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Chapter 3, Section 7: Alternative Form of Annuity: Lump-Sum Benefit

The "Alternative Form of Annuity" provision allowed workers entering retirement beginning in 1986 to receive a payment equal to the value of the contributions they made to the retirement program over their careers as a tax-free amount, with annuity payments then reduced.

General Description

The "Alternative Form of Annuity" provision allowed workers entering retirement beginning in 1986 to receive a payment equal to the value of the contributions they made to the retirement program over their careers as a tax-free amount, with annuity payments then reduced. However, Public Law 103-66 eliminated the lump-sum option as of October 1, 1994, for everyone except those who have conditions resulting in a life expectancy of less than two years and who are not taking disability retirement. (During the first two years of the provision, the lump sums were paid in one payment. During the following years, the lump sums were paid in two installments, except in the case of individuals with life-threatening conditions, who continued to receive it as one payment.)

The following medical conditions provide prima facie evidence of life-threatening afflictions or critical medical conditions for the purposes of qualifying for a lump-sum payment:

Metastatic and/or inoperable neoplasms; aortic stenosis (moderate-severe); class IV cardiac disease with congestive heart failure; respiratory failure; cor pulmonale with respiratory failure; emphysema with respiratory failure; ventricular tachycardia; severe cardiomyopathy; aplastic anemia; uncontrolled hypertension with hypertensive encephalopathy; cardiac aneurysm; agranulocytosis; hepatic failure; severe hypoxic brain damage; severe portal hypertension with esophageal varices; AIDS (active--not AIDS related complex or only seropositivity); life-threatening infections (encephalitis, meningitis, rabies, etc.); scleroderma with severe esophageal involvement; amyotrophic lateral sclerosis (rapidly progressive); hemiplegia with life threatening complications; quadriplegia with life threatening complications; or ventricular flutter. This list is revised from time to time; see www.opm.gov/retire/faq/glossary.asp.

In exchange for the lump-sum payment, the law requires that the recipient's monthly annuity be reduced so that the present value of the benefits received under this alternative is the same as the present value of the annuity they would have otherwise received.

The reduction is pegged to an individual's age at retirement and is based on life expectancy tables and assumptions about the future of the economy known as "present value factors." This is true even though the only people now eligible for the Alternative Form of Annuity are those whose life expectancy is short. The sum used to compute subsequent retirement benefits under the Alternative Form of Annuity is equal to the employee's total contributions to FERS or CSRS, without interest.


Present Value Factors

Present value factors apply to retirees who elect to provide survivor annuity benefits to a spouse based on post-retirement marriage and to retiring employees who elect the alternative form of annuity, owe certain redeposits based on refunds of contributions for service before March 1, 1991, or elect to credit certain service with non-appropriated fund instrumentalities.

Age Value Factor Age Value Factor
CSRS FERS* FERS** CSRS FERS
40
290.4
185.8
256.6
66
170.2
160.0
41
288.1
186.1
254.3
67
164.4
154.9
42
285.4
186.2
251.8
68
158.7
149.8
43
282.1
186.3
249.2
69
152.9
144.7
44
278.3
186.1
246.6
70
147.2
139.5
45
274.2
185.7
243.9
71
141.4
134.3
46
270.1
185.4
241.1
72
135.5
129.0
47
266.0
185.1
238.1
73
129.5
123.6
48
262.0
185.0
235.1
74
123.7
118.3
49
257.6
184.6
231.9
75
118.0
113.0
50
253.1
184.3
228.6
76
112.3
107.8
51
248.9
184.2
225.2
77
106.8
102.7
52
244.7
184.1
221.6
78
101.0
97.3
53
240.2
184.0
217.9
79
95.3
92.0
54
235.3
183.7
214.0
80
89.9
86.9
55
230.4
183.4
210.0
81
84.4
81.9
56
225.3
183.1
205.9
82
78.9
76.6
57
220.1
182.9
201.5
83
73.7
71.7
58
214.9
182.7
197.1
84
69.4
67.6
59
209.7
182.6
192.5
85
64.6
63.1
60
204.3
182.6
187.9
86
59.4
58.1
61
198.9
182.6
183.1
87
54.6
53.5
62
193.2
180.1
88
50.9
49.9
63
187.5
175.2
89
47.7
46.8
64
181.8
170.2
90
44.1
43.3
65
176.0
165.1

*Applicable to annuity payable when annuity is not increased by COLAs before age 62.
**Applicable to annuity payable when annuity is increased by COLAs before age 62. For age 62 and after, see other FERS column.


CSRS/FERS Benefits at a Glance

ProvisionCivil Service
Retirement System
(CSRS)
Federal Employees
Retirement System
(FERS)
Basic Annuity: Retirement
Basic plan design Defined benefit Defined benefit not “integrated,” i.e., it is fully added to Social Security
Required employee pay retirement contributions7.0% retirement contribution plus 1.45% Medicare on all pay Social Security tax (normally 6.2%; 4.2% in 2011-Feb. 2012, subject to extension at the lower level) up to $110,100, plus 1.45% Medicare on all pay, plus 0.8% retirement contribution
Vesting (retirement) 5 yrs. for retirement Same as CSRS
Salary base Avg. of high-3 yrs. salary Same as CSRS
Retirement benefit
(accrual rate)
1.5% x first 5 yrs. of service; 1.75% x second 5 yrs. of service; 2.0% x yrs. of service beyond 10 High-3 years average salary formula times 1%, times years of service, or 1.1% at age 62 with 20 years of service
Unreduced retirement benefits Age 55 with 30 yrs. of service; age 60 with 20 yrs. of service; age 62 with 5 yrs. of service Age 62 and 5 yrs. of service; age 60 and 20 yrs. of service; or “minimum retirement age” (MRA) plus 30 years
MRA = 1987-2002, age 55; 2002-2008, increases 2 mos. per yr., 2009-2020, age 56; 2021-2026 increases 2 mos. per yr.; 2027 and after, age 57
Reduced retirement benefits 2% reduction for taking early retirement before age 55 MRA and 10 yrs. of service. Reduced by 5% for yrs. under age 62
Optional (RIFs or reorganizations) or involuntary early retirement; age and reductions Age 50 with 20 yrs. of service; any age with 25 yrs. of service. Benefit reduced 2.0% for each yr. under age 55 Unreduced benefits at age 50 with 20 yrs. of service; any age with 25 yrs. of service
Deferred retirement At least 5 yrs. of service; accrued benefit payable at age 62 Unreduced benefit at age 62, if employee had 5 yrs. of civilian service at termination and did not get refund of contributions, or upon attaining the MRA and had 30 yrs. of service at separation, or is age 60 with 20 yrs. of service at separation. Reduced benefit available upon reaching the MRA to vested employee with 10 yrs. of service
Pre-62 supplement for early retirement N/A Payable at retirement (but no earlier than MRA) until age 62; approximately equal to projected Social Security benefit payable at age 62, attributable to federal service Supplement is subject to earnings test, similar to the test used by Social Security at age 62, reducing supplement if retiree has earned income in excess of an annually adjusted exempt amount ($14,160 in 2011, wage- indexed)
Refunds Option to withdraw sums contributed at separation with benefits forfeited, unless subsequently made redeposit when reemployed in a covered position. May elect actuarial reduction for refunded service that ended before March 1, 1991 Option to withdraw sums contributed at separation with benefits forfeited, unless subsequently made redeposit when reemployed in a position. May elect actuarial reduction for refunded service that ended before March 1, 1991
Cost-of-living adjustments (COLAs) Payable to all annuitants. Annually, full rate of inflation measured by CPI-W Payable only to regular retirees over age 62, or disabled (after first yr.) and survivors at any age
Increase in CPI-WAnnual COLA percentage
Up to 2%Same as CPI-W increase
2% to 3%2%
3%+CPI-W increase minus one percentage point
ProvisionCivil Service
Retirement System
(CSRS)
Federal Employees
Retirement System
(FERS)
Disability Benefits
Vesting (disability) 5 yrs. of service 18 mos. of service
Definition of disability Unable to do own job or vacant position at same grade or pay level in same agency and commuting area Same as CSRS
Disability benefit amountsAnnuity earned at onset, or if greater, the lower of (1) 40% of salary base, or (2) the annuity that would be paid projecting service to age 60 at the same salary base. Benefits increased annually by full CPI-W For the first yr. of eligibility, 60% of high-3 pay minus 100% of any Social Security payable. After the first yr., 40% of high-3 pay minus 60% of any Social Security payable. No COLAs provided first yr.; thereafter, COLAs provided on the same basis as for retirees aged 62 and over
Retirement benefits after disability Disability pension continues for life unless 1) restored to earning capacity before age 60 or 2) no recovery before normal retirement age At age 62 the annuity will be recomputed. For the retirement recomputation, the per. of disability would be credited toward yrs. of service, and average pay would be increased to reflect COLAs applicable during that period
Death Benefits
Preretirement death benefit—spouse At death of worker with at least 18 mos. of service, surviving spouse receives 55% of the accrued benefit, or, if larger, the lesser of (1) 55% of 40% of salary base, or (2) 55% of the accrued annuity with service projected to age 60 at same high-3 At death of worker with at least 18 mos. but less than 10 yrs. of service, the benefit is a one-time payment of $29,722.95 plus one-half of the deceased worker’s final annual pay. If the deceased worker had 10 or more yrs. of service, an annuity is also payable equal to 50% of the accrued annuity
Preretirement death benefit—children Unrelated to annuity. Annually adjusted amount varies by number of children and whether or not orphaned by one or both parents. Children must be (1) unmarried, (2) under age 18 or 22 if in school, or (3) any age and incapable of self-support if disability started before age 18 The amount in excess, if any, of payments to children under CSRS (to all children in family) over the children’s Social Security benefits
Postretirement death benefit—spouse Annuity to married retiree automatically reduced by 2.5% of first $300 monthly plus 10% of remainder unless jointly waived, but raised to unreduced level after death or divorce of spouse (unless otherwise stipulated in a divorce decree)

Benefit equal to 55% of the annuity received by the retiree at the time of death, excluding the reduction for survivor election and including any reduction for involuntary early retirement. No Social Security for federal employment
Annuity to retiree reduced by 10% (or 5% if lower benefit is jointly elected) to provide a survivor annuity, unless jointly waived but raised to unreduced level after death or divorce of the spouse, unless otherwise stipulated in a divorce decree

If the survivor is under age 60 and Social Security survivor benefits are not payable, benefits are lesser of (1) current CSRS or (2) 50% (25% if elected) of accrued annuity plus a Social Security “equivalent.” When Soc. Sec. survivor benefits are payable, FERS pays 50% (25% if elected) of the deceased retiree’s annuity
Postretirement death benefits—childrenSame as preretirement death Same as preretirement death
ProvisionCivil Service
Retirement System
(CSRS)
Federal Employees
Retirement System
(FERS)
Thrift Savings Plan (TSP)
EligibilityEmployees may begin or change contributions at any timeSame as CSRS
Contributions:

by employees

Employees may contribute up to $16,500; Those 50 and older in a year may contribute an additional $5,500Same as CSRS

by agencies

noneAgency automatically contributes amount equal to 1% of pay into each employee’s account

Agency also matches employee contributions: 1st 3% of pay = $1 per $1; next 2% of pay = $0.50 per $1
VestingFull and immediate vestingFull and immediate vesting of all except the 1% automatic agency contribution, which becomes vested at 3 yrs. of service for career civil servants, 2 yrs. for non-career senior executive and political (Schedule C) appointees, Members and congressional staff
Investment options
(both systems):
G Fund: special government securities
F Fund: Bond index fund consisting of US. Treasury, corporate, and federally sponsored agency notes and bonds and mortgage-backed securities
C Fund: a stock index fund (invested in diversified common stock portfolio designed to replicate Standard & Poor’s 500 stock index)
I Fund: international stock index fund invested in the shares of Barclays EAFE Index Fund, which holds common stocks of all the companies represented in the Europe, Australasia, and Far East stock index, and whose contributions are invested in the EAFE Index Fund
S Fund: medium and small company stock fund that tracks the returns of the Wilshire 4500 stock index, which includes those U.S. stocks that are not found in the S&P 500 index. It invests in shares of the Barclays Extended Market Index Fund, which holds common stocks of companies in the Wilshire 4500 index
L Funds: Invest in the other TSP funds in ratios set according to projected withdrawal dates of 2020, 2030, 2040 or 2050. Also has a current income fund for those already making withdrawals, or expecting to do so soon

Following is an example of how such a lump-sum payment is computed for an eligible CSRS employee retiring at age 55 with 30 years of service and a total contribution of $34,160. In this case, the lump-sum payment will reduce the amount of the monthly annuity received during retirement. The employee's initial or basic annuity computed from the CSRS formula would be $23,513 per year, which amounts to $1,959 per month. The actuarial adjustment made to the monthly annuity to take into consideration the lump-sum payment is dependent on the retiree's age. For example:

Age: 55

Actuarial adjustment (present value factor): 230.7

Monthly annuity: $1,959

Reduction ($34,160 divided by 230.7) = $148.07

Adjusted monthly annuity: $1,810.93

The reduction also applies to the election of survivor benefits:

Monthly annuity (initial computation reduced for survivor annuity): $1,785.97

Reduction ($34,160 divided by 230.7) = $148.07

Adjusted monthly annuity with survivor benefits: $1,637.90

IRA Rollovers

Lump-sum distributions may be "rolled over" into IRA accounts. Recipients should arrange a direct account-to-account transfer to avoid the 20 percent federal tax withholding that otherwise would apply.

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