Retirement Credit for Military Service
by Robert F. Benson |
Military service is generally creditable for civilian retirement, but it must be paid for by the employee. This is referred to as “buying back” the military time, or making the “military deposit.” The amount to be paid is 3% of military earnings, plus compounded interest added each year on the anniversary date of the start of civilian employment. The interest begins accumulating two years after the entry-on-duty date. If the employee pays in full any time prior to the 3-year anniversary date, no interest is charged.
Annually, the Treasury Department sets the interest rate. For an individual employee, the interest for each 12 months is calculated by a “composite” interest rate, which is pro-rated on his anniversary date from the rates of the current year and the next year. For an anniversary date of August 23, the composite rate would be 127 days at the first year’s rate plus 233 days at the next year’s rate (by law, a 360-day year is used).
Example: employee started work on November 5, 2001. Previously, he earned $60,000 while serving in the military. Three percent of $60,000 is $1,800. If he had paid the $1,800 in full by November 5, 2004, there would have been no interest charged. However, he waited until August of 2010 to pay. This would mean six years of interest, accumulated as follows:
|Time Period||Interest Rate||Interest||Total|
|2003 – 2004||4.0469%||$72.84||$1872.84|
In the example above, if the employee pays on/after Nov 5, 2010, he will be charged one additional year’s interest, to total $2,397.95. Once he has paid in full, he is assured he will receive full credit for retirement purposes for his military time.
Can a retired military employee pay the applicable principal + interest on his military earnings, and receive a larger civilian pension? Yes, but he must waive the military pension. There are risks in this. The larger civilian pension that results can be less than the combined military and civilian pensions.
There may be occasions when the employee believes the benefit of making the deposit is not worth the cost. For example, in the above case, the employee was in the military four years. His annuity would be an additional 4.0% of his high-three. If his high-three was $72,000, then he would get an increase of (0.04 x 72000), or $2,880 annually. Probably he would want to pay $2,322 one time to receive $2,880 more each year for the balance of his life. But what if his military service was just two years? Then he would still have to pay $2,322, but his annual “gain” would be only $1,440.
What if the high-three was $57,000 rather than $72,000? Then four years military would increase the annuity $2,280, while two years would be just $1,140, yet the payment in either case would still be $2,322.
But more than just money is involved. For retirement eligibility, the military time does not count at all, unless the employee makes the deposit. In our above example, the employee would become eligible to retire at age 57 with 30 years Federal service (26 civilian + 4 military). If he did not pay for the military time, he would not qualify for retirement until he became 60! (At age 60 he needs only 20 years service.)
Note: the above applies to FERS employees. For CSRS, there are slight, but significant, differences. A helpful tool for the arithmetic is at www.fedbens.us, menu option #1. This software will calculate the exact amount due to pay the military deposit. Also, the employee’s payroll/personnel office can provide information on repayment by payroll deduction, etc.
Ref: Chapter 23, CSRS and FERS Handbook, www.opm.gov/retire/pubs/handbook/hod.htm
© 2013 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.