The Book of Answers for Federal Employees and Retirees - New 4th Edition

Retiring?

Introduction

What if?

That's a question that we have heard time and again from federal employees and retirees during our many years of providing information to help them through their careers and in their personal and financial lives.

What if I get married? What if I leave government before retirement eligibility? What if I encounter a serious medical or financial problem? What if I want to change my insurance benefits? The list goes on and on.

This fully updated book provides a unique perspective on such questions. Information on these topics previously was scattered among numerous official sources, which often are written for technical experts and rarely show how one consideration might affect another.

Since the prior edition, many policies have been changed substantially, some new benefits added, some new restrictions applied, some major eligibility changes made. Some of these were driven by changes in law, others by administrative action, others by court decisions. But whatever their source, all have implications.

Also, certain changes that appear less significant on the surface have been made—less significant unless they apply directly to you, of course, in which case they could be of major importance. Also, various benefit levels and conditions have been changed that may give you different options or direct you to a different course of action than before.

The various federal benefits all have special rules that apply in certain life situations, including some with deadlines that once missed become unavailable. These programs include health, life, vision/dental and long term care insurance, flexible spending accounts, retirement benefits, the Thrift Savings Plan, Federal Employees Compensation Act, Medicare and Social Security. For example, the insurance programs all have special rules for changing coverage, and eligibility to carry benefits after separation for retirement or other reasons.

There also are some changes that occur at certain ages without a triggering life event—magic number ages, such as reaching certain ages and gaining retirement eligibility under certain years of service options.

When it comes to such issues, being forewarned is being forearmed.

This book draws on insight gleaned from our long experience in talking with employees and retirees about the what if? questions they face day after day. Chances are, you've asked many of them yourself, or you will. You've come to the right place for answers.

Section I—Life Events

WHAT IF I HIT A ‘MAGIC NUMBER’?

There are certain magic numbers associated with working for the government or being a retiree from it. Often these ages creep up, presenting opportunities—or potentially undesired changes in benefits—that individuals miss entirely.

For example, the cost of Federal Employees’ Group Life Insurance benefits varies according to age, as do the benefits payable under certain circumstances. In this way FEGLI insurance differs from term insurance that individuals might buy through the private market. In some term policies, premiums increase every year, while in others they are fixed for a period of years—for example, 10, 15, or 20 years. The FEGLI program falls in between in that premiums rise when enrollees enter five-year age increments.

In addition, there are certain magic numbers and events to be watched in regard to family benefits.

Retirement Eligibility Ages

There are numerous magic numbers in the retirement program, but understanding their importance requires first understanding some important features of the program, and in particular the differences between the major types of retirement. There are five major categories of retirement, each with eligibility rules that vary depending on age and, in some cases, years of service.

Optional Retirement—This is considered standard or voluntary retirement" and is at the employee's discretion when meeting one of the age and service combinations.

Special Optional Retirement—This variant on optional retirement applies in certain occupations considered especially demanding, in which affected employees (called special category employees) pay higher contributions into the retirement system but are able, and in many cases required, to retire earlier.

Early Optional Retirement—If your agency undergoes a major reorganization, reduction in force, or transfer of function, and a significant percentage of the employees will be separated, or will be reduced in pay, it may be authorized to permit early optional retirement for eligible employees to lessen the impact of involuntary separations and demotions. Under early optional retirement, if you have at least 25 years of service, or you are at least age 50 and have as much as 20 years of service, you may retire voluntarily on an immediate annuity.

Under the Civil Service Retirement System, the annuity is reduced by 2 percent for each year you are under age 55. At least five years of your service must be civilian service, and you must have been employed under CSRS for at least one year out of the last two years preceding retirement.

Under the Federal Employees Retirement System, if you retire at the minimum retirement age (see table) with at least 10, but less than 30 years of service, your benefit will be reduced by 5 percent a year for each year you are under 62, unless you have 20 years of service and your benefit starts when you reach age 60 or later— what sometimes is termed delayed retirement.

Discontinued Service Retirement—If you leave federal service before you meet the age and service requirements for an immediate retirement benefit, you may be eligible for deferred retirement benefits, also called discontinued service benefits. To be eligible, you must have completed at least five years of creditable civilian service. You may receive benefits when you reach age 62 with five years of service or age 60 with 20 years of service.

In addition, FERS employees may begin to receive benefits upon reaching their minimum retirement age (see table) with 10 years of service. The same rules described above under Early Optional Retirement apply.

Disability Retirement—Employees who become disabled during the course of their federal career may be entitled to a disability annuity. First, under CSRS/CSRS Offset, they must have completed at least five years of federal civilian service; under FERS, only 18 months. Second, while employed in a position covered by either CSRS/CSRS Offset or FERS, they must have become disabled for useful and efficient service in both their current position and any other vacant position at the same grade or pay level for which qualified.

Before they can be considered eligible for a disability retirement benefit, their employing agency must determine that they are not qualified for reassignment to any other vacant position within the agency and commuting area at the same grade or pay level of the position they currently occupy.

Eligibility Requirements for Retirement—FERS

* MRA =minimum retirement age. Depending on your year of birth the MRA ranges from age 55 to age 57.

To determine your MRA refer to the table below.

** Annuity may be subject to age-based reduction (see text).

MRA Table

* If you retire at the MRA with at least 10, but less than 30 years of service, your benefit will be reduced by 5 percent a year for each year you are under 62, unless you have 20 years of service and your benefit starts when you reach age 60 or later.

Eligibility Requirements for Retirement—CSRS

* Annuity may be subject to age-based reduction (see text).

Important Life Insurance Ages—Active Employees

Basic—Basic Federal Employees’ Group Life Insurance provides term life insurance at group rates. Your Basic Insurance Amount is equal to your annual basic pay rounded up to the next $1,000 plus $2,000. The cost is:

FEGLI also offers an extra benefit to employees under age 45, at no additional cost. This doubles the amount of life insurance payable if you are age 35 or younger. Beginning on your 36th birthday, the extra benefit decreases 10 percent each year until, at age 45, there is no extra benefit.

Option A—You may elect Option A-Standard Life Insurance in the amount of $10,000.

The cost is:

See next page for special rules for retirees.

Option B—You may elect Option B-Additional life insurance in an amount equal to one, two, three, four or five times your annual basic pay (after rounding up to the next $1,000).

The cost is:

See below for special rules for retirees.

Option C—You may elect Option C-Family Life Insurance to provide coverage for your spouse and eligible dependent children. When you elect Option C, all of your eligible family members are automatically covered. You may elect either one, two, three, four, or five multiples of coverage. Each multiple is equal to $5,000 for your spouse and $2,500 for each of your eligible dependent children.

You receive Option C benefits; you cannot designate a beneficiary.

The cost is:

See below for special rules for retirees.

Important Life Insurance Ages—Retirees

Basic—The rates for continuing each $1,000 of Basic coverage in effect at the time of retirement are:

* You will continue to pay premiums for life (unless you cancel or subsequently elect the 75% reduction.

Option A—If you are enrolled in Option A-Standard coverage, you may continue that coverage into retirement if you wish. It is worth $10,000, for which you pay the full cost. Premiums for this insurance rise with your age:

•  50 through 54—$3.03 per month

•  55 through 59—$5.85 per month

•  60 through 64—$13 per month

•  65 and over—no charge*

*For retirees at age 65, premiums will cease and the value of your insurance will drop by 2 percent per month until it reaches 25 percent.

Note: While Basic and Option A insurance provide accidental death and dismemberment coverage while you are employed by the government, that coverage stops when you retire.

Option B—If you are enrolled in Option B-Additional coverage, you may also continue that coverage into retirement. Depending on the choice you made when electing this coverage, you may have two, three, four or five times your annual basic pay (after rounding it up to the next $1,000). Like Option A-Standard, you pay the full cost for this insurance and the premiums are based on your age:

•  50 through 54—$.282 per $1,000 per month

•  55 through 59 — $.498 per $1,000 per month

•  60 through 64—$1.127 per $1,000 per month

•  65 through 69 — $1.343 per $1,000 per month*

•  70 through 74—$2.47 per $1,000 per month*

•  75 through 79 — $3.90 per $1,000 per month*

•  80 and over—$5.20 per $1,000 per month*

For retirees who do not elect to stop the future reduction of coverage, at age 65 premiums will cease and the value of insurance will drop by 2 percent per month until it reaches 25 percent. If you elect to have no reduction in your Option B coverage, its value will not be reduced (unless you later cancel the election or change your coverage amount) and premiums will continue beyond your 65th birthday. Before you reach age 65 the government will contact you to request your election. You will be able to choose to reduce part or all of your coverage.

Option C—Option C-Family insurance provides life insurance coverage for your present spouse and unmarried dependent children (other than a foster child). If you are enrolled in this option, for which you pay the full cost, your spouse is covered for $5,000 and each eligible child for $2,500. You may continue this coverage into retirement. Like Options A and B, the premiums are based on your age group. For example:

•  50 through 54—$2.04 per multiple per month

•  55 through 59—$3.29 per multiple per month

•  60 through 64—$5.85 per multiple per month

•  65 through 69—$6.80 per multiple per month*

•  70 through 74—$7.80 per multiple per month*

•  75 through 79—$10.40 per multiple per month*

•  80 and over—$14.30 per multiple per month*

* At age 65, premiums stop and the value of this coverage will decline at 2 percent per month for 50 months, at which time coverage will end, unless the retiree elects to keep the full amount of insurance in effect and continue paying premiums.

Age 59½

Age 59½ is significant in tax-advantaged savings plans such as the Thrift Savings Plan because under the tax code, that generally is the earliest that withdrawals can be made from such plans without incurring the 10 percent early withdrawal penalty.

In the TSP, an age-based withdrawal becomes available for active employees at age 59½. You may make only one age-based withdrawal. Taking such a withdrawal does not affect your eligibility for a later TSP loan or a financial hardship in-service withdrawal. However, if you choose one, you will not be allowed to make a partial post-separation withdrawal.

The form to use is TSP-75, Age-Based In-Service Withdrawal Request, available through personnel offices or through https://www.tsp.gov/forms/civilianForms.shtml.

If you have both traditional and Roth investments in your account, a withdrawal will be taken proportionately from both.

Traditional Investments—For money invested through the TSP's traditional design on a pre-tax basis, and its associated earnings, you can continue to defer taxation of the money by having it transferred directly to an IRA or other eligible retirement plan. You can postpone taxation even if you receive the money directly, by depositing an equal amount into an IRA or other eligible plan within 60 days of receiving it, but there are complicated tax implications for doing so.

Money transferred or rolled over under these withdrawals is taxable when drawn out of the IRA or other retirement plan.

Roth Investments—For money invested through the TSP's Roth design on an after-tax basis, the withdrawal is tax-free. So are its associated earnings if they are qualified—requiring only, for those who have reached age 59½, that five years have passed since the start of the calendar year in which you made your first Roth investment. If the earnings are not qualified, they can be transferred or rolled over to an IRA or other eligible plan, and they will not be taxable if they have become qualified by the time you later withdraw them from that account.

For details see the publication Tax Information: Payments from Your TSP Account at https://www.tsp.gov/forms/allPublications.shtml#I.

If you are a married FERS participant, you must obtain the consent of your spouse before you can receive a TSP in-service withdrawal, regardless of the amount. If you are a married CSRS participant, the TSP must notify your spouse before your withdrawal is approved. (Note: The definition of spouse includes a same-sex spouse married in a jurisdiction that recognizes such marriages, and a common law spouse recognized in a jurisdiction in which such a marriage was formed, regardless of current place of residence.)

If the TSP receives a qualifying order or legal process for the enforcement of back payment of alimony or child support, your account will be frozen for withdrawals. That means a withdrawal will not be approved and disbursed until the court order process has been completed.

Age 62

As shown in the tables above, upon reaching age 62 employees with as few as five years of service become eligible for retirement. Age 62 also is the point at which those who separate with eligibility for deferred (discontinued service) retirement can begin drawing their benefits. In addition:

FERS—Age 62 is important in several ways under the Federal Employees Retirement System.

Generally, the civil service portion of a FERS benefit is calculated according 1 percent of your high-3 average pay times your years of creditable service. However, if you retire at age 62 or later with at least 20 years of service, a factor of 1.1 percent is used rather than 1 percent.

Also, under FERS cost-of-living adjustments generally are not payable until age 62. The exceptions to this are firefighters, law enforcement officers, air traffic controllers, survivor beneficiaries and disability retirees—they get COLAs regardless of their ages.

Social Security—Under Social Security, age 62 is the earliest normal age to begin drawing benefits, but your benefit will be lower than if you waited until a later age. See Social Security Full Retirement Age, below.

Age 65

Generally, you are eligible for Medicare if you or your spouse worked for at least 10 years in Medicare-covered employment and you are