An official who headed several federal benefit programs once gave me a clue as to how Washington really works. He said he never knew of a time when there was an overall improvement of some federal benefit that wasn’t somehow structured to provide a special break for either a member of Congress or a favored congressional aide. The legislation was an overall benefit to most feds, he said, but it was often worded or timed to benefit a handful of influential individuals too.
With that in mind, today’s guest columnist is benefits expert J.A. Elliott.. His topic: Taking a refund of retirement contributions.
In the year 1990, Congress passed a law that, as the story goes, benefited either one of their own, or a member of his or her congressional staff. The law made it possible for those, and by extension all federal employees, who left the government and took a refund of their Civil Service Retirement System (CSRS) contributions, to get credit for the refunded service both for eligibility for retirement and in the computation of their annuity, without (get this) paying a dime back to the government! All they would suffer was, and still is, a reduction to their annuity based on the age at which they retire and how much they owe of the refunded contributions plus interest. They only stipulation was, and still is, that the period of federal service for which the refund was given had to end before October 1, 1990. If any portion of the refunded period ended on or after 10/1/90, the only way federal employees would get credit for the service in the computation of their annuity is to pay back the refund with interest. They would, however, still get credit for retirement eligibility.
What follows are two real life examples, one federal employee who benefited from the change in the law because his refunded service ended before 10/1/90, and one who didn’t because her refunded service ended after 9/30/90.
The first example is my good friend, Harry. Harry, an engineer, left the federal service sometime in the early 1980’s, to take a job in the private sector. He took a refund of his CSRS contributions. Eventually, after becoming disenchanted with his job, he sought a return to the federal bosom, and with his considerable skills was welcomed back with open arms.
Years went by, and one night in the 1990’s Harry and his spouse were at our house. He was lamenting the fact that he should not have left the government and taken a refund, which with interest had grown to a huge sum.
“I’ll have to work longer to retire,” he wailed. “Not only will you not have to work longer to meet CSRS retirement eligibility,” I chirped, “you will also get credit for the service in the computation of your annuity, taking only a relatively painless actuarial reduction in the amount of your annuity.”
Based on his desired retirement age of 55, and the amount he would owe at retirement with interest, I showed him the actuarial reduction in his annuity paled in comparison to paying back the refund with interest. Harry, being a manly man, did not burst into tears of joy, though I thought I detected some puddling and he did leave the room. But, he returned shortly with another beer, so that may have been the reason. Harry retired in his mid-fifties with a comfortable CSRS pension, without paying back the refund plus interest. He’s happily refereeing basketball games and playing golf.”
The second example is a federal employee I’ll call Joy, because I don’t remember her real name, and it’s in keeping with the season. At a Christmas party, Joy asked me a question about her CSRS refund. Joy left the federal service in 1994 after 24 years of service, to do God knows what. She took a refund of her retirement contributions, a tidy sum, no doubt. A few years later she returned to the federal service. Now 55, she had worked nine additional years for the government. She had not redeposited her refund plus interest. Could she retire with 33 years of service, was the question. Yes she could, was the joyful answer. But the really bad news was, without paying back the refund with interest, the Office of Personnel Management (OPM) could not use her previous 24 years in computing her annuity. Her annuity would be based on only nine years of service, rather than 33 years – a huge difference! So, our advice to Joy was to beg, borrow, or steal the money to pay the redeposit. By paying the redeposit, and having her CSRS annuity based on 33 years was very cost effective, since she could recoup the money she paid OPM in a few short years of higher annuity payments.
Note to our FERS friends, don’t try this at home: None of the above applies to folks who take a refund of FERS contributions. You are not allowed to redeposit these funds, ever, and you lose the FERS refunded service both for retirement eligibility and computation of annuity. So, best not to take a refund if you leave covered under FERS. John Elliott