In our discussions of length of service for retirement purposes, we have already explored making deposits for service where no retirement deductions were taken. This article looks at service where you left federal service, withdrew your contributions and did not re-deposit them when you later returned to work for Uncle.
The bulk of this article will deal with CSRS employees, as the rules that cover CSRS re-deposits can get confusing. Towards the end of the article we will discuss the changes brought about by legislative action this past fall. These changes allow FERS employees to re-deposit contributions they have withdrawn. Up until the passage of the National Defense Authorization Act in November 2009, FERS employees were unable to make re-deposits.
TransFERS employees (those who switched from CSRS to FERS either in an open season, or upon returning to federal employment after a break in service of more than 365 days) will have any CSRS re-deposits covered by CSRS rules and FERS re-deposits covered by FERS rules.
When a CSRS employee is deciding whether or not to re-deposit money that was withdrawn, the most important thing to consider is the ending date of the service for which the refund was received. At the risk of oversimplifying, here’s a way to look at the choice. If the service ended before 03/01/91, the answer is “it depends”. If the service ended 03/01/91 or after, the answer is “pay it”.
It is unlikely that any CSRS employees would have withdrawn contributions on 03/01/91 or after, but if they did, the refunded service will not count in the computation of their annuity. I guess the good news is that the service will count for their eligibility to retire.
Let’s look at an example.
Jim withdrew ten years worth of CSRS contributions when he left on 01/01/92 to become an 8-track repairman. He soon realized he had made a bad decision and returned to federal service before 365 days had passed. This fact allowed him to remain in CSRS. However, he had invested much of the money he withdrew in the business and was unable to make a re-deposit to the CSRS fund. He will work for a total of 30 years and will retire in 2012 with a high-three salary of $70,000. If he does not deposit the withdrawn contributions (and interest), his annuity will be $25,375 rather than the $39,375 it would have been had he made the re-deposit. Even though Jim would owe an amount in the vicinity of $50,000 by 2012, my advice to him would be to repay it, even if he had to take out a loan.
Now let’s look at the situation that most people who are facing a CSRS redeposit find themselves in. That is, the period of service for which they received a refund of contributions ended before 03/01/91.
In this case, the service counts for both their eligibility to retire and in their retirement computation. If they do not make the redeposit, their annuity will be subject to an actuarial reduction (i.e., it will be reduced by an amount that is determined by their age at retirement and the amount of redeposit that they owe). What they owe is the amount of money they withdrew plus interest.
Not to confuse you, but there is another date to remember.
Money taken out before 10/01/82 is charged interest at a flat 3% rate. If the money was taken out 10/01/82 or later, the interest charged varies year by year (in one year it was 13%). Since the amount taken out, plus interest will determine the annuity reduction, those who took the money out before 10/01/82 will face a smaller reduction.
Let’s say that Sally took her money out in 1981, and that, by 2012, the amount she will owe will be $30,000. When she retires in 2012, Sally will be 58 years old. The “Present Value Factor” chart used by OPM gives a 58 year old a reduction factor of 197.6. That amount is divided into the $30,000 that Sally owes to determine how much her annuity is reduced. Her monthly annuity will be reduced by $152, or $1824 a year. That leaves her with a relatively small annual reduction in her annuity. Disregarding opportunity cost (what she could make by investing the money) Sally would break even when she reaches her life expectancy. If Sally had taken her money our after 10/01/82, she would have owed much more money (due to the variable interest rates) and would have taken a larger reduction in her annuity.
Now we will take a look at FERS employees who have withdrawn FERS contributions when they left federal service, but ended up coming back to federal employment. Thanks to the National Defense Authorization Act of 2009, FERS employees can re-deposit that money and receive credit for retirement eligibility and computation. If they do not re-deposit the money, they will receive no credit for either. The earlier example of Jim pretty much describes how a FERS employee would be affected.
The Office of Personnel Management (OPM) is working with FERS employees who have applied for retirement to compute their re-deposits and to receive their payments. OPM is not working at this time with FERS employees who want to make a re-deposit but have not yet applied for retirement. They are developing procedures and will make an announcement once they are ready to accept payments from those who have not yet applied for retirement. The folks at OPM must be really exhausted these days, what with having to implement all the changes that were enacted last year.
Probably the best advice for someone who is considering making a redeposit is to ask their human resources office to compute how much they owe and what the effect will be on their annuity if they do not pay it back. Armed with that information, they should be able to make a good decision.