Military Deposits: Is the Grace Period Two Years or Three?

By on February 18, 2014 in Current Events, Retirement with 11 Comments

As a general rule, your military service in the Armed Forces of the United States is creditable for federal Civil Service Retirement purposes as long as certain conditions are met.

These general conditions are:

  • Your service was active duty and it was terminated under honorable conditions
  • You performed this service before separating from a civilian position under the federal retirement system; and
  • You pay any required deposit to the federal retirement system.

An exception to this general rule is that you cannot receive credit for any military service if you receive military retired pay unless you were awarded the retirement pay because of a service-connected disability during combat or your disability was caused by an instrumentality of war and incurred in the line of duty under in a war.

If you were first employed by the federal government under retirement coverage on or after October 1, 1982, you will receive retirement credit for any post-1956 military service when you retire only if you make a deposit to the retirement system for your military service. Assuming you are qualified to make a military deposit, you can increase your federal civil service retirement by following the procedures outlined by the Office of Personnel Management. The deposit must be made to your employing agency before you retire.

This may require you to plan ahead as you will need to verify how much you were paid while in the military. If you do not have your actual military pay vouchers, you will need to obtain a certified estimate of your military earnings from the branch of the service in which you served.

The Military Service Deposit Grace Period

You will not be charged interest on a deposit for military service if you make that deposit within three years from the date you first become covered under the civil service retirement system. This can be confusing. The grace period, for this military deposit interest, is two years and three years, depending on how you look at it.  Let me explain.

The statutory grace period is two years.  That is, for the first two years after the veteran starts work as a civilian employee, there is no interest charged on his military deposit.  So, where does the three years come from?

Interest begins on the two-year anniversary of the employee’s entry on duty (EOD), but it is not actually assessed and due until one more year has passed.  This means the employee can wait to pay until shortly before the 3-year anniversary, and he will not be charged interest.  This can be a substantial savings.

This is why the interest-free period is sometimes referred to as two years and, at other times, it is referred to as three years.  As a practical matter, both are correct as long as you understand the actual time limitations that may apply to your situation.

What is Composite interest and How Does it Apply?

This is what makes computer software quite useful, if not actually necessary, for figuring how much money is owed.

Each year the Treasury Department announces various interest rates for Federal transactions.  One of these rates is the one used for military deposits.  Rates have been as high as 13% and as low as the current 1.625%.  Each employee with military service has a personal “interest accrual date,” which is the same as his entry-on-duty date.  This composite interest rate is tied to your EOD.

For example, assume an employee started working as a civilian on May 24th.  This composite rate is four months and 24 days at the interest rate for this year and combined with seven months 6 days at the interest rate for last year.

Got that?  On May 24th of this year the debt on this military deposit increased by 1.625%.  On May 24th of 2013, the interest added to his account was calculated at 2.0% – a weighted composite of 2.25% for 2012 and 1.625% for 2013.  (Note: this year was easier than usual, because the 1.625% for last year was repeated this year.)

Calendar year interest rates going back to 1985 and software for calculating the interest on military deposits are here, menu choice no. 7.

Ref: Chapter 23, CSRS & FERS Handbook

© 2016 Robert F. Benson. All rights reserved. This article may not be reproduced without express written consent from Robert F. Benson.

About the Author

Robert Benson served 35 years in various Federal agencies, as both a management analyst and IT specialist. He is a graduate of Northwestern University.

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