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Informed Investor: Congress makes changes to FERS

Congress recently made changes to the Federal Employees Retirement System that will become effective Jan. 1, 2013. This week’s column discusses these changes, including the increased amount of wages that newly hired FERS employees and newly elected members of Congress and congressional staff will be contributing to the FERS Retirement and Disability Fund.

Public Law 112-96 Section 5001, the Middle Class Tax Relief and Job Creation Act of 2012, makes two significant changes to the Federal Employees Retirement System. The first change is that new employees entering federal service after Dec. 31, 2012, will be covered by FERS as Revised Annuity Employees (RAE), or FERS-RAE. As such, these employees will contribute more each pay date to FERS. The second change is that new members of Congress—those who take office as members of the Senate or House of Representatives in January 2013—also will pay more to FERS and will accrue retirement benefits at the same rate as federal employees. This column discusses what these changes mean to current and future employees.

Coverage determination

FERS-RAE will generally apply to any individual who receives an appointment not excluded from FERS coverage after Dec. 31, 2012, and is placed in FERS. These employees will contribute 2.3 percent more to FERS each pay date compared to what current FERS employees contribute to FERS.

FERS employees who are not law enforcement officials, firefighters, air traffic controllers or military technicians currently contribute 0.8 percent of their after-tax wages to FERS each pay date. Under FERS-RAE, these employees will contribute 3.1 percent of their after-tax wages to FERS. Law enforcement officials, firefighters and air traffic controllers under FERS currently contribute 1.3 percent of their after-tax wages to FERS. Under FERS-RAE, these employees will contribute 3.6 percent of their after-tax wages to FERS each pay period.

As a result of the employee’s increased contribution of 2.3 percent to FERS, the employee’s agency contribution to FERS decreases by 2.3 percent. FERS-RAE employees will accrue retirement benefits at the same rate as FERS employees and will be eligible to retire according to the same eligibility rules as FERS employees.

There are three exceptions to an employee being placed in FERS-RAE: (1) an employee is already covered by FERS on Dec. 31, 2012; (2) an employee is performing civilian service on Dec. 31, 2012, which is creditable or potentially creditable service under FERS. (For example, an individual may have been covered under another retirement system from which service credit may be transferred to FERS, such as the Civil Service Retirement System, CSRS Offset, Foreign Service, or Federal Reserve); or (3) an individual on Dec. 31, 2012, is not covered under FERS and is not performing civilian service which is creditable service under FERS, but as of Dec. 31, 2012, had performed at least five years of civilian service creditable or potentially creditable under FERS, including service subject to CSRS or CSRS Offset.

Two other exceptions for employees being placed in FERS-RAE are:

• Performing active duty military service on Dec. 31, 2012, following a separation from civilian service. If a FERS-covered employee separates from federal service before Dec. 31, 2012, to enter active duty military service and returns to federal service after Dec. 31, 2012, after exercising their reemployment rights, the employee is not considered to be separated from federal service for the purpose of determining FERS-RAE service.

• FERS employees in a leave without pay status on Dec. 31, 2012, who are not separated from federal service, are excluded from FERS-RAE coverage, even if the employee has been on leave without pay for more than six months during 2012.

The following three examples help illustrate which employees will or will not be covered by FERS-RAE:

Example 1. Jim receives a FERS-covered appointment effective Jan. 13, 2013. Jim is a” first hire” with no prior civilian service with the federal government. Jim is therefore subject to FERS-RAE coverage.

Example 2. Joan receives a FERS-covered appointment, effective Jan. 13, 2013. Joan had one previous period of civilian service with the federal government under FERS, from Sept. 14, 2008, to Dec. 29, 2011. Since Joan was not employed by the government on Dec. 31, 2012, and had performed less than five years of creditable service or potentially creditable service under FERS, Joan will be subject to FERS-RAE coverage.

Example 3. Jason receives a FERS-covered appointment effective May 5, 2013. Jason was employed previously in civilian service that was covered under FERS from May 6, 2000, through Sept. 15, 2007. Jason is subject to FERS even though he was not employed in federal service on Dec. 31, 2012, because he had performed at least five years of creditable service as of Dec. 31, 2012.

Members of Congress and congressional employees

 Members of Congress and congressional employees who do not qualify for the exclusion from being a FERS-RAE employee are subject to a significant change in their future benefits. The first change is they will be subject to employee contributions at the same contribution rate as regular employees. Secondly, their retirement benefits will be computed under the regular employee formula and not the enhanced formula used for current members of Congress and congressional employees.

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