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Chapter 8, Section 5: Separation Before Retirement Eligibility

The following summarizes policies governing benefits for employees who separate before retirement eligibility. These benefits differ in some ways from benefits upon retirement.

The following summarizes policies governing benefits for employees who separate before retirement eligibility. These benefits differ in some ways from benefits upon retirement. For further details on each of these benefits, including the rules on retirement eligibility, see the pertinent material in each applicable section of this Almanac.

Thrift Savings Plan

Upon separation before retirement eligibility, you have the same options for withdrawing your TSP account that apply to retirees. You may leave your money in TSP; transfer all or part of your TSP balance into an Individual Retirement Account (IRA) or other eligible retirement plan; receive your TSP account balance in a lump sum payment; receive your TSP account balance in equal monthly installments; purchase a life annuity through TSP if you have at least $3,500 in your account; or use a combination of those choices.

If you also have a uniformed services TSP account, you may transfer your civilian TSP account into the uniformed services account. Complete Form TSP-65 and submit to the TSP Service Office. Form TSP-65 may be obtained from the TSP Web site at www.tsp.gov or from the TSP Service Office (from inside the United States and Canada toll-free (877) 968-3778, TDD (877) 847-4385; other callers (404) 233-4400.

If you separate before the year in which you reach age 55 and withdraw your account balance in a single payment or series of equal monthly payments, you will be subject to a 10 percent penalty as well as income tax on all amounts you receive before age 59 1/2. The penalty does not apply to money drawn out as an annuity or to a series of monthly payments based on life expectancy.

If you separate during or after the year in which you reach age 55, you will only be subject to income tax and not the 10 percent penalty on the withdrawal regardless of how you receive the money.

If you have an outstanding TSP loan you must repay the loan in full, including interest, on the outstanding balance to the date of repayment. Delay in repaying your loan may affect the processing of your withdrawal. If you do not repay the loan within the required time frame specified by TSP, a taxable distribution will be declared to the IRS in the amount of the unpaid loan balance and any unpaid interest. The distribution will be subject to income tax and a 10 percent penalty as described above.

Your personnel office will either provide you with the TSP Withdrawal Package or refer you to the TSP Web site at www.tsp.gov/forms for the necessary forms.

Federal Employees' Group Life Insurance

Your life insurance automatically terminates effective with your separation from federal employment. You then have a 31-day extension of coverage during which coverage will continue at no cost to you. During the 31-day period, you may apply for conversion to an individual policy.

You may convert all or any part of your Basic and Optional insurance to an individual policy. However, if you assigned your insurance, only your assignee may apply for conversion. Also, you may not convert Option C family coverage if you no longer have any eligible family members.

The purchase of a policy is a private business transaction between you and the insurance company. The cost is determined by the insurance company and is based on your age and class of risk. See Converting to an Individual Policy in Chapter 2, Section 2.

Federal Long-Term Care Insurance Program

Coverage under the FLTCIP is fully portable. As long as you continue paying premiums, your insurance coverage will continue. If you were paying premiums by payroll deduction and you leave the government, you'll have to make arrangements with the insurance carrier, LTC Partners, to start paying premiums directly or by automatic debit from your bank account. But you get to keep the insurance at the same premiums as if you never left the eligible group. Certain relatives are qualified relatives as long as you are in one of the groups eligible to apply for this insurance. If they enrolled while you were eligible (whether you enrolled or not), they will keep the coverage by continuing to pay their premiums, even if you leave the eligible group. However, once you leave the eligible group, they can no longer first apply for the insurance unless they are otherwise eligible.

Federal Employees Health Benefits Program

Enrollment in the Federal Employees Health Benefits (FEHB) program terminates on the last day of the pay period during which you separate. You then have a 31-day free extension of coverage. During the 31-day period, you may apply to convert to a non-group contract or apply for temporary continuation of coverage (TCC).

Note: Eligibility for "premium conversion"--payment of premiums with pretax dollars--ends when you separate.

Temporary Continuation of Coverage--When you separate from service, you may choose to continue FEHB coverage for a period of 18 months after your separation. TCC allows you to continue the same level of health benefits coverage enjoyed while employed. The TCC family enrollment covers the same family members as were covered under your plan while employed.

If you take advantage of the TCC option, you must pay both the employee and the employer share of the health benefits premium plus an administrative charge of 2 percent of the premium. You can choose to enroll in the same plan you had at separation or any other plan, option, or type of enrollment for which you are eligible. (Defense Department employees who are involuntarily separated by reduction in force, or who volunteer to be separated from a "surplus position," may receive TCC based on 5 U.S.C. 8905a(d)(4). If you are eligible for this special TCC, you pay only the employee contribution for up to 18 months, with a 31-day period to convert to a private policy following.)

TCC begins as soon as the 31-day free extension of coverage ends regardless of when you elect it. Your agency is required to notify you about your eligibility for temporary continuation of coverage within 60 days after you separate. You have 60 days after receiving the notice to enroll. If you enroll after the 31-day free extension expires, your enrollment will be retroactive to the expiration of the 31-day free extension and you will be billed for the retroactive coverage.

You are not entitled to TCC if your separation from service is involuntary due to gross misconduct. Also, cancellation of coverage prior to expiration at 18 months results in a loss of conversion privilege.

For additional information, see Temporary Continuation of Coverage in Chapter 2, Section 1.

Conversion--If you do not want to continue your health benefits coverage under the temporary continuation provision described above, you may convert to an individual (non-group) contract. The conversion contract is available only from the carrier of the plan you are enrolled in when you separate.

If you convert to a non-group contract, you will not be able to later apply for TCC; by the time the conversion process is completed, the time limit for applying for TCC will have passed. But if you continue your coverage under the temporary continuation provision, you will have another opportunity to convert to an individual contract at the end of the 18-month period.

To convert, you must write to your health plan within 31 days of the termination of your health insurance coverage and request information on converting to a non-group contract. The plan will provide you with an application for conversion, and information on benefits and costs. Additional information on the conversion process may be found in Part B on the reverse side of Standard Form 2810 (Notice of Change in Health Benefits).

If you do convert, you must pay the entire cost of coverage and your benefits may be less than previous coverage. However, the carrier must offer you a non-group contract regardless of any health problems you or your family members may have.

When you separate, your employing office must terminate your enrollment by completing an SF 2810 and forwarding you a copy. The SF 2810 tells about the 31-day extension of coverage and how to convert to an individual (non-group) contract and gives information about TCC. Your agency will also give you a notice about your eligibility for the TCC described above (and information about how to enroll).

You cannot reinstate your health benefits coverage if you receive a deferred annuity.

Further information is at www.opm.gov/insure/health.

Federal Employees Dental and Vision Insurance Program

Coverage under the Federal Employees Dental and Vision Insurance Program (FEDVIP) ends when you no longer meet the definition of an eligible employee (see Eligibility in Chapter 2, Section 4). Those who separate with eligibility for a deferred annuity are not eligible to enroll in FEDVIP and cannot continue a FEDVIP enrollment. Those who retire on a Minimum Retirement Age+10 annuity under the Federal Employees Retirement System and who elect to postpone receipt of their annuity lose FEDVIP coverage upon separation from service but can enroll in FEDVIP within 60 days of when they start receiving their annuity.

Coverage for family members also ends when you as the enrollee lose coverage.

Under FEDVIP, there is no 31-day extension of coverage, temporary continuation of coverage, or right to convert to an individual policy.

Flexible Spending Accounts

If you separate before the end of a plan year, a health care FSA terminates on separation. Any expenses incurred before separation will still be reimbursable, even if claims are submitted after separation. Any remaining balance in an account is not refunded. A dependent care account balance will still be available for any eligible expense incurred within the plan year.

Retirement—FERS

If you separate before retirement eligibility you have two basic options regarding your retirement, a refund or a deferred annuity.

Refund--You may apply for a refund of your retirement contributions if you have been separated from federal service for at least 31 days (or have occupied a position not covered by the Federal Employees Retirement System for at least 31 days). If you have more than one year of service, interest on the contributions will be part of the refund. The form to use is SF 3106, Application for Refund of Retirement Deductions, available at www.opm.gov/forms.

Before you can receive a refund, generally you must notify your spouse and any former spouse that you have filed the application. Also, you may be barred from receiving a refund if the refund would end the court-ordered right of any spouse or former spouse to future benefits based on your service.

A refund of all deductions voids any retirement options, including survivor benefits.

A refund may be paid directly to you or rolled over into an IRA or into a qualifying retirement plan of another employer. See the information on the form regarding procedures and tax consequences.

See Redeposit Service in Chapter 3, Section 3, for rules on recapturing service time after taking a refund and later returning to federal employment.

Deferred Annuity--If you have left your retirement contributions or deposits in the fund when you separated from the government, and you are not eligible for an immediate retirement benefit, you may be eligible for a deferred annuity.

If you have at least five years of creditable service, you may receive a deferred annuity beginning on the first day of the month after you attain age 62.

If you have at least 10 years of creditable service, you may receive a deferred annuity as early as the first day of the month after you attain your Minimum Retirement Age (MRA). However, your deferred annuity will be reduced by 5/12 percent for each month (5 percent per year) by which the commencing date of annuity precedes your 62nd birthday, unless you: have at least 30 years of service; have 20 years of service and postpone the commencing date until you are age 60; or have at least 20 years of service as an air traffic controller, firefighter, law enforcement officer, or Member of Congress.

The form to use is RI 92-19, Application for Deferred or Postponed Retirement, available at www.opm.gov/forms, call (888) 767-6738 or write to: Office of Personnel Management, P.O. Box 45, Boyers, PA 10617-0045. Complete the form and mail it to OPM no sooner than two months before you are eligible to receive a deferred annuity.

The deferred annuity is based on the length of your service and your high-3 average salary on the day you left government. The annuity computation formula is 1 percent of your high-3 average pay times years of creditable service.

If you want to make a deposit for post-1956 military service so that you can receive credit for this service in the computation of your deferred annuity, you must pay the deposit to your employing agency before you separate from federal employment. OPM cannot accept your payment.

Unused sick leave is not creditable toward a deferred annuity.

If you die before applying for a deferred annuity and you have less than 10 years of creditable service or no eligible survivor, any contributions remaining in the retirement fund are paid in a lump sum (with interest) to your designated beneficiary or person in the order of precedence set by law.

If you die before applying for a deferred annuity, your surviving spouse is entitled to a survivor annuity if:

  • you have at least 10 years of creditable service for which withholdings or deposits remain in the fund (five years of which is creditable civilian service); and
  • your spouse was married to you at the time of your separation from federal service.

Your surviving spouse may elect to receive a lump-sum payment of your retirement contributions in lieu of the survivor annuity.

Retirement--CSRS

If you separate before retirement eligibility you have two basic options regarding your retirement, a refund or a deferred annuity.

Refund--You may apply for a refund of your retirement contributions if you have been separated from federal service for at least 31 days or have occupied a position not covered by the Civil Service Retirement System or Federal Employees Retirement System for at least 31 days. The form to use is SF 2802, Application for Refund of Retirement Deductions, available at www.opm.gov/forms.

Before you can receive a refund, you generally must notify your spouse and any former spouse that you have filed the application. Also, you may be barred from receiving a refund if the refund would end the court-ordered right of any spouse or former spouse to future benefits based on your service.

A refund of all deductions voids any retirement options, including survivor benefits, until the refund is redeposited.

A refund may be paid directly to you or transferred into an IRA or into a qualifying retirement plan of another employer. See the information on the form regarding procedures and tax consequences.

See Redeposit Service in Chapter 3, Section 3 for rules on recapturing service time after taking a refund and later returning to federal employment.

Deferred Annuity--If you have at least five years of creditable civilian service, do not receive a refund of all retirement contributions, and are not eligible for an immediate retirement benefit, you may be eligible for a deferred annuity at age 62. The form to use is OPM Form 1496, Application for Deferred Retirement, available at www.opm.gov/forms, call (888) 767-6738 or write to: Office of Personnel Management, P.O. Box 45, Boyers PA 16017-0045. Complete the form and mail it to OPM no sooner than two months before you turn age 62. The deferred annuity begins on your 62nd birthday.

The general formula for computing annuities can be expressed as a percentage of your "high-3" average salary. Your high-3 average salary is the highest three years of base pay or salary you earned in any consecutive three-year period (usually your last three years). The percentage is determined by a three-part formula based on your length of creditable service:

  • 1.50 percent per year for the first five years (7.50 percent) plus
  • 1.75 percent per year for the next five years (8.75 percent) plus
  • 2.00 percent per year for service over 10 years.

If you want to make a deposit for post-1956 military service so that you can receive credit for this service in the computation of your deferred annuity, you must pay the deposit to your employing agency before you separate from federal employment. OPM cannot accept your payment.

Unused sick leave is not creditable toward a deferred annuity.

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