If you are a federal employee, you are covered under one of two retirement systems: the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). You can’t be covered under both systems; you are either a member of one or the other. However, you may have worked under CSRS at some point during your career, then opted to transfer to the FERS system later. Although CSRS was the only retirement system covering federal employees prior to 1987, most federal employees today are covered under FERS. If you are a state employee, you are probably covered under the Public Employees Retirement System (PERS). PERS retirement plans may vary from state to state, but they are largely defined benefit plans.
Key Similarities Between CSRS and FERS
CSRS and FERS pay retirement, survivors, and disability benefits under generally similar terms and conditions. As a federal employee under either system, you are also automatically covered under a group life insurance plan through the Office of Personnel Management. Employees of both programs also pay Medicare payroll taxes and are covered by Medicare at age 65.
Key Differences Between CSRS and FERS
The main difference between CSRS and FERS is that FERS employees are covered under Social Security and pay Social Security taxes, while CSRS employees generally are not covered under Social Security and are exempt from paying Social Security taxes. Another key difference is that FERS employees participate fully in the Thrift Savings Plan (TSP), while CSRS employees can only participate on a limited basis. FERS benefits and CSRS benefits are also calculated differently, and FERS benefits are integrated with Social Security benefits.
The Civil Service Retirement System
Who Is Covered Under CSRS?
If you were hired before January 1, 1984, you are covered under CSRS unless you elected to transfer to FERS during a transfer period in 1987. If you previously worked for the government under CSRS, then left government service, you may also be covered by FERS or may transfer to FERS in certain cases.
Eligibility for Retirement Benefits Under CSRS
If you have worked for the government as a civilian for at least five full years (not necessarily consecutively) and you have been employed under the CSRS for at least one year out of the last two years prior to retirement or separation (unless your retirement was due to disability), then you may be eligible to receive a retirement annuity under CSRS. Depending on your age, you will be eligible to receive either an immediate annuity or a deferred annuity.
Example: Mamie worked for the government as an administrative assistant for three years, then left when she had her first child. Four years later, she went back to work for the government in a similar position and continued working for the government for three years before quitting to start her own catering business. Although Mamie wasn’t eligible for an immediate annuity, she was eligible for a deferred annuity because she had worked for the government for a total of six years and was employed under CSRS during the last two years prior to separation.
CSRS Retirement Annuity
You can receive an immediate retirement annuity if you have reached a certain age and have worked for the government for a certain number of years or a deferred annuity if you don’t meet the minimum age requirements and length of employment requirements. Your annuity is computed based on your high-3 average pay and length of creditable service. In most cases, your annuity will be reduced if you retire before age 55. You can elect to receive payment of your annuity in one of several ways: for life, for life with a survivor annuity payable for the life of your surviving spouse, or for life with benefits paid to a named person having an insurable interest.
Caution: If you have a life-threatening illness or critical medical condition, you may qualify for an alternative form of annuity. If you elect this option, you may receive a reduced monthly benefit plus a lump-sum payment equal to all your unrefunded contributions to the retirement fund. However, you can’t choose this option if you are retiring under disability rules or if your former spouse is entitled to court-ordered benefits.
Other Benefits Under CSRS
You may also receive an annuity if you retire due to disability. To receive it, you must have worked for the government as a civilian for at least five years, be totally disabled, and unable to do your own job or a similar job. In addition, your spouse and dependent children may receive an annuity if you die, or a lump-sum death benefit will be payable to your estate if you die without a survivor.
The Federal Employees Retirement System
Who is Covered Under FERS?
If you are a federal employee hired on or after January 1, 1984, then you are covered under the FERS. You may also be covered under the FERS if you were formerly a CSRS employee but elected to transfer to the FERS during 1987. A few people, however, are specifically excluded from FERS coverage.
Eligibility for Retirement Benefits Under FERS
To be eligible to receive a retirement benefit under FERS, you must have at least five years of creditable service and be covered under FERS at the time you separate from government employment.
Retirement Benefits Under FERS
Like CSRS, FERS provides either an immediate annuity or a deferred annuity to federal employees who are separating from government service. Immediate annuities are payable to employees who meet certain age and length of employment criteria. The annuity you receive is called a basic benefit annuity. It guarantees a certain monthly retirement payment based on your age, length of service, and high-3 years’ average salary. Like a CSRS annuity, a FERS annuity can be paid in one of several ways: as an annuity with no survivor benefit, as a reduced annuity with a survivor benefit payable for the life of your surviving spouse, or as a reduced annuity with a survivor benefit to a person with an insurable interest. Like CSRS employees, FERS employees who have a serious health condition may also be eligible for an alternative form of annuity. If you opt to receive benefits before age 62, your annuity will be reduced by 5/12ths of 1 percent for each month you are under age 62.
Example: Denny retired from government service at age 58 with 17 years of government service. Although his earned annuity was $1,000 per month, he was four years away from age 62, so he received a reduced annuity of $800 per month, 20% less than his earned annuity.
Other Benefits Under FERS
If you begin receiving a basic benefit annuity but are under age 62 and not yet eligible to receive Social Security, you may also receive an annuity supplement. If you die, your spouse, former spouse, and dependent children may also be entitled to a survivor annuity. A lump-sum survivor benefit will be paid to your designated beneficiary if you have less than 18 months of creditable service at the time of your death and you leave no widow(er), former spouse, or children who are eligible for a survivor annuity. If you become disabled, you may also be entitled to receive a disability benefit.
The Thrift Savings Plan
FERS employees are automatically enrolled in the Thrift Savings Plan (TSP), a retirement investment plan that functions like a 401(k). The government contributes 1% of your basic pay to an investment fund each pay period, whether you contribute or not. If you do contribute to the plan (you can contribute up to 100% of your basic pay each pay period up to an annual maximum of $19,000 in 2019, $25,000 if you’re age 50 or older), the government matches a portion of your contribution. You will receive matching contributions on up to 5% of the basic pay that you contribute each pay period, dollar for dollar on the first 3% of basic pay you contribute and 50 cents on the dollar for the remaining 2%. Contributions (and earnings on contributions) to the plan grow tax-deferred until distributed to the employee or employee’s survivors. Your contributions can be either pre-tax (contributions reduce your current pay, resulting in an immediate federal income tax savings) or Roth (there is no up-front tax savings, but qualified distributions are tax-free).
Example: Naoko was employed under FERS and was eligible for a TSP. Her basic pay each pay period was $2,000. Each pay period, the government contributed $20 (1% of her basic pay) to her investment account. Naoko contributed $60 (3% of her basic pay) each pay period. The government matched her contribution dollar for dollar, so at the end of the year (26 pay periods), Naoko had $3,640 in her TSP account.
CSRS employees can also contribute to a thrift plan but the government does not match their contributions.
Public Employees Retirement System
If you are a state employee covered by a Public Employees Retirement System (PERS) plan, you are probably covered by a defined benefit plan. Defined benefit plans promise employees specific retirement, disability, survivors, and death benefits based on their age, years of service, and salary. The plans are funded by contributions from both the state employer and the employee. In general, PERS plans require employees to contribute a percentage of their salary towards the plan. In addition, many state workers also participate in supplemental deferred compensation plans.
Tax Considerations
Annuities paid under CSRS, FERS, or a PERS plan are generally taxed as pensions for federal income tax purposes. Your pension may also be subject to state income tax. However, federal legislation enacted in 1996 prohibits states from taxing the pensions of former employees who are no longer state residents. Contributions to the TSP and state-sponsored deferred compensation plans generally reduce your gross income for income tax purposes but are generally taxable when withdrawn at retirement. For more information on this, contact the Office of Personnel Management, the IRS, or your tax advisor.
Planning for your retirement is a big project. If you are a federal or state employee and need help deciphering the options available to you, contact the Experts at Henssler Financial:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Disclosures: The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
