Co-authored by Ehren Clovis and John Grobe
You wouldn’t expect the “Middle Class Tax Relief and Job Creation Act of 2012” to affect federal employee retirement benefits, would you? But it does. In fact, it makes two significant changes to the Federal Employees’ Retirement System (FERS).
First significant change: New employees who are hired on or after January 1, 2013 will pay more for their FERS retirement coverage than current employees. The increase (2.3% across the board) will raise deductions for new regular employees from 0.8% to 3.1%, and deductions for new “special category” and Congressional employees from 1.3% to 3.6%. Employees paying the new higher rate will be called FERS “Revised Annuity Employees,” or FERS-RAE.
Thinking about returning to federal service after a break? Be warned: “New” employees include employees who are rehired with less than 5 years of creditable or potentially creditable FERS service as of 12/31/2012. Employees with more than 5 years of creditable or potentially creditable service as of 12/31/2012 are exempt from the new FERS-RAE provisions and will remain under FERS at the old rates.
Example: Eric was employed under FERS from December 1997 through June 2005, then left federal service for a private sector job. If Eric returns to federal service in 2013 or later, he will be covered under FERS, not FERS-RAE, because he had 5 years of creditable FERS service as of 12/31/2012. But if Eric had left in 2001, he would be under FERS-RAE when he returned.
“Potentially creditable service” is service for which there are no funds currently in the FERS system, but for which redeposits or deposits can be made to FERS. This includes FERS service for which the employee contributions have been withdrawn (aka “redeposit service”) and service for which FERS deposits can be made (aka “deposit service,” including Peace Corps and VISTA volunteer service, most Temporary service before 1989, and most active duty military service performed while on leave from a civilian federal position).
Are you thinking that FERS-RAE employees will get a larger retirement benefit, since they are paying more? Think again: there’s no change in the way most retirement benefits are computed (see the next paragraph).
Second significant change: The new law changes the way pensions are computed for “new” Members of Congress and Congressional staffers who begin service in 2013 or later. Their pensions will be computed the same way as those of regular employees. They will no longer receive a higher benefit similar to that of “special category” employees. Yes, that’s right: they’ll be paying more and getting less than before.
One thing federal employees can be grateful for is Congress’ penchant for grandfathering current employees and shielding them from negative changes to federal benefits. Those who are employed on 12/31/2012 and rehires who have at least 5 years of creditable or potentially creditable FERS service are exempt from the new provisions. This should give some small comfort to current federal employees who are concerned about other possible changes (e.g., high-five, future contribution increases, etc.).
More information about the new FERS provisions can be found in the Office of Personnel Management’s Benefits Administration Letter 12-104, dated 10/3/2012.
Ehren Clovis recently retired after a career in retirement and benefits with the Bureau of Public Debt. She provides individual retirement counseling (“Federal Benefits on Call”) for federal employees.
© 2014 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.