The Office of Personnel Management (OPM) has issued a fact sheet for federal employees covered by the Federal Employees Retirement System (FERS) who leave federal service before becoming eligible for immediate retirement. This column discusses departing employees’ option of receiving a lump-sum payment of their contributions to the FERS Retirement and Disability Fund. Employee contributions to the FERS Retirement and Disability Fund are made each pay date via payroll deduction.
Eligibility Requirements for Receiving a Refund of Employee FERS Contributions
If a FERS-covered employee leaves federal service before becoming eligible for immediate retirement(opens in new tab), then the departing employee can request a refund of their contributions to the FERS Retirement and Disability Fund if the departing employee meets all of the following requirements:
‧ The departed employee has been separated from federal service for at least 31 days or transferred to a position not subject to FERS retirement deductions for at least 31 days.
‧ The departed employee is not reemployed in a position subject to CSRS or FERS retirement deductions.
‧ The departed employee filed an Application for Refund of Retirement Deductions (Standard Form 3106) with OPM.
‧ The departed employee is not prohibited from receiving a refund because of a court order.
‧ The departed employee has obtained formal permission from their current spouse to take a refund, if applicable, and
‧ If applicable, the departed employee has obtained formal permission from their former spouse(s) to take a refund. Formal may include sending OPM a copy of any court order related to divorce or legal separation.
Also, in order for a departing employee to file an application for a refund, the departing employee cannot be eligible to receive a FERS annuity within 30 days after filing the Application for Refund of Retirement Deductions (Standard Form 3106).
Option to Keeping Employee Contribution in the FERS Retirement and Disability Fund
If a departing employee has at least five years and less than 10 years of creditable FERS service, then the departing employee is eligible for a deferred FERS annuity, starting when the departing employee is age 62. If the departing employee has 10 or more years of FERS service then the departed employee would be eligible for a FERS annuity starting when the departed employee reaches minimum retirement age (MRA, age 55 to 57). Departing employees eligible for a deferred FERS annuity are advised to discuss with a knowledgeable financial professional the potential value of a deferred FERS annuity in comparison to a lump-sum payment of the employee’s FERS contributions.
In addition to receiving a lump-sum payment of their FERS retirement contributions, a departing FERS employee is eligible to receive a refund of their deposits for active-duty military service and/or non-deduction (temporary) service. Deposits for either type of service may also include interest charges, all of which are refundable .
The Consequences of Taking a Refund of Employee Contributions to the FERS Retirement Fund Disability Fund and Deposits for Active-Duty Military Service and Temporary Service
A departing employee who receives a refund of their contributions to the FERS Retirement and Disability Fund and deposits will void all future annuity rights under FERS. However, a departing employee who receives a refund of their contributions and later returns to federal service in a position subject to FERS contribution should consider the following:
‧ The newly rehired FERS employee is eligible to complete a redeposit. By making a full redeposit of FERS contributions previously withheld and distributed, the newly rehired employee will reestablish credit for both FERS retirement eligibility and annuity computation using the years previously worked and refunded.
‧ The amount of the redeposit is equal to the refund received plus interest, and
‧ If a departed FERS employee works the required number of years to be eligible for an immediate FERS annuity but decides not to complete a redeposit, the refunded service will not be used in the computation of the FERS annuity. The years included in the lump sum payment will in the rehired employee’s FERS annuity, as well as any survivor annuity that is due to a surviving spouse. However, refunded service will always be used for determining the rehired employee’s eligibility for immediate retirement. The following example illustrates:
Helen initially started federal service on June 10, 1990 at age 22 and worked 10 years until June 30, 2000 at which time she left federal service. When she left federal service, Helen elected to take a refund of her FERS contributions ($16,000 covering 10 years of creditable service). Helen then returned to federal service on January 10, 2016. When she returned to federal service, Helen was given the option to make a redeposit of her withdrawn FERS contributions, $16,000 plus interest.
Including interest charges, Helen owed $34,200. Helen elected to make a full redeposit and to make her redeposit in installment payments. Note that interest charges continued on any of Helen’s unpaid balance. By choosing to make a full redeposit, Helen will also get full credit for the initial 10 years that she worked in the computation of her FERS annuity. She is eligible to retire at age 60 on October 31,2026 (20 years of FERS service). She completed her FERS redeposit of $37,500 on August 10, 2026. Her high-three average salary is $155,000. Her unused sick leave hours totaled six months. When she retires, her FERS gross annuity will be computed as follows:
20.5 years times $155,000 equals $31,775
Had Helen not made a full redeposit, the 10 years of FERS contributions she withdrew would not be used in the computation of her FERS annuity. Her FERS gross annuity will then equal:
10.5 years times $155,000 equals $16,275
The difference in Helen’s starting gross annuity depending on whether she makes a full redeposit:
$31,775 less $16,275 equals $15,500 per year
The question becomes: By making a full redeposit, how long will it take for Helen to get her redeposit money back?
$37,500/$15,500 = 2.42 years (two years, five months)
If Helen lives for at least 2.42 years after she retires, then she will get her redeposit back.
Note that if Helen elects to give a survivor annuity to a spouse, the $31,775 also applies to a survivor annuity.
What is the Application Process for a Refund of Employee Contributions to the FERS Retirement and Disability Fund
If a FERS employee has been separated from federal service for 30 days or less, then the departed employee should mail Form SF 3106 (Application for Refund of Retirement Deductions) to their former personnel office for completion of the agency portion. They will forward it to OPM for processing once the departed employee meets the 31 days post-separation eligibility requirement.
If a FERS employee has been separated from federal service for at least 31 days, then the separated employee should send a completed Form SF 3106 to:
Office of Personnel Management
Federal Employees Retirement System
P.O. Box 45
Boyers, PA 16017-0045.
Taxability of Refund of Employee Contributions
An employee’s contributions made to the FERS Retirement and Disability Fund are made via payroll deductions and always made with after-taxed dollars. All deposits for active-duty military service and non-deduction (temporary) service including interest charges are made with after-taxed dollars. Therefore, a refund of employee contribution deposits is not subject to federal and state income taxes..
Any interest paid on a FERS refund is fully taxable if paid directly to the departed employee. Taxes on interest paid directly to the departed employee will be withheld at a 20 percent federal withholding tax rate. Taxes on interest can be avoided if interest is directly rolled over to a traditional IRA.