In an earlier article, we discussed length of service for
retirement computation purposes. This article builds on the previous discussion by discussing the effect
of what Human Resources folks call “deposit service.” (See How Do You Determine Your Length of Service for Retirement?)
“Deposit service” is federal service, usually early in your
career where CSRS or FERS retirement deductions were not taken from your
pay. This service might have been
as a seasonal postal worker when in college, or time spent in some types of
temporary employment before being converted to a permanent position. Many employees hired by one federal law enforcement agency in the
mid 1970s had their first three years of service treated as deposit service,
regardless of the status of their appointments.
We will first look at the rules on deposit service for CSRS
and CSRS Offset employees. These
rules might also apply the CSRS component of the service of a FERS transferee
(a person who had at least five years of coverage under CSRS and who switched
to FERS during an open season, or who chose FERS after returning to work
following a break in service of 365 days or more).
If your ‘deposit service’ ended prior to 10/01/82, the
service will count towards your eligibility to retire and will count towards
the computation of your annuity, regardless of whether or not you make a
deposit. However, if you don’t
make a deposit, your annuity is reduced by 10% of the amount you owe, both
deposit and interest. The deposit
is 7% of the salary you were paid at that time (6.5% if 1969 or earlier). Interest is charged at 3% per year.
Here’s an example:
Bill was a temporary employee for 12 months, ending in December 1981, at
which time he was appointed to permanent position. He earned $12,000.00 during that period of time and CSRS
deductions were not withheld from his salary. Had they been withheld, they would have totaled $840. With interest at 3%, we are looking at
an amount of roughly $1,900 today. If Bill did not pay the deposit, his annual annuity would be reduced by
$190 per year or slightly less than $16 per month.
If we were to totally disregard opportunity cost (what we
could make by investing the $1,900), Bill would recoup his $1,900 in ten
years. Bill wouldn’t be missing a
lot whether or not he made the payment.
Now let’s say that Bill had his temporary service in
1983. The service would still be
creditable for his eligibility to retire, but it would not be counted in the
computation of his annuity. In
addition, variable interest rates would be used to compute the amount he
owed. Bill’s deposit amount would
be roughly $4500.00 today.
If Bill did not make the deposit, the year of service
represented by the temporary time would not be used to compute his
annuity. Let’s say he will retire
with 30 years of service and a high-three salary of $65,000. That would give him an annuity of $36,562
per year. If the one year of
temporary service were not used, has annual annuity would be $35,262. Once again disregarding opportunity
cost, Bill would recoup his $4,500 in three and a half years.
The FERS rules differ significantly from CSRS rules
regarding deposit service. FERS
deposit service performed after 01/01/1989 is not creditable at all for
retirement. It will not count for
either eligibility or computation. There is an exception for Peace Corps and VISTA service. A FERS employee can make a deposit for
Peace Corps and VISTA service and it will count for both eligibility to retire
and in the annuity computation.
FERS employees who have deposit service that took place
before 01/01/1989 are allowed to make a deposit to have the time counted. Absent a deposit, the time will not
count either for eligibility to retire or in the annuity computation.
A FERS deposit is 1.3% of the salary earned during the
period of deposit service. Variable interest rates would be used to increase the amount, resulting
in a large amount owed for those who wait until close to retirement to make the
payment. In this situation, an
individual would likely recoup the amount of their deposit payment in three and
a half to four years.
It is possible to have more than one period of deposit
service, so individual computations may be more difficult than the examples
In most cases it makes sense to make a deposit for FERS
service before 01/01/89 and CSRS service after 10/01/82.
If you are in a situation where you are
considering making a deposit to cover temporary service, perhaps your best bet
is to contact human resources and ask them to compute how much you owe and what effect it
will have on your annuity if you make it (or not). The earlier you start making the payments, the easier it
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