Required Contributions from Employees
Over an employee’s career, the contributions for retirement that are deducted from a worker’s pay represent a substantial sum of money. Yet, in spite of their importance to employee retirement, the contributions to CSRS, FERS, and Social Security do not constitute savings. Contributions made to the various federal retirement programs are a part of the eligibility criteria that must be met to qualify for benefits.
These contributions are an “admission ticket” to the programs; except in certain special circumstances the amounts an employee contributes have no direct bearing on the amount of benefits the worker will receive. In some cases, employees must pay to capture service for use in the computation of benefits, but the amounts required bear no relation to the value in the benefit computation of the captured service. Only in the TSP, which is a savings program, is there a direct relationship between contributions and benefits.
CSRS, CSRS-Offset and FERS require different amounts of payment from participating employees, as described below. Included in the amount of basic pay subject to the civil service deduction are salaries for regularly scheduled work. Excluded are differentials for special services such as night duty, and payments for bonuses, allowances, overtime, and lump-sum payments for unused leave. See High-3 Salary Base in Section 4 of this chapter.
Under each system, special category employees—including air traffic controllers, law enforcement officers, and firefighters—pay an additional 0.5 percent toward their civil service benefit and are eligible for enhanced benefits. See Section 8 of this chapter.
CSRS—Most employees covered by CSRS pay 7.0 percent of their basic pay to participate in the program (7.5 percent for special category employees).
Social Security—Federal and postal employees first hired after 1983 are automatically covered by the Federal Employees Retirement System, which unlike CSRS includes Social Security; the CSRS Offset system also includes Social Security. For Social Security-covered employees, all wages up to an annually determined taxable maximum, or “wage base” ($117,000 in 2014), are subject to the Social Security Old-Age, Survivors, and Disability Insurance (OASDI) tax, also known as the Federal Insurance Contributions Act (FICA) tax of 6.2 percent.
FERS—FERS employees pay a standard contribution for the FERS civil service benefit of 0.8 percent of basic pay if hired before 2013. The contribution is 3.1 percent for those first hired, or rehired after a break in service, during 2013; however, it is 0.8 percent for those rehired with at least five years of prior creditable or potentially creditable (for example, from another federal retirement system from which credit may be transferred to FERS) civilian service. For those first hired in 2014 and after, the required FERS contribution is 4.4 percent, with the same exception regarding those rehired after a break in service. These are termed “Revised Annuity Employees” and “Further Revised Annuity Employees.” The same requirements apply under the Foreign Service and CIA retirement systems. For each system, an additional 0.5 percent of salary contribution also applies to special category employees, as described above.
All FERS employees also pay the Social Security OASDI tax up to the taxable maximum (see above). Above the Social Security taxable maximum, FERS employees do not pay the OASDI component but continue paying the civil service component.
CSRS Offset—On pay below the Social Security taxable maximum (see above), employees covered by CSRS Offset pay the Social Security OASDI tax plus 0.8 percent (or 1.3 percent if a special category employee) of their salary for their civil service benefit. On pay above the taxable maximum, contributions are 7 or 7.5 percent as applicable, and the entirety goes into the civil service fund.
Note: The higher contribution required under FERS for some employees, as described above, does not apply to employees under CSRS because no new hires are placed in that system. Nor does it apply to employees returning to government after a break in service under CSRS Offset, which by definition applies only to those with at least five years of creditable service.
Medicare—All federal and postal employees regardless of retirement system coverage pay 1.45 percent of all salary toward Medicare. This deduction is not a retirement contribution since the money goes toward Medicare health insurance coverage, not retirement benefit coverage. However, the Medicare deduction commonly is considered a standard part of an individual’s mandatory deductions from salary. In many cases the Medicare tax (also called the Hospital Insurance deduction) is lumped together with the OASDI contribution for those covered by Social Security and the two collectively are termed the Social Security deduction, even though only the OASDI portion goes toward the Social Security trust fund.
Refunds of Contributions at Separation
Employees who leave federal or postal service before becoming eligible for immediate retirement benefits under CSRS or FERS have the option of either leaving their retirement contributions in the retirement fund or withdrawing them in total. To be eligible for a refund of contributions, an employee must have been separated from the service for at least 31 days. Separated employees may apply for a refund up to 31 days before their 62nd birthday, provided they don’t return to federal service in a position that provides retirement coverage.
If a court order awards benefits to a former spouse, a separated employee may not be eligible for a refund. See Refunds of Retirement Contributions in Chapter 7, Section 2.
Under both CSRS and FERS, refunds of contributions for employees who served less than one year do not receive any interest. Under CSRS, contributions withdrawn by former employees with more than one year but less than five years of service at separation are refunded with interest, computed at 3 percent. Withdrawn amounts for separating employees with more than five years of service do not include interest. Under FERS, all refunds for service of more than one year do include interest, which is based on variable interest rates determined by the Treasury Department.
A separated employee who exercises the right to withdraw contributions waives the right to collect further benefits from either CSRS or FERS based on that service unless that person returns to a covered position in the federal government and repays the withdrawn amount, plus interest. See Redeposit Service in Section 3 of this chapter.
In any event, the withdrawal of contributions should be done with caution. The rights to future benefits through a deferred retirement are typically far more valuable than the dollar amount of the contributions, even after taking into account what could be earned by investing those contributions.
For more information about redeposits of refunded contributions, see Section 3 of this chapter.
Employees are never entitled to a refund of Social Security taxes, except for the inadvertent collection of taxes above the maximum amount.
Also see Retirement—FERS and Retirement—CSRS in Chapter 8, Section 5.
Excess CSRS Contributions—Long-serving CSRS employees may have more creditable service than is required to earn the maximum annuity benefit of 80 percent. Under standard accrual rules, the maximum is reached at 41 years and 11 months of service, but less is required for those who served in certain occupations in which benefits accrue at a higher rate, as described in Section 8 of this chapter. When their retirement application is processed by OPM and after any unpaid deposits or redeposits are paid off, those retirees are offered a choice of having the remaining amount refunded with interest or using it to purchase additional annuity, which won’t be subject to the 80 percent limit. The rules for purchasing additional annuity are the same as those for voluntary contributions (see below). This policy is not germane to FERS because there is no benefit maximum under FERS.
CSRS Voluntary Retirement Contributions
Voluntary contributions are optional payments CSRS and CSRS Offset (but not FERS) employees may make to the Civil Service Retirement and Disability Fund in addition to the regular retirement deductions taken from their salary. These voluntary contributions to the fund earn interest at rates as described below. The earnings are tax-deferred.
On retirement, the contributions, plus interest, may be used to purchase an additional annuity. This VC annuity is added to the regular annuity an employee would normally receive. Alternatively, all contributions may be withdrawn, with interest, at any time. However, once a refund is taken, an employee generally may not participate in the VC program again.
Who May Make Voluntary Contributions—The VC program is open only to CSRS-covered individuals, including CSRS Offset. Active employees covered under CSRS may apply to make voluntary contributions by completing a Standard Form 2804, Application to Make Voluntary Contributions, available from your personnel office or at www.opm.gov/forms. Retired employees whose applications for retirement are being adjudicated by OPM still may make voluntary contributions, provided the SF 2804 has been approved by OPM. (Note: Even if employees opened a voluntary contributions account before separating from service, they cannot make any additional contributions following separation except during the period that they are eligible to actually receive a retirement annuity and have filed an application for that annuity with OPM.)
No moneys will be accepted until the SF 2804 is approved. OPM will not approve an application from anyone who, although otherwise eligible, has: (1) not deposited amounts covering all civilian service performed by the applicant (including any refund of contributions) or (2) previously received a refund of voluntary contributions, unless the applicant was separated for more than three calendar days and was again employed in a position subject to the CSRS after the refund was paid. Employees covered by or retiring under the Federal Employees Retirement System (FERS) are not eligible to make voluntary contributions.
Voluntary Contribution Rules and Procedures—As long as employees are eligible, they may make voluntary contributions at regular intervals or whenever they wish. However, these cannot be deducted from an employee’s salary. Each payment must be in multiples of $25. Employees should not attempt to make payments before their application has been accepted by OPM. If they do, their payment will be returned. Once an application is accepted, the employee will be assigned an account number and OPM will provide instructions for making payments.
An employee’s VC program contributions cannot be more than 10 percent of the total of basic civilian salary received as of the date any contribution is made. Employees cannot make contributions based on anticipated future earnings. OPM will compute an employee’s limitation when the worker retires or closes out the account. While OPM generally will accept an employee’s VC contributions, when the worker retires or closes out an account, any amount found to be in excess of the worker’s limit will be refunded, without interest.
Employees may apply for and be paid a refund of all (not just a part) of their voluntary contributions, plus earned interest, at any time before they retire. Note that they will not receive interest on the amount of their deposits that exceed the 10 percent limitation. If they are paid such a refund, they cannot again make voluntary contributions unless they are separated for more than three calendar days and are then re-employed in a position subject to CSRS. At retirement, account holders can elect either a refund or use the money to buy an additional annuity. The form to use for all withdrawals is RI 38-124, available from your personnel office or at www.opm.gov/forms.
Interest on Voluntary Contribution Accounts—Voluntary contributions currently earn interest based on the average yield earned by new investments purchased by the Civil Service Retirement and Disability Fund during the preceding fiscal year, a rate that is determined annually by the Treasury Department (see the Interest Rates table in Section 3 of this chapter). Interest on voluntary contributions begins to accrue on the date they are deposited by OPM and is compounded on December 31 of each year. OPM provides an annual account statement to each employee who has made voluntary contributions.
Additional Annuity for Oneself—Voluntary contributions, with interest, may be used to purchase an additional annuity. The amount of this VC annuity depends on the age at which you retire. If you retire at age 55 or younger and do not elect an additional survivor annuity, each $100 will buy you $7 a year of a VC annuity. This amount increases by 20¢ for each full year you are over 55 at the time you retire. Thus, if you retire at age 60, each $100 will buy $8 a year of VC annuity; at age 62, $8.40 a year; and so forth. The VC annuity is payable as long as you stay retired, but is not increased by cost-of-living adjustments (COLAs).
Additional Survivor Annuity—If you decide to use your voluntary contributions to buy an additional annuity for yourself, you have the option of electing a survivor annuity for your spouse or any other person. If you do, your VC annuity will be reduced and, at your death, your survivor will be paid half of your reduced VC annuity for the rest of his or her life. The reduction in your VC annuity depends on the difference in ages between you and the person named to receive the survivor benefit.
The reduction is 10 percent of your VC annuity, plus an additional 5 percent for each full five years the person is younger than you. The maximum reduction is 40 percent.
Example: Suppose you are 57 years old at retirement and have voluntary contributions of $25,000, including interest. Your VC annuity would be $154 per month ($25,000 divided by $100 = 250, multiplied by $7.40 = $1,850 per year, divided by 12 months = $154, rounded down). If you provided a survivor annuity for someone who is age 50, your VC annuity would be reduced by 15 percent, to $131 per month ($1,850 - $277.50 (15 percent) = $1,572 per year, divided by 12 months = $131, rounded down). Your survivor would receive $65 per month after you died ($1,572.50 x .5 = $786.25 per year, divided by 12 months = $65, rounded down).
Refunds of Voluntary Contributions—As an alternative to buying an additional annuity, employees may withdraw their total VC program contributions, plus interest, at any time and for any reason. Partial refunds are not permitted. Once an account is closed out, it can never be opened again, unless the person has been separated from the government for more than three days and is re-employed in a CSRS-covered position.
Generally, those who take a refund of their voluntary contributions account may roll it into an IRA or qualified employer retirement plan and defer income taxes on the interest. The rollover options depend on the amount of interest payable on the employee’s account.