Alternative Form of Annuity: Lump-Sum Benefit
The Alternative Form of Annuity, commonly called the “lump-sum benefit,” allows those who have conditions resulting in a life expectancy of less than two years to receive a tax-free payment equal to the contributions they made to the retirement program over their careers, with annuity payments then reduced. It is not available to those taking disability retirement or those who have a former spouse entitled to court-ordered benefits based on their service; it also cannot be taken into phased retirement.
The list of medical conditions that provide prima facie evidence of eligibility is at www.opm.gov/retirement-services/benefits-officers-center/reference-materials (select “Glossary”). Evidence of a medical condition must be certified by a physician. If a condition other than the ones listed there is claimed, the Office of Personnel Management will review the certification to determine if the condition is life-threatening or critical. Any costs associated with providing the medical documentation are the responsibility of the retiring employee unless OPM exercises choice of physician.
The reduction in the monthly annuity is based the employee’s total contributions to FERS or CSRS, without interest, using standard life expectancy tables known as “present value factors” (see the accompanying table), even though the only people eligible are those whose life expectancy is short. Following is an example of how taking the payment would affect an eligible CSRS employee retiring at age 62 having made a total contribution of $34,160 and with an annuity entitlement of $1,959 per month:
Present value factor: 214.6
Monthly annuity: $1,959
Reduction ($34,160 divided by 214.6) = $159.17
Adjusted monthly annuity: $1,799.83 ($1,959-$159.17)
If survivor benefits are elected:
Reduced monthly annuity to provide for full survivor annuity: $1,785.97
Adjusted monthly annuity with survivor benefits: $1,626.80 ($1,785.97-$159.17)
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.