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The Federal Employees Retirement System (FERS) Basic Benefit Plan

Nov 25, 2020 8:49:00 AM / by The Retirement Group (800) 900-5867

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What Is The Basic Benefit Plan?

The Basic Benefit plan is the second tier of benefits under the Federal Employees Retirement System (FERS). This plan pays retirement, survivor, and disability benefits. Most benefits from this plan are paid as monthly annuities, although certain benefits are paid in a lump sum. To receive benefits from the Basic Benefit plan, you have to meet established eligibility requirements that include length of service and, in some cases, age requirements.

Who Is Covered By The Basic Benefit Plan?

If you are automatically covered by FERS or you elect to transfer to FERS from the Civil Service Retirement System (CSRS), you will participate in the Basic Benefit plan.

Caution: Certain groups of employees (for example, members of Congress and their staffs, firefighters, law enforcement officers, air traffic controllers, part-time employees, and military reserve technicians) may have different contribution rates and/or annuity benefits.

How Is The Basic Benefit Plan Funded?

The Basic Benefit plan is funded by contributions from both you and the federal government. The amount you contribute depends on the date you were hired (see table below). The government's contribution is based on a formula.

Category

Hire Date

Standard Contribution Rate

FERS employees

First hired after December 31, 19861

.80% of earnings

FERS-RAE employees

First hired after December 31, 20122

3.1% of earnings

FERS-FRAE employees

First hired after December 31, 20132

4.4% of earnings

1 Or rehired after December 31, 1987, with less than 5 years of creditable or potentially creditable service under CSRS. 2 Or rehired after that date with less than 5 years of creditable or potentially creditable service under FERS. "FERS-RAE" means FERS-Revised Annuity Employees. "FERS-FRAE" means "FERS-Further Revised Annuity Employees."

Who Is Eligible to Receive Benefits from the Plan?

Employees Who Leave Federal Service Before Retirement

To be eligible to receive deferred retirement benefits if you leave federal service before retirement, you must have at least five years of creditable civilian service and must meet certain age requirements before you can begin receiving benefits. However, you have the option, at the time you leave federal service, to withdraw the portion of income you've contributed to the system no matter how many years you've worked.

Example(s): Kevin left government service after six years. Because he was only 36, he was not eligible to receive an immediate retirement annuity (with only six years of employment and the eligibility age of 62). He decided that since it was unlikely he would work for the government again, he would withdraw the $1,200 he had contributed to FERS during his five years of civil service. He was not, however, entitled to the portion of his account contributed by the government, although he received the interest that had accrued.

Caution: If your contribution is refunded to you, you won't be eligible later to receive benefits based on service covered by the refund. This may be a particular problem if you leave federal service, withdraw your contributions, and then become re-employed by the federal government at a later date. In addition, there may be tax consequences when you withdraw your contributions. Although you won't owe tax on your contributions, you may owe tax on any refund you receive that is over and above your contributions, such as interest. This taxable part of the refund (distribution) may also be subject to an additional 10 percent tax on early distributions if you separate from service before the calendar year in which you reach age 55.

Employees Who Retire From Federal Service

Once you've worked for the federal government for five years and have reached the Minimum Retirement Age (MRA), which varies depending on length of service and other factors, you will be eligible to receive immediate, postponed, or early retirement benefits.

Employees Who Are Disabled

To receive disability benefits, you must have at least 18 months of creditable civilian service and meet the definition of disability under FERS.

Survivors of Employees

Your survivors may receive benefits when you have completed at least 18 months of creditable service before your death. Eligible survivors may include your spouse, former spouse, dependent children, or someone who is dependent on your income, usually a blood relative or partner. If you have less than 18 months of creditable service when you die, your survivors will receive a lump-sum benefit equal to your contributions to the retirement fund, plus accrued interest. This lump sum is also payable if you have no survivors entitled to receive a survivor's annuity, such as a spouse, former spouse, or children.

Retirement Benefits

Benefit Eligibility

Under FERS, you may be eligible to receive immediate retirement benefits (that can be postponed), deferred benefits, or early benefits. The type of benefit you will receive will depend on whether you are voluntarily or involuntarily separated, how many years of creditable service you have, and how old you are at the time you separated. To receive immediate or deferred benefits, you must have reached the MRA. Consult the following table to determine your MRA, based on your year of birth:

If You Were Born:

Your MRA Is:

Before 1948

55

In 1948

55 and 2 months

In 1949

55 and 4 months

In 1950

55 and 6 months

In 1951

55 and 8 months

In 1952

55 and 10 months

In 1953 through 1964

56

In 1965

56 and 2 months

In 1966

56 and 4 months

In 1967

56 and 6 months

In 1968

56 and 8 months

In 1969

56 and 10 months

In 1970 and after

57

Immediate Annuity

If you retire at or after your MRA and you have the required number of years of service, you will be entitled to an immediate retirement benefit. However, if you retire at your MRA with at least 10 but less than 30 years of service, your benefit will be reduced unless you have 20 years of service and your annuity begins at age 60 or later. You can reduce or eliminate the age reduction by postponing the start date of your annuity. The following table shows the age and length of service requirements you must meet to receive an immediate annuity:

Age

Years of Service

62

5

60

20

MRA

30

MRA

10*

*Benefit reduced unless postponed to lessen/eliminate age reduction

Example(s): Eleanor retired at age 62. She had been employed in federal service for nine years, so she was eligible for an immediate annuity.

Deferred Annuity

If you leave government service but are not yet eligible for immediate retirement benefits, you may be eligible to receive a deferred retirement benefit in the future. To be eligible in the future, you must have completed at least five years of creditable civilian service and meet one of the following age and service requirements:

Age

Years of Service

62

5

60

20

MRA

30

MRA

10*

*Benefit reduced unless delayed to lessen/eliminate age reduction

Example(s): Antonio started working for the federal government when he was 23 and worked in government service for 20 years. When he was 43, however, he resigned to open a restaurant. Although he wasn't old enough to be eligible for an immediate retirement annuity under FERS, he will be entitled to receive a deferred reduced annuity either at his MRA (for him, age 56) or a deferred full annuity at age 60 (subject to reduction for a survivor annuity).

Early Benefits

If you are separated from service voluntarily during a major reorganization or reduction of force or involuntarily (not for misconduct or delinquency), you may be eligible to receive early benefits. To receive early benefits, you must meet one of the following age and length-of-service requirements:

Age

Years of Service

50

20

Any

25

How Will Your Retirement Benefit Be Paid?

In general, your retirement will be paid as an annuity for life, with or without a survivor's annuity benefit or a benefit for someone with an insurable interest. One exception to this is a benefit paid to you if you have a life-threatening or critical illness. This benefit is called an Alternative Form of Annuity. You can elect to receive a reduced monthly benefit (reduced by about 5 percent to 15 percent) plus a lump-sum payment of your unrefunded contributions to the retirement fund in lieu of a regular retirement annuity.

Example(s): Joe, a heavy smoker, was diagnosed with lung cancer and was expected to live only six months. To help pay his expenses, Joe opted to receive a reduced monthly benefit plus a lump-sum payment of his contributions to the retirement fund.

Caution: You can't be retired under disability rules or have a former spouse entitled to court-ordered benefits, and you must have your spouse's consent to elect an Alternative Form of Annuity.

Caution: Usually 85 percent to 95 percent of the lump sum is taxable income. See IRS Publication 721 for more information.

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How Much Will You Receive?

Benefit Calculation

Benefit calculations under FERS can be complicated, but these are the general rules: Your benefit is based on your high-3 average pay, which is figured by averaging your highest basic pay over any three consecutive years of creditable service.

Creditable service years are determined by adding up all your periods of creditable service, then eliminating any fractional part of a month (less than 30 days). This formula is then used to calculate your benefit: One percent of your high-3 average pay times the number of years of creditable service (if you retire under age 62, or 62 and older with less than 20 years) or 1.1 percent of your high-3 average pay times the number of years of creditable service (if you retire at age 62 or older with at least 20 years)

Example(s): Mike is retiring at age 62 after 18 years of civil service. His high-3 average salary is $40,000, so his FERS benefit is calculated this way: (1) 1 percent x $40,000 = $400; (2) $400 x 18 years of civil service = $7,200 retirement annuity.

If necessary, your annuity benefit will be reduced if you opt to receive retirement benefits before age 62 or to provide an annuity to a spouse, former spouse, or someone with an insurable interest. However, you may be eligible to receive a Special Retirement Supplement that will increase your benefit until you reach age 62 (see Special Retirement Supplement below) and become eligible for Social Security benefits. At age 62, your annuity will also be increased periodically for cost-of-living increases that occur after you retire.

Age Reduction

If you want to receive retirement benefits under FERS but are under age 62, you may opt to receive reduced benefits as long as you have 10 or more years of service and have reached MRA. Your benefit will be reduced 5/12ths of 1 percent (5 percent per year) for each month you are under age 62, with two exceptions to this reduction: If you are age 60 or older and have 20 years of service when you retire, your benefit won't be reduced; and your benefit won't be reduced if you have completed at least 30 years of service.

Example(s): Denny retired from government service at age 58 with 21 years of government service. Although his earned annual annuity was $6,000, his annuity was reduced by 20 percent to $4,800 because he was 4 years away from age 62. However, his twin sister, Penny, received a full FERS annuity when she retired the same year because she had worked for the government for 30 years.

Reduction for Surviving Spouse Annuity

If you are married when you retire, your retirement annuity will automatically be reduced to provide a full or partial survivor's annuity for your spouse. You can also choose to provide a survivor's annuity for your former spouse. If you are married, your spouse must consent if you want to provide an annuity for another person or if you elect to provide no or only a partial annuity for your spouse. To provide a full annuity for a surviving spouse, your retirement annuity will be reduced 10 percent; to provide a partial annuity, your benefit will be reduced 5 percent.

Example(s): When Paul retired, he opted to receive a reduced annuity with a survivor benefit for his wife. His monthly annuity of $1,000 was reduced by 10 percent so that his wife, Judy, would be eligible to receive a $500-a-month annuity (50 percent of Paul's unreduced annuity) when he died.

Reduction for Insurable Interest Annuity

If you elect to provide a survivor benefit for someone who has an insurable interest, your retirement annuity will be reduced. The amount of reduction depends on the difference between your age and the age of the named beneficiary.

The Special Retirement Supplement

You may be eligible for a Special Retirement Supplement if you retire before you are eligible to receive a Social Security retirement benefit (age 62). This supplement is the equivalent of the Social Security benefit you earned while you were employed by the federal government and that you will be eligible to receive at age 62. To receive the supplement, you must meet one of the following requirements:

  • You must retire after the MRA with at least 30 years of service
  • You must retire at age 60 with 20 years of service
  • You must have reached your MRA and have taken voluntary or involuntary early retirement as a result of a major reorganization of your agency, a reduction in force (RIF), or transfer of function

You are not eligible for the supplement if:

  • You have less than a full calendar year of creditable service under FERS
  • You retire under the MRA + 10 provision
  • You retire on disability
  • You retire later than age 62

Tip: The supplement ends when you reach age 62, and it may be reduced or stopped if you have earnings after retirement that exceed the Social Security annual exempt amount.

Survivor Benefits

Spouse's Benefit

  • If you die while you are employed by the federal government--Your surviving spouse may receive a survivor's benefit if you die after having at least 18 months of creditable civilian service. To be eligible for benefits, you and your spouse must have been married for 9 months or longer or have had a child born of the marriage, or you must have died accidentally. If you had 10 or more years of service at the time of your death, your spouse may receive a survivor annuity equal to 50 percent of your accrued basic retirement benefit, plus a cash payment called the Basic Employee Death Benefit. The cash payment will be a lump-sum payment (check with the Office of Personnel Management (OPM) for the current figure) plus the higher of 50 percent of your final salary or 50 percent of your high-3 average pay. If you had at least 18 months of civilian service but less than 10 years, your spouse may receive only the cash portion of the benefit.
  • If you die after you have retired from federal service--The annuity you receive after you retire is automatically reduced 10 percent so that your spouse can receive a survivor annuity after you die, unless you and your spouse waive the spousal benefits in writing. Under the 10 percent election, your spouse will receive an annuity equal to 50 percent of your unreduced benefit (subject to cost-of-living adjustments). You and your spouse can also choose to have your annuity reduced only 5 percent to give your spouse a lesser annuity. Under the 5 percent election, your spouse will receive an annuity equal to 25 percent of your unreduced benefit. If your spouse will not be eligible to receive Social Security survivor benefits until age 60, he or she may also receive a special supplemental annuity payable until age 60.
  • If you die after separating from federal civilian service but before retirement--Your spouse at the time you separated from federal service may be eligible for a monthly survivor benefit if he or she was married to you for at least nine months (unless your death was accidental) or was the parent of a child of the marriage. The benefit begins on the date you would have been eligible for an unreduced annuity or on the day after you die. However, if your surviving spouse chooses to receive an immediate annuity, he or she will receive a smaller benefit. Your spouse may also choose to receive a lump-sum payment of your contributions remaining in the retirement fund.

Former Spouse's Benefit

Your former spouse may be eligible to receive a survivor annuity if provided by a court order or if you elected to provide a former spouse with a survivor annuity (and your current spouse consented) at retirement. However, your former spouse must not have remarried before age 55 and must have been married to you for at least nine months. Former spouses generally can receive the same survivor benefits as those available to current spouses.

Example(s): Sid worked for the federal government under FERS. When Sid and his wife, Becky, divorced, Becky received a survivor annuity under FERS as part of her divorce settlement. Under the terms of the court order, Sid's retirement annuity was reduced by 5 percent in order to provide Becky with an annuity equal to 25 percent of Sid's unreduced benefit.

Caution: You can elect that a survivor benefit be paid to both your former and current spouses (with your current spouse's consent). You can even elect to provide survivor benefits to more than one former spouse. However, any benefit elected for a former spouse limits what benefit can be paid to the current spouse. The maximum combined benefit that can be elected for both spouses is 50 percent of your benefit.

Caution: If your former spouse is entitled to a court-ordered survivor's benefit, you can still elect to provide a survivor annuity for your current spouse. If the court-ordered survivor's annuity is less than 50 percent of your annuity and you elect a survivor's annuity for your current spouse as well, your current spouse can receive an annuity no greater than the difference between the court-ordered annuity and 50 percent of your annuity when you die. Even if the court-ordered annuity is equal to 50 percent of your annuity, consider electing a survivor annuity for your current spouse to protect his or her rights to an annuity in case your former spouse loses entitlement to his or her annuity at some point in the future.

Dependent Child's Benefit

Your unmarried dependent child may receive an annuity if you die and he or she is under age 18, is under 22 and a student, or is any age and has a disability that occurred prior to turning age 18. This annuity is payable whether you died in service or after retirement. The amount of monthly annuity payment your child will receive depends on whether the child is orphaned and how many children in the family will be receiving benefits. However, if your child is also receiving Social Security benefits, your child's FERS benefit will be reduced. For every dollar in Social Security your child receives, he or she will lose a dollar in FERS benefits.

Example(s): Carrie received $297 a month in Social Security survivor's benefits after her father, Sid, died. She was also eligible to receive a $337 per month FERS survivor's benefits. However, because of the offset with Social Security, Carrie received only $40 from FERS ($337 - $297).

Insurable Interest Benefit

You can elect to provide an insurable interest survivor's benefit annuity to someone who has an insurable interest in you. This might be someone who depends on your income, such as a dependent parent. You might also elect to provide an insurable interest annuity to your current spouse if he or she is ineligible to receive an annuity because your former spouse has a right to a court-ordered survivor annuity.

Example(s): Leslie's disabled brother lived with her and depended on her for financial support. When Leslie retired, she opted to receive an annuity reduced by 5 percent so as to provide a survivor's annuity for her brother equal to 25 percent of her monthly annuity. Knowing that her brother would be taken care of if she died gave Leslie peace of mind. You must be in reasonably good health (you'll have to take a medical exam) and not retiring due to disability in order to provide an insurable interest survivor annuity.

Disability Benefits

Benefit Eligibility

You may receive disability retirement benefits under FERS if you suffer an injury or disease and are unable to perform useful and efficient service in your current position. This disability must be expected to last at least one year. In addition, you must have at least 18 months of creditable federal civilian service, and you must not decline any alternative positions that are at the same grade or pay level and within the same commuting area offered to you to accommodate your disability. Occasionally, you may have to provide proof that you haven't recovered from your disability and that you still meet the disability definition.

Disability Benefit Amount

The first year you are disabled, you will receive 60 percent of your high-3 average pay if you do not qualify for Social Security disability benefits. After the first year, and until you reach age 62, you will receive 40 percent of your high-3 average pay if you do not qualify for Social Security disability benefits. At age 62, your annuity will be recalculated once again.

Example(s): Sid worked for the government for five years, earning $3,000 a month during his first three years of employment and $4,500 a month during the following two years. He became disabled and was unable to work for nine months. His disability payment under FERS was $2,400, which was calculated by figuring his average earnings based on his three highest earnings years, then taking 60 percent of that figure. His highest three years of earnings were averaged, and the result was $4,000. Sixty percent of $4,000 is $2,400, the amount of Sid's benefit.

Caution: Note that your FERS disability benefits are offset (reduced) by any Social Security disability benefit you may receive. You must apply for Social Security disability benefits or your FERS application won't be processed. In the first year, your FERS disability benefit will be reduced by 100 percent of your Social Security benefit for any month in which you are entitled to Social Security benefits. After the first year and until age 62, your FERS disability benefit will be reduced by 60 percent of your Social Security disability benefit for any month in which you are entitled to Social Security benefits. However, if your earned annuity is higher than your disability annuity, you will receive that amount instead.

Applying for Benefits

Benefits under FERS are not automatically payable. You must apply for them by filling out the appropriate application forms. To do this, contact your employing agency. The employing agency will forward your completed application to the OPM. Nondisability retirement applications are normally processed within 35 days of receipt, but this will vary. In any event, OPM suggests that you contact your employing agency at least 60 days before the date you intend to retire. If you must apply for disability retirement, however, by law, your application must be received by OPM within one year after the date you separated from federal service. In addition, other rules apply. Contact your employing agency for further information.

Tax Considerations

Federal Income Tax Withholding

The annuity you receive is subject to federal income tax withholding unless you choose not to have tax withheld. If you decide not to have tax withheld, however, you may have to make estimated tax payments. Contact the OPM for information on how to make the choice for no withholding.

Federal Income Tax Rules

The federal income tax rules that apply to civil service retirement benefits received by retired federal employees (including disabled employees) and their survivors are complex. For a thorough discussion of these rules, see IRS Publication 721 Tax Guide to U.S. Civil Service Retirement Benefits.

Questions & Answers

If You Retire from Government Service and Begin Receiving a FERS Retirement Annuity, Can You Change Your Annuity to Include a Survivor Annuity for Your New Spouse?

Yes. You should contact the OPM within two years of the date of your marriage to elect a survivor annuity for your spouse. Of course, you will now be entitled to a reduced annuity. It will be reduced by either 5 percent or 10 percent, depending on whether you choose to provide a full survivor annuity or a partial survivor annuity for your spouse. In addition, your annuity will be reduced in order to pay the survivor benefit deposit. The reduction is a permanent actuarial reduction, not a one-time payment.

When Can You Expect to Receive Your First Retirement Annuity Check After You Retire?

Retirement annuities are generally paid on the first day of the month after separation, although annuities based on involuntary separation begin on the day after separation. For instance, if you voluntarily separated from service during November, you should receive your first annuity check on December 1. If you have a savings or checking account, you must have your federal benefit payment deposited directly into your account.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that focuses on transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

 

The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at www.theretirementgroup.com.

 

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