Alternative Form of Annuity: Lump-Sum Benefit

Chapter 3: Section 7

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 that “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/retirement-services/benefits-officers-center/reference-materials (select “Glossary”).

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.

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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