A) Retirement Coverage - Which Retirement Plan Do You Have?
B) Credit for Service
C) Age and Service Requirements for Retirement Eligibility
D) Computation of Retirement Annuity
E) Disability Benefits
F) Alternative Form of Annuity
G) Survivor Benefits/Designation of Beneficiary
H) Reemployment
I) Voluntary Contributions
J) Lump Sum Payments of Annual Leave
K) Taxation of Benefits
L) COLA's After Retirement
M) Annuity (Estimate) Calculator
N) How to File An Application for Retirement
A) Retirement Coverage - Which Retirement Plan Do You Have?
Civil Service Retirement System (CSRS). This is the so-called "old" retirement plan. In general, participation in this plan is limited to those who initially entered the federal service prior to 1/1/84 and (1) have been continuously employed by the United States Government (USG) since 12/31/83 or before, or (2) have had a break in federal service of one year or less since 1984. Employees who are enrolled in this plan contribute 7.0% of their basic pay to the CSRS. This is the only Federal retirement plan which had been open to FSN employees. The CSRS appointing authority for FSN's was gradually withdrawn during the 1960s through 1980's on a post-by-post basis.
Civil Service Retirement System (CSRS) Offset. This plan was developed during the period 1984 through 1986 when Congress was devising a plan to put new Federal employees under social security (FICA) coverage. Participants in this plan are covered by both the old CSRS and social security. In general, participation in this plan is limited to Federal employees who had at least five years of creditable civilian Federal service prior to 1/1/87, and who rejoined the Federal service since 1/1/84 after a break of CSRS coverage of more than one year. In addition, Assistant Secretaries and above, who are career CS employees and meet the criteria above participate in CSRS Offset, if they do not elect FERS. Employees who are enrolled in CSRS Offset contribute .8% of basic pay up to $90,000 (in 2005) to CSRS and 6.2% of this basic pay to social security. On all annual income in excess of $90,000, they contribute 7.0% of basic pay to CSRS. (Unless otherwise noted, all references in this notice, which address CSRS, also apply to CSRS Offset.)
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B) Credit for Service
A basic factor in determining whether an employee is eligible for retirement and in computing the annuity benefit is the total of the years and months of the employee's creditable service. In general, employees will receive retirement credit for all types of Federal civilian and military service subject to the following general rules. An employee cannot receive retirement credit for service credit under another Federal retirement system, unless the employee waives credit under that system and transfers retirement deductions to the new system.
1) Civilian Service. Virtually all types of Federal civilian appointments qualify for credit, subject to the conditions on deposit or redeposit described below. Service which qualifies for credit, for example, includes all Federal employment in which the individual was appointed to a position in the USG, temporary Christmas appointments at the Post Office, service as a Peace Corps or VISTA volunteer, service in the D.C. Government (if first hired before 1987), etc. Periods of service under a personal service contract or personal services agreement do not qualify for retirement credit, unless the FSN applied for and received approval for credit under P.L. 100-238 in 1991. Employees also receive up to 6 months credit in any calendar year for periods of Leave Without Pay (LWOP) from a Federal job and full credit for any periods during which workers' compensation benefits were paid from the Department of Labor. Employees receive no credit for periods of Intermittent No Work Scheduled (INWS) status under the Family Member Appointment (FMA)
Passport employees who work as a "seasonal When Actually Employed" (WAE) may wish to note that under the Office of Personnel Management's (OPM) newly (5/23/03) revised guidelines, WAE employees are NOT entitled to up to six months of retirement credit for any periods of LWOP in a calendar year. Credit is NOT allowed for non-work time for seasonal Passport employees who are placed in intermittent (WAE) status. For those periods, employees are only entitled to credit for time they actually worked.
2) Military Service. In general, military service is creditable when the individual served on active duty and received an honorable discharge. If the individual was awarded military retired pay (based on a 20 year military retirement), the military service is not creditable unless the recipient waives the military retired pay. However, an individual who is awarded military retired pay under the provisions of Chapter 67 of Title 10 U.S.C. (at age 60 based on service in the reserves), can keep the military retired pay and still receive credit for the periods of active duty.
Military Service Deposits. If the military service took place prior to 1/1/57, it must be used in the computation of the annuity, but cannot be credited towards social security. If the military service was performed on or after 1/1/57, it is creditable in the social security benefit. If the military service was performed on or after 1/1/57 and either (a) it is used in a social security benefit, or (b) the employee was first hired by the government after 9/30/82, the military service cannot be credited in the annuity of a CSRS employee unless the employee pays a 7% military deposit, plus interest.
Note: A civilian service deposit or redeposit can be made after retirement while OPM is computing the annuity, but a deposit for military service must be paid to the employing agency before the employee retires. Otherwise, the military service cannot be credited, as explained above.
3) Civilian Service Deposits. If a CSRS employee performed civilian service during which no retirement deductions were withheld, and the service was performed prior to 10/1/82, the service time will be counted in the annuity, subject to a small reduction. If a CSRS employee had service on or after 10/1/82, which was not subject to CSRS withholding, the employee must pay the deposit due or the service will not be counted in the annuity computation.
In general, the rate of deposit due for most service after 12/31/69 is 7% of basic pay, plus interest. If the deposit period occurred before 10/1/82, interest on the deposit accrues at 3.0% per year. For a deposit period occurring on or after 10/1/82, annual interest on the deposit accrues at a variable market rate, which was 4.375% for 2005.
4) Redeposits: If a CSRS employee received a refund for retirement deductions withheld for a period of past civilian service, the employee must repay the refund, plus interest (which together constitute the redeposit due) in order to receive credit in the annuity calculation. Under a new retirement provision the retiring employee is entitled to have the annuity computed with credit for the service and reduced by the actuarial value of the refund, provided that the redeposit is based on a period of service ending on or before 9/30/90.
For example, assume an employee had 30 years of service, but 15 of those 30 years were service for which a refund of retirement deductions was paid and not redeposited. Under the old law, the annuity would have been reduced by almost 50%. Under the new law, assuming the refund period ended on or before 9/30/90, the employee does not have to repay the refund, and still receives credit for the service, but the annuity is reduced by about 5% rather than 50%.
In general, the interest on any refund dated prior to 10/1/82 accrues at 3.0% per year. In the case of refunds paid on the basis of applications dated on or after 10/1/82, annual interest accrues at a variable market rate, which is 4.375% for 2005. OPM will allow any employee who has not paid a redeposit, the opportunity to do so before the final rate of annuity is established at the time of retirement.
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C) Age and Service Requirements for Retirement Eligibility
Age and years of service determine whether an employee is eligible to retire on a voluntary or involuntary basis, and whether the employee would qualify for an immediate or deferred annuity. A brief summary of the conditions for eligibility for retirement and immediate or deferred annuities under the three systems follows.
Immediate Annuity/CSRS
In order for an employee to be eligible for an annuity under CSRS, he or she must have at least five years of civilian service, the last year of which was subject to CSRS withholding, and meet a years-of-service requirement based on age:
| Age |
Years of Service
(civilian/military) |
Other Requirements |
| 62 |
5 |
None |
| 60 |
20 |
None |
| 55 |
30 |
None |
| 50 |
20 |
Involuntary Retirement |
| Any* |
25 |
Involuntary Retirement |
| Any* |
2 |
Disability |
*An employee under CSRS with 25 or more years of service, who is subject to involuntary retirement, is eligible for an immediate annuity at any age. An employee under CSRS with 5 or more years of service, who has been approved for disability retirement, is eligible for an immediate annuity irrespective of age.
Deferred Annuity/CSRS
An employee under CSRS who has five years of civilian service but fails to meet the length of service requirements for his or her age at time of separation (e.g., the employee is age 60 but only has 18 years of service), can either receive a refund of retirement deductions, or a deferred annuity at age 62.
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D) Computation of Retirement Annuity
The formula to compute an employee's basic retirement annuity is based on two factors, the employee's years and months of service credit and the employee's so-called "high-three average salary".
The annuity of part-time employees is computed under a special formula.
"High-Three Average Salary The salary figure in the "high-three average salary" refers to basic pay for the position. It includes locality pay (only if paid, for employees in CSRS/FERS) and administratively uncontrollable overtime for certain law enforcement officers. It does not include regular overtime, differentials, awards or bonuses, or information technology incentive pay. For FSN's, the high-three is based on earnings over the 78 consecutive pay periods of highest earnings in U.S. dollar terms. It includes a certain percentage of the Physicians Comparability Allowance (PCA), $30,000, for certain government physicians retiring after 12/28/02 with at least 15 years as a government physician.
CSRS Retirement Annuity Benefits:
The basic annuity of an employee covered by CSRS is computed as follows:
1.5% of high-three average salary for first five years of service.
1.75% of high-three average salary for next five years of service.
2% of high-three average salary for service in excess of ten years.
Unused sick leave. Unused sick leave is creditable in an immediate CSRS annuity. It is not creditable in an FERS annuity (without a CSRS component). If an employee retiring on an immediate annuity under FERS, has a CSRS component to the annuity, the amount of unused sick leave at the time of conversion to FERS is creditable, provided the retiree has at least that much sick leave at retirement. Unused sick leave cannot be used to establish annuity eligibility or used in the average salary computation
A quick way to compute the percentage of the average salary is to multiply the years of service by 2 and deduct 3.75%. For example, an individual with 30 years of service would receive 60% (30 X 2), less 3.75%, or 56.25% of his or her high three average salary.
The basic annuity is reduced for several reasons:
1) By 2% for each year, or part thereof, the employee is under age 55. The age reduction only applies when the employee qualifies for an immediate annuity based on an involuntary/early out separation.
2) By 10% of any outstanding deposit (refer to page 4, B. 3. on civilian service deposits). Assume an employee had an unpaid deposit of $1,500.00, which represented 7% of the pay for that period, plus interest. The annuity would then be reduced by $150.00 per year or $12.00 per month. It is generally not worthwhile to pay a deposit for a period of service before 10/1/82 because the rate of accrued interest (3%) and the reduction in the annuity are so small.
3) For any survivor benefit, the reduction is 2.5% for the first $3,600.00 of the basic annuity, and 10% of any base amount in excess of $3600.00. The survivor annuity is always calculated to be 55% of the base annuity amount for that benefit. For example, if the basic annuity was $20,000 and the maximum survivor benefit was elected, the reduced employee annuity would be $20,000 less $90 (2.5% of $3600) and less $1,640 (10% of $16,400), or $18,270. The survivor annuity would be 55% of $20,000, or $11,000.00.
Note: A quick way to compute the annuity reduced for the survivor benefit is to multiply the basic annuity by 90% and add $270.00.
Remember that the survivor benefit reduces the retirement annuity. The CSRS law requires that the annuity of a married employee be reduced for the maximum survivor benefit, unless the spouse consents to a smaller survivor annuity or waives the survivor annuity altogether at the time of retirement. The CSRS law also requires that the annuity be reduced to provide a survivor benefit for any former spouse, if the divorce occurred on or after 5/7/85, and the court awards a survivor annuity to the former spouse.
If the marriage is terminated by death or divorce the annuity will be recomputed to eliminate the reduction for the survivor benefit. The basic annuity is then reduced for any survivor benefit. Under CSRS, the reduction for the survivor benefit is 2.5% of the first $3600 used a base for computing the survivor benefit, and 10% of any amount exceeding $3600.00. In other words, the law was designed
to make it especially attractive for employees to elect at least a
minimal survivor benefit, since one can provide a monthly spousal survivor annuity of $165.00 and only incur an $8.00 monthly reduction in the retirement annuity.
CSRS Offset Annuity
A CSRS Offset annuity is computed exactly like an annuity under CSRS with one exception. If the employee becomes eligible for a social security benefit at age 62, the annuity is reduced by the amount of the social security benefit that is attributable to Federal employment that was covered by social security. If the employee is not paid the social security benefit due to excess earnings, but is otherwise eligible, the CSRS Offset annuity is still reduced by the portion of the social security benefit attributable to Federal employment after 12/31/83.
The CSRS annuity is reduced by 2% for each year the employee is under age 55 at the time of retirement. (This reduction only applies when the employee qualifies for an immediate annuity based on an involuntary separation.)
Ceiling on CSRS/FERS Annuity Benefits
Under the law, an annuity under CSRS cannot exceed 80% of the employee's "high-three average salary", except for the benefit attributable to unused sick leave. An employee reaches the maximum annuity benefit of 80% of salary after 41 years, 11 months of service. When that maximum benefit ceiling is reached, the employee's annuity benefit is frozen in terms of years of service credit, although the annuity can still be increased by the higher average salary and additional sick leave. Also the employee becomes entitled to a refund of all retirement deductions, plus interest, effective the first of the month after the one in which maximum annuity benefits are attained. This refund of excess retirement contributions is paid in a "lump sum" check by OPM.
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E) Disability Benefits
An employee, who has completed a specific term of years of civilian Federal service, and who becomes totally disabled or incapacitated, may be found eligible for disability retirement by OPM.
Disability Benefits under CSRS
An employee under CSRS must have at least five years of civilian service, and be found by OPM to be totally disabled for useful and efficient service, to be considered for disability retirement. The disability annuity is computed like a regular CSRS annuity except that the disability annuity cannot be less than the smaller of (a) 40% of the employee's high 3 average salary or (b) an annuity computed under the regular formula, but projecting the service (not salary) to age 60.
Note: In 1976, Congress eliminated virtually all tax breaks that had applied to retirement benefits under CSRS; therefore, there is no advantage, for tax reasons, for applying for disability retirement under CSRS, if one is eligible for regular retirement. Also there is no advantage in the annuity computation of applying for
disability retirement under CSRS, when one is over age 60, or has over
22 years of service, since the regular formula will apply.
One disadvantage of applying for disability retirement is
that it takes longer for OPM to process the application.
Another disadvantage is that if one is critically ill, and eligible for regular retirement, he or she could lose the option of electing a large, lump sum payment at retirement by choosing disability retirement. Of course, if an employee is not eligible for regular retirement, disability retirement may be the only available option.
Disability Retirement vs. Workers Compensation
Employees who incur illnesses or injuries at the workplace may be eligible for compensation benefits from the U.S. Department of Labor. Compensation benefits from the Office of Workers Compensation Programs (OWCP), U.S. Department of Labor are not payable concurrently with Federal retirement benefits, except when the OWCP has authorized a schedule award for temporary compensation or reimbursement of medical expenses. Employees who are eligible for both regular compensation benefits and retirement annuity must elect one benefit in lieu of the other. In most cases, benefits from the OWCP are about 10-20% higher than the disability benefit; therefore, it is usually advantageous to elect the compensation benefit. In addition, OWCP payments are tax-exempt.
An employee who has been separated from Federal employment (retirement, resignation, etc.) may elect a refund of CSRS contributions, when OWCP has awarded benefits based on a work-related illness or injury. However, employees should note that OWCP survivor benefits are not payable unless the employee dies as a result of the illness or injury for which compensation benefits were awarded. Therefore, an employee who has been awarded compensation and separated from the USG would be well advised to apply for disability retirement. Even though payment of the CSRS annuity would be suspended, this would protect the rights of the surviving spouse and children to an annuity, in the event of accidental death.
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F) Alternative Form of Annuity
What is the AFA or Lump Sum Payment at Retirement?
The AFA provides an eligible employee with an option of electing a lump sum payment equal to the employee's unrefunded retirement deductions and a reduced monthly annuity, in lieu of a regular unreduced annuity. (There is no reduction for the AFA in the rate of annuity payable to surviving spouse.) In general, the annuity of one who is eligible to elect the AFA is reduced by about 10-l5%.
Who is eligible to elect the AFA?
(1) Only Foreign Service and Civil Service employees who are suffering from a life threatening illness or disease (who do not retire on disability) may elect the alternative form of annuity in one installment.
(2) All other employees are INELIGIBLE.
How is the lump sum payment distributed?
Employees under the CSRS who have a life threatening illness are paid the AFA in one installment at retirement.
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G) Survivor Benefits/Designation of Beneficiary
The death of an employee, while in service or as a post-retirement annuitant can trigger a variety of survivors' benefits. A surviving spouse and unmarried children can qualify for annuities under all retirement systems. Employees need to complete, and keep current, the various designations of beneficiary forms to ensure prompt processing of benefits to the appropriate survivors in the event of the employee's death.
Death in Service of an Employee Covered by CSRS
If an employee enrolled in CSRS dies in service, with at least 18 months of service, the spouse receives a survivor annuity in the amount of 55% of the disability benefit described. For example, if an employee with an average salary of $50,000.00 dies in service with 10 years of service at age 30, the surviving spouse, if married at least 9 months (or a parent of a child), receives an annuity of 55% of 40% of $50,000, or $11,000.
Death of a CSRS Annuitant
If a CSRS annuitant dies, the surviving spouse or surviving former spouse entitled to benefits (see Part D), receives the rate of survivor annuity set at retirement, plus whatever COLA's are applicable. The maximum survivor annuity payable to the surviving spouse of a CSRS annuitant is 55% of the retiring employee's unreduced annuity.
Note: Under a new regulation that went into effect in May 1990, the FEHB enrollment for a survivor annuitant may continue even if the survivor annuity is not large enough to cover the cost of the premium. All that is required is that the surviving spouse be eligible for a survivor annuity of at least $1.00 a month; this will allow the surviving spouse to pay the FEHB premium directly to the government.
Benefits to Children When an Employee or Annuitant Dies
Children of employees who die in service while covered under CSRS, and who had at least 18 months of Federal civilian service, and children of deceased CSRS annuitants, are automatically entitled to a survivor annuity. Each child receives approximately $403 per month, per child (maximum 3 children) if single orphan, and $484 per month, per child (maximum 3 children) if double orphan.
The monthly annuity is payable provided the child is unmarried and (a) under age 18, or (b) under age 22 and a full-time student. Children of deceased annuitants or employees as described above, who are incapable of self-support due to a disability incurred before age 18, are also entitled to the monthly survivor annuity. The benefits are payable by operation of law and do not require an election or contribution by the employee.
Benefits which Accrue when Death due to Terrorism or Hostile Action
If an FSN or CS employee under a FS appointment dies overseas in line of duty, the survivors can receive a lump sum death benefit of one year's salary, in addition to any benefits previously described. If an FSN or CS employee dies anywhere as a result of hostile (terrorist) action, a lump sum death benefit is also payable, but this benefit is reduced by whatever other survivor/death benefits are payable by the USG. If the death is due to terrorism, tax exemptions may also be granted to the survivor(s) for first year of death and the year preceding death.
Death in Line of Duty
Certain disability and survivor benefits are payable by the U.S. Department of Labor to employees who die, or become disabled, due to work-related illnesses or disabilities, and/or to surviving spouses and children. These benefits are generally about 10% to 20% higher than the disability/death benefits payable under the retirement system, but the employee/survivor cannot receive compensation benefits and annuity benefits concurrently and must elect one benefit in lieu of the other. OWCP benefits are not taxed in the U.S.
Designation of Beneficiary
There are several different forms that may be used to designate a beneficiary, as explained below.
SF 2808 - Designation of Beneficiary for CSRS Benefits
SF 1152 - Designation of Beneficiary for Unpaid Compensation (salary or leave)
SF 2823 - Designation of Beneficiary for Federal Employees Group Life Insurance
TSP 3 - Designation of Beneficiary for TSP
The purpose of completing a Designation of Beneficiary (DOB) form is to name the beneficiary of any lump sum payments that may be payable following the death of an employee. A designation of beneficiary form does NOT affect one's eligibility for a survivor annuity. Separate forms are used for (1) unpaid salary/leave, (2) retirement benefits, and (3) life insurance.
If an employee fails to execute a DOB form, the law provides for automatic payment of benefits by order of precedence. The advantage of completing a DOB form, besides the ability to include or exclude specific heirs, is that benefits can usually be adjudicated more quickly because there is no question of entitlement, if the most recent DOB is on file. The disadvantage of completing a form is that it may have to be updated as potential heirs are born and named heirs pass away. For example, consider the situation of one who has three children A, B, and C, each of whom has three children (grandchildren of the employee) called A-1, A-2, A-3, etc. If an employee names A, B and C as beneficiaries, and C dies before the employee, the children of C (C-1, C-2 and C-3) inherit nothing. On the other hand, if there is no surviving spouse and the same circumstances apply except that no DOB has been executed, C-1, C-2 and C-3 will each inherit one ninth of the benefit payable.
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H) Reemployment
In general, a CSRS annuitant who is reemployed by a Federal Government agency would continue to receive his or her annuity. However, his or her salary will be reduced by the amount of the annuity allocable to the period at employment. In other words, the reemployed annuitant would be working for the difference in the hourly rate of salary and the hourly rate of the annuity. For example, if the annuity were $30,000 per year and the salary $45,000 per year, the adjusted salary of the reemployed annuitant would be $15,000. The requirement that the salary be reduced applies to any type of USG employment, including part-time, temporary or intermittent (WAE).
Employees who receive a buyout must repay it if they are reemployed by appointment or personal services contract within 5 years of retirement.
There are four situations in which the annuity of a reemployed CSRS annuitant is terminated, as follows:
1) A CSRS annuitant retired involuntarily and is reemployed in a position subject to CSRS coverage, or
2) A CSRS annuitant retired for any reason and is reemployed under a Presidential appointment, or
3) A CSRS annuitant elects FERS retirement coverage during reemployment or
4) A CSRS disability annuitant is reemployed and OPM finds that the employee is recovered from the disability for which he or she retired.
If any of the above conditions apply, the annuity is terminated upon reemployment and recomputed after the period of reemployment ends, reflecting credit for the additional salary and service. If, for any reason, the new period of employment cannot be counted in the annuity, payment of the old annuity is resumed with intervening COLA's.
There are two exceptions that allow a CSRS annuitant to receive full salary and full annuity concurrently. Under P.L. 100-509, an annuitant may receive full salary and full annuity when (1) there is "exceptional difficulty in recruiting or retaining a qualified employee", or (2) the employee is serving on a temporary basis in emergency situations involving a "direct threat to life or property or other unusual circumstances". The provisions of this law, which became effective 5/5/91, require that OPM approve (or delegate to the agency head) the waiver (of the normal reemployed annuitant provisions) on a case-by-case basis.
If a CSRS annuitant is reemployed under a personal service contract, the person receives full annuity and full compensation from the contract because the courts have ruled that individuals hired under contract are not considered Federal employees. The only exception is when the hiring agency effects an appointment through the contract.
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I) Voluntary Contributions
Voluntary Contributions is an investment program available only to certain Federal employees. The voluntary contributions made by the employee are invested in the Civil Service Retirement and Disability Fund.
-- Eligibility to make voluntary contributions is limited to employees who are covered by the CSRS plan, or the CSRS Offset plan. Employees who are covered by the old (FSRDS) or new (FSPS) Foreign Service plans, or the new (FERS) Civil Service plan are NOT eligible to make voluntary contributions. Employees who shift from the CSRS or CSRS Offset plans to FERS, FSRDS or FSPS are not eligible to continue making voluntary contributions. However, they can leave whatever voluntary contributions they made as a CSRS or CSRS Offset employee in the account until they retire.
-- Employees who make voluntary contributions earn a fixed annual rate of return, announced in advance each year. In 2005, the rate of return was 4.375%. The voluntary contributions account of an employee must be closed at retirement, when an employee can elect (a) to receive a lump sum payment, or (b) to purchase additional annuity, which is added to the regular annuity.
-- In general, an employee at age 60, for example, can purchase additional annuity of about $8.00 per year for every $100.00 of voluntary contributions. (The basic formula for calculating the additional annuity is $7.00 a year, plus $.20 per year for each year the employee is over 55, for every $100.00 in voluntary contributions.) The additional annuity purchased by voluntary contributions is not increased by cost-of-living adjustments.
-- Unlike investments in the Thrift Savings Plan or an Individual Retirement Account, the voluntary contributions made by an employee are NOT excluded from taxable income. The interest earned on voluntary contributions, however, is not taxed until the voluntary contributions account is withdrawn.
-- Total voluntary contributions for an employee cannot exceed 10% of the total basic pay the employee received during all of his or her Federal service. An employee cannot make voluntary contributions until any outstanding deposits or redeposits are paid.
-- Employees can withdraw their voluntary contributions accounts at any time before retirement, but an employee who receives a refund of the balance in his or her voluntary contributions account cannot reopen another account unless the employee has had a break in Federal service after receiving the refund.
-- Employees who wish to make voluntary contributions should file an Application to Make Voluntary Contributions (SF 2804) with OPM. This form is available in HR/RET.
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J) Lump Sum Payments of Annual Leave
At time of retirement, CSRS employees are entitled to a lump sum payment for the hours of unused annual leave they have accrued. Most civil service employees may not carry more than 240 hours of unused leave into a new leave year. The total unused annual leave hours are capped by this ceiling plus additional leave hours earned in the new year. CSRS members of the Senior Executive Service, however, are capped at 720 hours, or the amount of annual leave in effect on 10/15/94.
The FY-92/93 State Authorization Bill, signed into law on l0/28/9l, ended prospectively the provision for adding the salary differential to the lump sum payment of annual leave payment for those employees who retire abroad while assigned to an overseas post. This new provision applies only to those who arrive at post on or after l0/28/9l. Anyone who retires from a post at which they arrived before that date is not affected by this legislation.
An employee in the SES, who is holding a Presidential appointment (i.e. holding a non-leave earning position), must be re-assigned to a leave-earning position before retirement to qualify for a lump sum payment. The payment would be computed on the basis of his or her SES salary rate. Otherwise, the lump sum payment would be computed on the basis of the salary rate of the employee's pre-SES position.
Under a new law, there is a cap on the amount of annual leave that SES employees can carry forward to a new leave year. The cap is the lesser of (a) 720 hours or (b) the amount of leave the SES employee had on 10/15/94. If the SES employee's balance of annual leave falls below the capped amount on 10/15/94, the leave cap is also reduced.
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K) Taxation of Benefits
1) Federal Income Tax
Civil service annuity benefits are subject to Federal income tax unless the recipient is a non-U.S. citizen living overseas. All annuitants are entitled to a portion of tax-free annuity, which equals the amount of retirement contributions paid by the employee during his or her Federal career. The date of retirement determines the year in which the tax free amount of the annuity can be deducted from one's income for tax purposes, as explained below.
3 Year Rule: Employees who retired before 7/1/86 could take the tax deduction on their annuity (equal to the total retirement contributions and deposits) as soon as they retired. For most employees, this meant that the first 18-36 months of annuity payments were free of a Federal income tax liability. IRS refers to this provision as the "3 Year Rule".
General Rule: Employees who retired on or after 7/2/86 are still entitled to a tax deduction (equal to the amount of retirement contributions and deposits), but they cannot claim this tax deduction immediately upon retirement. They can only claim a small portion of the tax deduction each year, based on the value of their contributions divided by their actuarial life expectancy. For example, if an employee had a life expectancy of 20 years, 5% of the retirement contributions could be deducted from their taxable income each year.
Taxation of the Lump Sum Payment under the Alternative Form of
Annuity (AFA). The lump sum payment under the AFA is fully taxable (unless as explained below, it is "rolled over" to an IRA). In a court case, now pending, some annuitants claim that the AFA should not be taxable because it is really a return of the employee's contributions. The position of IRS, however, is that the AFA is merely a prepayment of annuity benefits and it should be taxed like all other annuity benefits.
In general, 85-90% of the lump sum payment is taxable. (To obtain the percentage of the AFA that is taxable, the rate of annuity with the AFA is divided by the rate of annuity without the AFA.) If an employee retires before the year in which he or she reaches age 55, and elects the AFA, and declines to make a "roll over", there is a tax penalty of 10% of the taxable portion of the lump sum payment.
Under Public Law 102-318, certain lump sum payments that are authorized under CSRS can be "rolled over" to an
Individual Retirement Account (IRA) if the lump sum payment
is dated on or after January 1, 1993. The following types of lump sum payments, when dated on or after January 1, 1993, can be "rolled over" to an IRA:
- The taxable portion of a lump sum payment under the
alternative form of annuity. In general, about 85% to 90% of the AFA payment is taxable, so this represents a significant tax savings for a retiring employee; and
- Interest on refunds of excess deductions. Under the law, employees who have more than 41 years, 11 months of service under CSRS have their annuity "capped" at 80% of high three average salary. They also receive a refund of the retirement deductions, plus interest, withheld thereafter. The retirement deductions that were withheld after 41 years, 11 months of service were never taxable, but the interest on those contributions is taxable. Under the new law, the interest on those "excess deductions" can be rolled over to an IRA.
Marriage to non-U.S. Citizen: Under a 1988 change to the inheritance law, the actuarial value of a survivor annuity benefit payable to a non-U.S. citizen is added to the value of the decedent's estate for tax purposes. The law may only adversely impact those with estates with a projected value that exceeds $675,000.00 (including the value of the survivor annuity), because of estate credits.
b) State Income Tax
The 50 states tax annuity benefits differently, as described below:
States with no personal income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.
States exempting total amount of CS annuity benefits: Alabama, Hawaii, Illinois, Kansas, Kentucky, Massachusetts, Michigan, New York, and Pennsylvania.
States allowing partial exemption of CS annuity benefits: Arizona, Arkansas, Colorado, Connecticut, Delaware, District of Columbia, Georgia, Idaho, Indiana, Iowa, Louisiana, Maryland, Mississippi, Missouri, Montana, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Puerto Rico, South Carolina, Utah, Virginia, West Virginia and Wisconsin.
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L) COLA's After Retirement
The law provides for cost-of-living adjustments (COLA's) for all annuity benefits under CSRS/CSRS Offset, as explained below:
-- All employee and survivor annuitants under CSRS/CSRS Offset receive a full COLA every year, which reflects the increase in the Consumer Price Index (CPI). The COLA is effective December 1 of each year and payable in the annuity payment dated January 2. The first COLA after retirement is prorated based on the number of months the employee had been on the annuity roll since the last COLA was awarded.
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M) Annuity (Estimate) Calculator
Employees can now use an online annuity calculator, available in
e-Phone, to calculate their annuity benefits. In order to use the calculator, you will need to enter a retirement date (hypothetical) and the amount of your survivor election (maximum, minimum or none). The survivor election is a benefit payable to your surviving spouse after your death. The calculator will then verify that you are entitled to an annuity on a given date and estimate your annuity. If the calculator does not work for you, you can submit an Application for Annuity Estimate, DS-5000, to HR/RET for processing
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N) How to File An Application for Retirement
1. Selecting a Date of Retirement. The selection of an employee's actual date of retirement is a decision that should be based on careful research and planning. It makes a difference which month of the year and day of the month a person chooses to retire. Among the factors to consider are the following:
- If you are under CSRS or CSRS Offset, and you voluntarily retire during the first three days of the month, or the last day of the month, your annuity will begin the next day.
- If you are under CSRS or CSRS Offset and you involuntarily retire, or you retire on a disability retirement, your annuity will begin the next day.
- If you retire at the end of the pay period, you will be paid for the annual leave accrued for that pay period.
- If you retire by the end of the leave year, you will be paid for all leave.
- Legislation has been enacted which ends the provision for adding the salary differential to the annual leave payment of those who arrived at an overseas post on or after l0/28/9l.
- Although every day of service potentially adds to the computation of the annuity, in reality, the days count only when they add up to full months. The extra days, including applicable sick leave, are dropped. In order to obtain maximum benefits, you should plan to retire with as few extra days as possible.
2. Processing of Your Retirement Application. The U.S. Office of Personnel Management (OPM), Office of Retirement Programs, 1900 E Street N.W., Washington, D.C. 20415, administer all retirement benefits under CSRS and CSRS Offset. OPM will certify records of service, process applications for deposit and redeposit, authorize payment of lump sum benefits and refunds of retirement deductions, and compute and authorize retirement and survivor benefits. OPM also acts as the payroll office for all CSRS/CSRS Offset annuitants, ensuring proper payment of monthly annuities, processing changes of tax withholding, changes of address or EFT requests, and managing the annual FEHB open season for annuitants.
In turn, the Department's role in the retirement process is to counsel employees and their families about retirement benefits, ensure that employees have the correct retirement code and service computation date (SCD), and prepare the personnel and accounting records that OPM needs to compute an annuity benefit. In this regard, several offices within the Department share responsibility:
-- The Office of Retirement, Bureau of Human Resources (HR/RET) is responsible for all retirement policy matters, including the administration of all Foreign Service Retirement programs, counseling CS and FS employees about retirement benefits, and administrating the Thrift Savings Plan for Department employees. HR/RET also prepares and certifies retirement records of CS employees and forwards them to the Bureau of Resource Management, Retirement Accounts Division for transmission to OPM.
-- The Retirement Accounts Division, Bureau of Resource Management (RM/RAD) is responsible for maintaining all accounting records of the Department's employee retirement deductions, as well as maintaining the FS annuity rolls. RM/RAD also handles the certification of retirement records for domestic CS employees under CSRS/CSRS Offset, and FSN employees under CSRS, and transmits the same to OPM.
-- The Office of Overseas Employment (HR/OE) is responsible for all retirement policy issues that uniquely address FSN personnel.
-- The Executive Office of each bureau is responsible for the preparation of personnel actions in conjunction with retirement or separation actions of CS personnel, as well as, ensuring the accuracy of TSP eligibility dates for Bureau Personnel and adjustments of salary of reemployed CS annuitants. EX also coordinates operational problems with overseas posts and follows up on the preparation/certification of personnel records of CS employees who die in service.
-- The overseas Management/HR Officer is responsible for the preparation/certification of retirement records and personnel actions of FSN employees under CSRS, operational responsibility, counseling on retirement matters, and dissemination of materials for overseas employees.
3) Further Information/Applying for Benefits. Overseas FSN employees should contact their Management/HR officer at post for any information about retirement programs or benefits, or procedures for initiating an application for benefits. FSN retirement policy questions for State Department employees that cannot be resolved at post should be directed first to HR/RET.
Domestic CS employees should first contact their Bureau Personnel Officer for any information about retirement programs or benefits. The bureau executive office will then coordinate retirement counseling actions with HR/RET, who will process the application for retirement benefits. CS applications are certified by RM and then forwarded to OPM for adjudication.
The Department provides each State retiree with an attractive walnut plaque, engraved with the retiree's name and time of service. In addition, women receive a charm and men a pin. Retirement counselors will see to it that retirees receive these awards.
Any employee who has suggestions or recommendations for improving the retirement programs administered within the Department should contact HR/RET. Any suggestions are welcomed and appreciated.
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