Edward A. Zurndorfer, Certified Financial Planner

One of the benefit law changes resulting from the recent passage of the 2010 Defense Authorization Act (DAA) is that effective immediately, those employees covered by the Federal Employees Retirement System (FERS) are permitted to make a redeposit of previously withdrawn FERS contributions.

A redeposit is defined as a repayment of refunded retirement contributions. Note that employees covered by the Civil Service Retirement System (CSRS) have always had the option of making a redeposit of withdrawn CSRS contributions. Unfortunately, until this law change FERS-covered employees have never been able to make a redeposit.

It is important to first review what FERS-covered employees contribute to the FERS Retirement and Disability Fund each pay period.

Each pay period, most FERS-covered employees contribute 0.8 percent (.008) of their "after-taxed" salary to the FERS Retirement and Disability Fund. Those FERS employees who are not eligible to retire because they have not met minimum age and service requirements and who choose to leave federal service have the option of withdrawing their FERS contributions. But withdrawing their FERS contributions will result in their losing the years of service covering their FERS contributions. They will subsequently not be eligible for a deferred retirement. Before DAA's passage, this withdrawal prevented these employees from redepositing their contributions in the event they would reenter federal service.

The consequence of withdrawing FERS contributions and not having the option of redepositing the contributions has caused much hardship among many FERS employees who have left and returned to federal service. The following example illustrates:

Phillip entered federal service in May 1985 and worked for 13.5 years. He withdrew his FERS contributions upon leaving federal service in November 1998.  Phillip re-entered federal service in May 2001. This resulted in his retirement service computation date (SCD) - the date that determines when Phillip can retire and how much of a FERS annuity he will receive - to be reset to May 2001. Had Phillip not withdrawn his FERS contributions, his retirement SCD would have been reset from May 1985 to approximately November 1987 (the 2.5 year reset is due to the fact that Phillip left federal service for 2.5 years). But because Phillip withdrew his FERS contributions, he essentially lost 13.5 years of service and will have to work an additional 13.5 years in order to " make up" the refunded years of service.

Under the new law, Phillip may redeposit the withdrawn contributions -- with interest -- and if he makes a full redeposit including full interest charges, he will not have to work the additional years to cover the years that were included when he previously worked as a FERS-covered employee.

But note that the interest charges usually far exceed the amount of refunded FERS contributions. The interest charges vary by percentage each year and are presented in the table below.

Note 1.  For refunds after Sept. 30, 1982, interest is not charged for a year when payment in full is received by close of business on the last regular business day of the year.

Note 2.  When interest begins during a year, it accrues for the remainder of the year.

Note 3.  Interest is charged by the employing agency or OPM, beginning on the date the refunded FERS contributions were paid.

The following example illustrates the total cost of a redeposit including the interest charges:

Joseph was a federal employee from 1985 through 1998. In November 1998, Joseph left federal service and withdrew all of his FERS contributions -- a total of $8,000. Joseph returned to federal service in 2005. Because the law has changed, Joseph would now like to redeposit his withdrawn FERS contributions. If he does, he will be able to get credit for 13.5 years of service, from 1985 to 1998, for FERS eligibility and FERS annuity computation purposes.

The following table summarizes what Joseph owes for his redeposit after withdrawing the $8,000 of FERS contributions when he left federal service in 1998:

Joseph therefore owes for his FERS redeposit a total of $14,517 as of the end of 2009.

By redepositing the full $14,517, Joseph will add 13.5 years to his FERS service. In so doing, Joseph's redeposit is also adding 13.5 percent (13.5 years times 1.0 percent) to his FERS annuity each year if he retires before 62. For example, if Joseph's high-three average salary is $100,000, he will add 13.5 percent of $100,000, or $13,500 a year to his annuity for the rest of his life. In other words, it will take slightly more than one year after Joseph retires to be reimbursed for his $14,517 redeposit. The "breakpoint" for Joseph's redeposit is therefore approximately 13 months. If Joseph retires after age 62 with at least 20 years of service, he will add 14.9 (13.5 times 1.1 percent) percent to his FERS annuity with a "breakpoint" of slightly less than one year. 

A FERS employee has several options in which to make a redeposit. These options include:

1. a lump sum payment using "after-taxed" dollars;
2. installment payments (made directly to OPM payments with "after-taxed" dollars); or
3. via the proceeds from a loan disbursement, such as a TSP general purpose loan or a home equity line of credit. Note that with respect to installment payments, interest charges will be applied to any unpaid balance due on the redeposit.

FERS employees who wish to make a redeposit can do so by completing form SF 3108 (Application to Make Service Credit Payment - Federal Employees Retirement System), available for download at:

http://www.opm.gov/forms/html/sf.asp 

[Editor's note: At the time this article was written, OPM has not released official guidance on how to make this redeposit. Until OPM gives official guidance, this is the only form available, even though it is likely to be updated.] Federal employees should submit the form to their personnel or human resources office. The form will then be sent to OPM. OPM will subsequently contact the employee with information concerning the amount due, including the refunded FERS contributions and total interest charges.

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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