Federal retirement expert, Chris Kowalik, shares how a federal employee who has military service may benefit from making a deposit to get credit under the CSRS or FERS programs.
Key takeaways:
- The type of military service that can be credited under CSRS/FERS
- How the deposit is calculated (this is what it costs you)
- What value does military service bring to federal service (this is what it gets you)
- The step-by-step process of making the deposit
- Special considerations for employees who RETIRED from the military
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Scott: Hello and welcome to this episode of Fed Impact, candid insights on your federal retirement. I’m Scott Thompson with myfederalretirement.com and I’m here today with Chris Kowalik of ProFeds. Home of the federal retirement impact workshop. Today’s episode, we’re going to focus on military service and how a federal employee may be able to get credit for their military service under the CSRS or FERS retirement programs. Chris it’s always great to have you.
Chris: Gosh, thanks Scott I’m so happy to cover this topic of military service and the decision surrounding that for federal employees. As a vet myself, I love being able to help feds to maximize their military service when it comes to their federal piece. We get a ton of questions about military service in our retirement workshop, so I suspect this will be of great interest to our audience today.
Chris: During this episode, of course we can’t possibly cover every scenario of military service, but we will cover a few key areas. The first is the type of military service that can be credited under CSRS or FERS. Next we’ll talk about what the deposit looks like, on how it’s calculated. That’s what it costs an employee to be able to get credit for it. The next thing we’ll cover is what value the military service brings to federal service, this is what it gets an employee. I help figure out what it cost them and what it gets them. Those are two very important pieces here. Of course, we will cover the step by step process of making that deposit, so that employees know the process that they’ll need to follow. Then some special considerations for employees who retired from the military. Also, before I forget, I want to make sure that we get feedback on this material. We’ll tell our listeners more about how to provide that feedback near the end of today’s episode.
Scott: Okay, great. Where should we get started?
Chris: Yeah, let’s start with the type of military service that can be credited for federal retirement purposes, so under CSRS and FERS. Really, how that credit can help an employee in general. We’ve got a couple of different pieces of service that can be credited. The first would be any active duty service. That is kind of the obvious one, when an employee has spent time on active duty they know that that is an option for them to buy back, and get credit for, under the federal side. Another piece of service that always seems to give some questions is reserve service.
Scott: Okay.
Chris: Now, typical reserve service. The time that an employee spent on drill weekends, the one weekend a month.
Scott: Right.
Chris: In the reserves. That time can’t count. Cannot count for this service. Any time that they were called to active service, their two weeks in the summer, if they were activated, if they went overseas, if they were called to active service for training purposes, all of that can count.
Scott: Okay.
Chris: Often times HR departments aren’t all that familiar with how to handle reserve time. You know, we want to make sure that employees know that they’re capable of making a deposit for the majority of the reserve service, just not their drill weekends.
Scott: Okay.
Chris: Then the other type of military service that can be credited, that we see an awful lot of, is folks that have gone to the military academies. The naval academy, you know, the citadel. We’ve got the Air Force Academy. Any of these … of this academy time can count for federal purposes as well, which is great. Let’s get some lingo straight so we’re all talking about the same things here.
Scott: Okay.
Chris: Many of our listeners who have had military service have probably heard some of the terminology that we’re going to have in this broadcast today. Technically when an employee takes action to get credit for their military service under CSRS or FERS it’s called making a military deposit. The slang for that is called buying it back.
Scott: Okay.
Chris: You can buy back your military service so that you get credit for it under CSRS or FERS. They both mean exactly the same thing.
Scott: Right.
Chris: The employee’s agency will be who calculates how much is owed by the employee and give them an opportunity to pay it if they wish. I’m not going to go into the technical calculation of how the interest is applied and how the calculation works, but a couple of points so that everybody is generally aware of how this works. First, employees are not required to pay the deposit. Whatever the agency tells them they owe, if they want credit for their military service they’re not required to make that payment. It’s simply an option for them.
Scott: Okay.
Chris: However, making or conversely not making military deposits may change an employee’s eligibility to retire from federal service maybe as early as they want, or with a calculation of the actual pension. The retirement cheque that they are expecting to receive. There are consequences to not making a military deposit, but still it is not a requirement by the employee.
Scott: Right.
Chris: The value of the military service, so this is what it gets an employee. We talk about what it costs them, but what it gets them will be very different for everybody. The reason is, how you’re rewarded for your military service is based on your high three and the general retirement formula that you’re using to calculate your federal pension. Everybody is a different pay rate, so what it’s actually getting them will be very different for each of these employees.
Scott: Okay, now can you give us an idea of how the government calculates the amount an employee would owe for the military deposit and when it must be paid?
Chris: Yeah, you bet. The amount of the deposit that is owed is based on two different figures. The first is the earnings that the employee had while they were in the military. All of the basic pay, no allowances like housing or uniforms or anything like that. Just their basic pay. Then the other number is the interest that’s accrued. Anybody that has the wherewithal to make a military deposit within three years of joining federal service, they don’t accrue any interest, which is great.
Scott: Okay.
Chris: Most of the time, employees don’t learn that they have the ability … or don’t see the value in doing it until much later in their career. Of course, they are going to have interest. The longer they wait to pay the deposit, the higher the interest is. Now, those deposits, that that money that an employee owes the government must be made prior to retiring from federal service. They can … An employee could make it in a couple of different ways. They could do a payroll deduction.
Scott: Okay.
Chris: They could say, “hey, $200 and … $250 bucks a pay period, I’m willing to put towards my military deposit or whatever the number happens to be” and they will eventually get it paid off before they retire. Of course, when there’s an outstanding balance, there’s still interest being accrued along the way, so we want to keep that in mind.
Scott: Right.
Chris: The way, of course, to avoid any extra interest is to pay it in lump sums. If the government says you owe $10,000 for your military service, write a cheque for $10,000 makes the interest stop and you’re fully credited for that piece of service.
Scott: Now, obviously, federal employees have two different retirement systems. The CSRS and FERS. How is military service treated differently between these two plans?
Chris: Yeah, these rules are vastly different, between CSRS and FERS. It does get a little bit complicated between the two systems, but we’ll try to break it down for our listeners. Now, we have a couple of charts in the handouts for this episode.
Scott: Okay.
Chris: For all of our listeners right below the play button on myfederalretirement.com on this page, you’ll see two links. One of them has the CSRS chart and the other has the FERS chart for military service. It’s helpful to have a little bit of a visual representation of all of this information. Everyone can follow along. To help everyone keep all of these details straight, make sure you’re applying the right rules with the right retirement system. For everyone listening, feel free to hit the pause button and pull up those charts so that you can follow along.
Scott: Okay. Well, and I bet some examples will be helpful to get a better understanding of the value of making a military deposit.
Chris: Yeah, you bet. Now that everyone has had a minute just to pull up those charts, lets walk through them starting with the CSRS chart. If we have an employee under CSRS that was hired for the first time, prior to October 1st of 1982.
Scott: Okay.
Chris: They paid the military deposit, whatever the agency tells them that they owe. Then they get full credit for their military time. Let’s assume, they had four years of active duty time that they want to make a deposit for. Those four years of active duty service are still going to count to help them to be eligible to retire. Perhaps a little bit sooner. Those four years are going to be calculated into their pension calculation. Most employees know those pension calculations have the high three times a certain percentage, times the number of years of service that they had.
Scott: Right.
Chris: Those, in this example, those four years would count for that purpose.
Scott: Okay.
Chris: If they decide not to make that deposit those years of service, in this example four, those would still count to help an employee be eligible to retire, but then there’s something special that happens with that piece of service. It’s called catch 62.
Scott: Okay.
Chris: Briefly, let’s talk about catch 62 and who it applies to and specifically who it doesn’t apply to. Again, this is right in the chart that we have in the download right at the bottom of this page.
Scott: Okay.
Chris: Catch 62, this is a penalty. This will not apply to CSRS employees who will not, who will not, be eligible for social security at the age of 62. If they don’t have at least forty quarters of social security then they get free credit for their military service.
Scott: Okay.
Chris: That’s great. That’s great.
Scott: Yeah.
Chris: No penalty, they don’t have to pay a dime and they get full credit for it. It really … this is where most people fall when they are under CSRS. They don’t naturally have social security at 62. That’s not something they become eligible for and so their going to get free credit.
Scott: Right. Great.
Chris: However, this penalty will apply to CSRS employees who will have at least forty social security credits, so be eligible at 62, and who choose not to make a military deposit. They fall into a little bit of a … of a hybrid program as far as how their military service is treated.
Scott: Okay.
Chris: Their CSRS annuity or their pension will be calculated at two different times. The first time is that the time that they retire and it will include all of their military service. Let’s assume we have somebody retire under CSRS at age 60. They have four years of military service from 60-62 they’re going to get credit for those four years of military service, as if they bought them back.
Scott: Okay.
Chris: Then at 62 the pension is going to be recalculated, removing those four years of military time. From 62 forward, for the remainder of their lifetime, none of their military service will count.
Scott: Wow.
Chris: Okay, if we have a CSRS employee that was hired prior to October 1st of 1982 and they want full credit forever for all their military service, they have to make a deposit for it.
Scott: Okay.
Chris: Okay. Assuming that they will have at least the forty social security credits.
Scott: Right.
Chris: Okay, now it gets a little bit easier when we have a CSRS employee that was hired after October 1st of ’82. Not many of them exist, since the last one was hired at the end of 83.
Scott: Sure.
Chris: The CSRS program went away at that point. Anybody that falls under that category at being hired after October 1st of ’82, if they paid the military deposit they get full credit for eligibility and in the pension calculation. If they decide not to pay it, all of that time just evaporates. It goes completely away, it’s not taken into account with respect to being eligible to retire. It’s not taken into account when the pension is being calculated.
Scott: Okay.
Chris: Okay. Some pretty heavy penalties there if we don’t make a military deposit under CSRS.
Scott: Sure.
Chris: Okay, now for FERS it gets a little bit easier. If we had any military service that happened prior to January 1st of 1957, which we don’t have too many of those folks around anymore working for federal government, there’s no military service deposit required.
Scott: Okay.
Chris: They’re going to get free credit regardless. Assuming we had military service after that date, so January 1st of 1957, if a FERS employee pays the deposit they get full credit. If they don’t pay it, again, just like the last scenario under CSRS, the time just evaporates.
Scott: Okay.
Chris: Those years won’t count for eligibility purposes and it won’t count for the pension calculation.
Scott: Okay, well that did get a little complicated. How does an employee know whether it is worth it or not to make a military deposit?
Chris: Gosh, you know, that is a great question. It’s one that we always get, as an employee is really trying to figure out whether this makes sense or not. Here’s how we determine whether it’s financially worth it or not to make a military deposit.
Scott: Okay.
Chris: The first is you have to weight what it costs you, and what it gets you.
Scott: Right.
Chris: Right, so we have to figure out what the … actual money is that we have to pay the government to get credit for it and then what is the extra pay out that we get by doing so.
Scott: Right.
Chris: One, kind of, test that we have to see if its financially worth it or not, is to see how quickly you’re going to get your money back once you retire.
Scott: Mm-hmm (affirmative)
Chris: Let me give you an example. Let’s say we have somebody that had regular military service and the government says, you know, their agency does the calculation, and they say “it’s going to cost you $10,000 dollars to get credit for this.”
Scott: Okay.
Chris: Nobody’s excited about writing a cheque for $10,000 to the government.
Scott: Right.
Chris: Nobody, right? If, we can show an employee that based on their numbers that it ends up yielding them a pension that’s $4000 dollars a year higher in retirement.
Scott: Wow.
Chris: By year three they’re back in the black.
Scott: Yes.
Chris: They’ve made their $10,000 back and from that point forward, they’re making a whole lot more money.
Scott: Okay.
Chris: Right? Now if it takes them 15 years to make their money back, then it’s “uh, I don’t know. I don’t know if that will really be worth it or not”. If we can look at both sides, what it costs you and what it gets you, I think it helps employees to really have a better feel for what it’s going to do for them financially speaking.
Another example I’ll give is anybody that had any time in the service academies. Let’s say we had somebody go to the Naval Academy out in Annapolis, Maryland. They spent four years there. They went on to have their military career. Now, they’re facing this “well gosh, can I get credit for that academy time?” The answer is yes. Let’s assume again, we had four years of time at the academy. Since the deposit that they owe is based on how much they made during that time, anybody’s that been to a service academy knows you don’t make a whole lot of money there.
Scott: Yeah, right.
Chris: You have a little bit of a stipend, so the amount that you’re going to owe to get credit for your military service at the academies is very, very inexpensive. What it gets you is four extra years of a pension calculation.
Scott: Yeah.
Chris: That is an incredible return on investment.
Scott: Sure is.
Chris: We’re going to, you know, use some financial speak here.
Scott: Yeah.
Chris: Academy time, that’s always one that I ask about in our workshops, because it is such a no brainer to do.
Scott: Okay.
Chris: Another byproduct of … of making a deposit for military service, is that an employee might also become eligible to retire sooner than if they just looked at their federal service by itself. When they include that military service they have more number of years of service, which might allow them to retire at an earlier age.
Scott: Okay. Can you walk us through the steps they’ll need to follow to do this.
Chris: Yes. Just like the charts that we covered before, there are links to the forms that I’m going to discuss in this section.
Scott: Okay.
Chris: Right at the bottom, right underneath the play button. Again, just … if you’re listening on myfederalretirement.com, right below the play button you’ll see the links to these forms.
Scott: Okay.
Chris: The very first step is going to be to figure out how much an employee made during their time in the military. The form that they’re going to use to figure this out is called RI20-97. That document will be sent to the appropriate defense finance and accounting service based on the different service that they were in. They all, kind of, go to different spots, but the addresses are right in the instructions of where they are supposed to be sent.
Scott: Okay.
Chris: DFAS gets that 20-97 they complete it and its returned back to the employee or perhaps to the agency. Depends on who submitted the document. That … that form, when it comes back to the agency or back to the employee, will outline all of the military earnings for basic pay. No allowances, just basic pay that an employee received during their time in the military.
Scott: Okay.
Chris: That’s kind of a two step program. We have to send off the form and then when the form comes back, that’s what it tells us. The third step in this is that the employee, whether they’re CSRS or FERS, they’re going to complete another form to determine how much they owe.
Scott: Okay.
Chris: Based on their earnings that they had in the military. The calculations are a little bit different between CSRS and FERS, as far as interest and things like that. The CSRS employees will complete the SF2803 and the FERS employees complete, almost an identical form, but it’s the SF3108.
Scott: Okay.
Chris: Just for the two different retirement systems. The employee takes the completed RI20-97 that they got back from DFAS, and those forms that I just mentioned, the SF2803 or the 3108. They take those to their agency, likely the HR, but whoever co-ordinates that type of documentation for that employee, and the agency calculates the deposit.
Scott: Okay.
Chris: It’s their responsibility to determine based on those two forms, how much the employee owes. The next step that the agency’s going to take is they’re going to provide a letter back to the employee that tells them, based on all their military service and all the information they have at hand, how much the employee owes for that particular piece of service. That’s where they would come up with that lump sum dollar amount of $10,000 or, you know, whatever the number happens to be.
Scott: Right.
Chris: At that point, they give the employee an opportunity to pick, which payment option they want to do, if they decide to make the deposit. Again, either a lump sum payment or a payroll deduction.
Scott: Okay
Chris: Gives them all the election instructions at that point.
Scott: Okay. That process doesn’t sound too painful. Would it be safe to say that this process can maybe take a couple of months?
Chris: Yeah, that’s probably a fair amount of time. You know, employees should do their best to document all their communication with HR in this process, so that they’re sure to get the answers that they need. It’s really easy for this type of thing to drag on and before you know it, it’s time to retire. Now you don’t have the information that you need.
Scott: Yeah.
Chris: Definitely employees should do this as early in their career as possible.
Scott: Okay, now Chris we have another group of folks that might have some different considerations and that’s our military retirees.
Chris: Mm-hmm (affirmative)
Scott: Can you shed some light on how they might be treated a bit differently with respect to making a military deposit.
Chris: Yeah, of course Scott. Military retirees have the exact same options as everyone else does that we just talked about. If they want to make a deposit for their military service to get credit under CSRS or FERS they follow the exact same process that we just discussed. There’s a catch, and there might be actually a couple of catches. It depends what group, what category, they’re really in. Let’s break our military retirees up into two different groups.
The first would be our group of active duty retirees. If we have an employee that retired from active duty they can, again, make a deposit for their military service. The first catch for them is that the amount that they owe is going to be big.
Scott: Yeah, yeah.
Chris: Right, because it’s for twenty plus years of military service that they’re having to make up retirement contributions for to make that deposit.
Scott: Right.
Chris: The second reason … the second catch here is that once they begin drawing their CSRS or their FERS pension that now includes their military service, they must waive their military pension. Rarely do we find that that is beneficial.
Scott: Sure.
Chris: However, there’s one scenario where … in which it happens, and I’ve seen it three times. In all of the cases that I’ve ever reviewed and all the numbers that we calculate for employees and this situation, I’ve only seen it worth it three times.
Scott: Okay.
Chris: Here’s the scenario, if we have somebody retire as a mid-grade enlisted person, maybe at the pay grade of E6 or E7. They retire from the military and then they come over and get a relatively high paying federal job where they’re making one hundred thousand plus, typically the numbers, the math just works out. That they, by waving their military pension, they’re rewarded so heavily on the federal side because of the disparity in their incomes from the military to the federal side, that the numbers simply work.
Scott: Okay.
Chris: Again, but rarely do we see that actually happen. Of course, it’s always important to do your numbers so you know what you’re looking at.
Scott: Sure.
Chris: Okay, the other group of employees … of military retirees that we’re going to look at are reserve retirees. They have a more moderate payment for twenty plus years of service, because, presumably, they worked most of the time out in the private sector. They were only working reserves part-time.
Scott: Sure.
Chris: Their payment is going to be much lower. Of course, all the time is going to be condensed. It might be over a span of twenty years of service, but if we were to condense all of those days together and eliminate all of the days they were working on the private sector we might only come up with three or four years of actual service.
Scott: Okay.
Chris: They’re not getting, truly, twenty years of credit being in the reserves.
Scott: Right.
Chris: Okay. Now, they’re what we call double dippers. Reserve retirees are able to make a deposit for their military service and get credit under CSRS or FERS, and they get to draw their military retirement cheque from the reserves at 60 with no penalty to either one.
Scott: Right.
Chris: They get double credit for their military service on both sides, which is really pretty great.
Scott: Wow, well that’s a pretty big difference between those two groups of retirees. It sounds like it’s definitely worth it for everyone to check out their numbers before making this important decision.
Chris: Absolutely. I never like to give broad brush advice in a forum like this, because everybody’s numbers are going to be a little bit different.
Scott: Sure.
Chris: It is usually worth it to make the military deposit. Everyone that’s listening today should have the calculations done. Again, not just what costs you, but what it gets you too. That way you know how you’ll be impacted by the decision that you make about your military service.
Scott: Well Chris, you’re always very generous with this information and I appreciate you providing it to all of our military veteran … veterans listening today. You mentioned that you loved getting feedback from employees and want to encourage our listeners to interact with you. Can you let us know what kind of feedback you’re looking for and where they can give you the feedback?
Chris: Yeah, you bet. You know, I’m so grateful to be able to provide this information to our vets, and I’m glad to be able to help them to know how to navigate through these decisions. As for the feedback that we’re looking for, if our listeners have ideas on topics that they want to hear in the future or just want to share their reaction to today’s content, they can visit our site at fedimpact.com/feedback and share their thoughts.
Scott: Great. Well again, its been great to have Chris Kowalik of ProFeds with us today. I invite you to stay tuned to Fed Impact podcast to get straight answers and candid insights on your federal retirement.
