A recent column discussed the retirement options for employees covered by the Federal Employees Retirement System (FERS). Among the retirement options presented are optional, no reduced (FERS annuity) immediate retirement, “MRA + 10” and “MRA + 20” immediate retirement, early retirement and discontinued service retirement.
This column discusses the options for CSRS- covered and FERS -covered employees who leave federal service before becoming eligible for any type of retirement. CSRS-covered employees include CSRS and CSRS Offset employees.
SEE ALSO:
- Understanding the FERS Retirement Options
- How to Calculate a Retiring Federal Employee’s Starting FERS Gross Annuity
A CSRS/CSRS Offset or FERS employee who leaves federal service before becoming eligible for any type of retirement has two options, namely:
• (1) The departing employee can request the Office of Personnel Management (OPM) that his or her CSRS or FERS contributions (made via payroll deduction while in federal service) be returned to the departing employee in a lump-sum payment, or
• (2) If the departing employee has five or more years of civilian (CSRS or FERS) service and does not request a refund of CSRS or FERS contributions, then the departing employee would be eligible for a deferred retirement in which he or she can apply for his or her CSRS or FERS annuity at a later age. For departing CSRS/CSRS Offset employees, that later age is age 62. For departing FERS employees, that later age is: (1) Minimum retirement age (MRA) for a departing FERS employee who has 30 or more years of service); (2) Age 60 for a departing FERS employee who at least 20 years and fewer than 30 years of service; and (3) Age 62 for a departing FERS employee who has at 5 least years and fewer than 20 years of service.
Option (1) will be discussed in this column. The second option will be discussed in a future column.
Procedures for Departing Employees to Request a Refund of CSRS or FERS Retirement Contributions
CSRS or CSRS Offset
A departing or a previously departed (there is no time limitation for requesting a refund) CSRS or CSRS Offset employee who wants a refund of their retirement contributions (including any military deposits for active-duty military service) needs to download Form SF 2802 (Application for Refund of Retirement Deductions – CSRS). Interest will be included in the lump-sum payment for those departing employees who had at least one year but less than five years of federal service under CSRS. Interest is paid at 3 percent.
In addition to providing personal information about the departed CSRS or CSRS Offset employee (name, current address, periods of federal service under CSRS or CSRS Offset), the departing employee has to answer the questions in Box 13 and Box 14 of Form SF 2802 as to whether the departing employee is married or was previously married to an ex-spouse when he or she was a CSRS or CSRS Offset employee. Here is snapshot of that line on Form SF 2802 asking those questions:
If the answer in either case is yes, then Form SF 2802A (Current/Former Spouse’s Notification of Application for Refund of Retirement Deductions) must be completed and attached to Form SF 2802.
FERS
A departing or a departed FERS employee who wants a refund of their retirement contributions (including any deposits for active-duty military service needs to download Form SF 3106 (Application for Refund of Retirement Contributions FERS). No interest is paid on the refund of employee FERS contributions, no matter how many years of service the departed employee had at the time of leaving federal service.
In addition to providing personal information about the departed FERS employee (name, current address, periods of federal service under FERS), the departed employee has to answer the questions in Box 11 and Box 12 of Form SF 3106 as to whether the departed employee is married or was previously married to an ex-spouse when he or she was a FERS employee. Here is snapshot of that line on Form SF 3106 asking those questions:
If the answer in either case is yes, then Form SF 3106A (Current/Former Spouse’s Notification of Application for Refund of Retirement Deduction) must be completed and attached to Form SF 3106.
Refund Payment and Tax Liability
Both the CSRS and FERS contributions made via bi-weekly payroll deduction and military deposits were made with after-taxed payroll monies. Therefore, a refund of these contributions and military deposits are not taxable. But any Interest included as part of a CSRS refund payment is taxable at both the federal and state levels.
The interest portion of the lump sum payment paid directly to the departed employee is subject to automatic federal income tax withholding. OPM will withhold federal income tax at a rate of 20 percent.
Direct Rollover of Refund Payment to an IRA or to an Employer-Sponsored Retirement Plan
If a departing employee is eligible to receive a refund payment of at least $200, the departing or departed CSRS employee can request that OPM directly rollover the refund payment to an IRA (traditional or Roth) or to a qualified employer-sponsored retirement plan that accepts direct rollovers.
The departing or departed CSRS or FERS employee can open an individual retirement account (IRA) (traditional or Roth) to receive a direct rollover of their refund payment. Note (see above) that the refund payment for departed CSRS or CSRS Offset employees consists of previously taxed contributions (and military deposits) and possibly interest. A refund payment made to departed FERS employees consists only of previously taxed contributions made via payroll and no interest.
Refunded payments consisting only of CSRS or FERS contributions (and miliary deposits) can be directly rolled over tax-free to a Roth IRA with no dollar limitation. The interest portion included in a CSRS refund payment can be directly rolled over to a traditional IRA or to the traditional TSP with no immediate tax consequences.
If the departing or departed CSRS or FERS employee want to directly rollover their refund payment to a qualified employer-sponsored retirement plan that accepts rollovers, the departed employee should contact the administrator of the retirement plan to find out what paperwork is required by the administrator of the retirement plan in order to perform the direct rollover.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019