1990, then the individual must redeposit the refund plus interest.
• If the individual is eligible to make an alternative annuity election, the redeposit will be deemed paid at the time of retirement.

A refund is subject to any properly certified and timely request for recovery of a valid debt due the United States government. The amount of a refund representing an employee actual contribution is not subject to federal income taxes. But any interest paid on those contributions is taxable in the year in which the refund is paid.

A former employee must meet all of the following requirements to be eligible for a refund: (1) separates from federal service for at least 31 consecutive days or transfers to a position in which he or she is not subject to CSRS, CSRS-Offset or FERS deductions and remain in that position for at least 31 consecutive days; (2) files an application with OPM for a refund; (3) not  to be reemployed in a position subject to CSRS or FERS deductions at the time the application is filed; (4) not to be eligible to receive an annuity within 31 days after filing the application; (5) not to be prohibited from receiving a refund because of a court order; and (6) comply with requirements for notification of current and former spouses. A current spouse must always be notified, regardless of the length of the marriage on the amount of civilian service the employee has.

The former employee's application for a refund must be accompanied by form SF 2802B, Current/Former Spouse Notification of Application for Refund of Retirement Deductions Under the Civil Service Retirement System, for a current spouse and each qualifying former spouse. Form SF 2802B must be signed by the individual's current spouse or any former spouse. OPM cannot pay the refund unless the applicant submits an SF 2802B, supplies the documentation required below, or is authorized a waiver of the notification requirement.

If the employee is unable to secure a current or former spouse's signature on the application, the employee must submit with the refund application one of the following:

• Notarized statements by two individuals who witnessed the employee notifying or attempting to notify a current or former spouse of the refund application. The notarized statements must attest that the witness state that the employee personally gave, or try to give, the notification to the spouse or former spouse, to whom the employee's purpose should have been clear.
• A current or former spouse's mailing address in order that OPM may attempt to notify him or her. If OPM is requested to make the notification, it will cause a six to eight week delay in payment of the refund. The refund cannot be paid unless OPM receives a return receipt, indicating that the notice was delivered.

OPM may waive the spousal notification requirement if the employee submits evidence to OPM that his or her current or former spouse's whereabouts are unknown. Evidence may consist of:

• A determination by a court or administrative agency empowered to make a decision that ht espouse is missing; or
• A notarized statement from the former employee and two other competent adults, one of whom is not related to the former employee, attesting to the fact that a current or former spouse's whereabouts are unknown. The statement must detail the steps taken to locate him or her.

If a former employee falsifies information or signature on form SF 2802B, he or she may be investigated and prosecuted. If the falsification results in a payment to the former employee that should properly have been made to a current or former spouse based on a qualifying court order, the former employee will be subject to civil litigation or administrative action to recover the erroneously paid funds.

To receive a refund, an employee or former employee must file form SF 2802, Application for Refund of Retirement Deductions and an SF 2802B, if required. The SF 2802 must be signed in ink in order to be accepted by OPM. OPM will verify that the "original" signature appears on the application. OPM cannot accept a photocopy. The payment address information shown on the SF 2802 must be the correct mailing address for the refund payment. OPM cannot accept an address that has been altered.

If the application has been separated 30 days or less, the application must be filed with the agency. If the former employee has been separated more than 30 days, he or she sends the application directly to OPM at the following address:

Office of Personnel Management
Civil Service Retirement System
Retirement Operations Center
Attn: REFUNDS
Boyers, PA 16020

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