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.”
“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 above.
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