By George Ray
One of the most troubling issues that I see when talking with Federal employees during benefits training sessions is a lack of awareness on how non-deduction service can be used to increase the amount of creditable service that may be used for their pension calculation and eligibility. Feds rarely know about non-deduction service and how to get credit for it. That’s unfortunate because learning about how to get credit for non-deduction service as early as possible in your career could save you thousands of dollars later if this issue affects you.
Background
As you likely know, contributions are taken from your bi-weekly pay check and contributed by your agency (along with the agency’s contribution) into the Civil Service Retirement and Disability Fund. The money in this fund will be used to pay your FERS (or CSRS) retirement benefit. CSRS-covered employees contribute 7% of their basic pay and FERS contribute .8% of their pay to the fund (the other 6.2% taken from FERS is paid as FICA tax to Social Security). Newly-hired FERS employees (those starting on January 1, 2013, or later) contribute larger amounts depending on whether they’re considered FERS-RAEs (Revised Annuity Employees) or FERS-FRAEs (Further Revised Annuity Employees).
Non-deduction service (also referred to as optional service) includes any period of creditable civilian service performed by you before 1989 during which no retirement deductions were withheld from your pay. Why might this have occurred? Temporary time or time worked on an intermittent work schedule most often created the issue. Because no deductions were being taken from your pay at that time you have ‘non-deduction’ service. For the most part, the circumstances leading to this issue were eliminated by the creation of the Federal Employees Retirement System (FERS), but there are employees who have been in service for many years who may have this type of service. There’s almost always at least one person in my sessions who have made a deposit for this service or needs information on how to do it.
The Issue
What’s that problem? Unfortunately, many Feds don’t learn about this issue until years after the non-deduction service has taken place. Sometimes the first time they’ve heard of this is during my session.
Why is this important? It could help you to qualify for your retirement benefit earlier by allowing this service to be considered ‘creditable service’. It could also increase the amount of your pension benefit by having more years of service used in the calculation. ‘You mean I could retire earlier with a larger pension? Where do I sign up?’
Getting Credit
So, what can you do to get credit for this service if you have it? That depends on whether you’re covered under the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS).
Under CSRS, periods of non-deduction service are always creditable for eligibility (i.e., how soon you can retire), however for this service to be used in the annuity computation (i.e., how much you’ll get) a deposit may need to be made.
For service on or after October 1, 1982, you must make a deposit to obtain credit for this service.
For service before October 1, 1982, a deposit may be made, but if it isn’t, you’ll still receive credit for eligibility purposes, but the amount of your retirement annuity will be reduced actuarially by 10% of the amount owed with interest. That means that the cost will be spread out over your life expectancy, so you’ll receive a somewhat smaller retirement check each month.
Those covered under FERS who have non-deduction service performed before January 1, 1989 will have that service counted for both eligibility and the calculation if a deposit is made. Non-deduction service after January 1, 1989 is not creditable for eligibility or for the pension calculation, and a deposit is not allowed to be made.
The Remedy
The deposit that must be made to receive credit for this service is equal to the amount that would have been contributed from your pay at that time. That means CSRS-covered employees will need to contribute 7% of the pay received during the non-deposit service. FERS-covered employees are required to contribute 1.3%. The payment must also include interest that is charged, and that’s why you want to find out whether you’re eligible to make these deposits as soon as possible in your career. The longer you wait, the larger the amount of interest that you’ll pay to receive credit for this time. I’ve talked to employees who only owed a few hundred dollars in contributions, but thousands of dollars of interest.
Making Payments
To find how much you’ll need to pay to get credit for this service, complete Standard Form 3108 (SF-3108/Application to Make Service Credit Payment). This form can be used by both FERS and CSRS-covered employees. You must begin the application process as an employee. (After you retire and begin receiving your retirement benefit, it’s obviously too late to try to make a deposit for this service.)
If you’re a current employee, send your application to your department or agency because they must certify it. OPM asks that you not file an application if you plan to retire within six months. Instead, OPM will give you an opportunity to make payment when it computes your annuity.
OPM says that if you’re already within six months of retirement, you should submit your request to make the deposit at the same time you submit your application for retirement. OPM will then notify you of any amounts due so you can decide whether to make the payments. But I believe that waiting until the end of your service to make a payment could be a costly mistake.
Here are some important questions you may be asking yourself at this point. ‘Should I make a payment? What information will I need to decide if it makes sense? To keep this post short(er), I’ll answer those questions in a follow-up titled “The 3 Questions You Must Answer Before Making a Deposit”.