Thousands of federal employees have lost their federal jobs in the last few months due to reduction-in-force (RIFs), firing or elimination of job positions. Most of these employees are not eligible to retire from federal service. A question that these departing employees are asking: What happens to their FERS retirement including the FERS Basic Annuity and the Thrift Savings Plan (TSP)? This column discusses “vesting” requirements with respect to the FERS Basic Annuity and the TSP.
Vesting and the FERS Basic Annuity
The term “vested” with respect to a departing employee’s retirement plan refers to the departing employee’s eligibility to keep the money the employee has contributed to the employer-sponsored retirement pan. With respect to the FERS retirement, federal employees who are covered by FERS contribute every pay date to the FERS Retirement and Disability Fund. If a FERS employee was initially hired before January 1, 2013, then 0.8 percent of the employee’s paycheck was deducted and contributed to the FERS Retirement and Disability Fund. Those employees hired during 2013 have 3.1 percent of their paychecks deducted bi-weekly and contributed to the FERS Retirement and Disability Fund. Finally, those FERS employees who were hired into federal service anytime after December 31, 2013, have 4.4 percent of their paychecks deducted bi-weekly and contributed to the FERS Retirement and Disability Fund.
There are three key facts that FERS employees should be aware of when it comes to their bi-weekly contributions to the FERS Retirement and Disability System. These facts are presented:
- Those contributions belong to the employee because they were deducted from the employee’s salary.
- Each payroll contribution the employee makes allows the employee to get closer to being fully vested in the FERS retirement. Once an employee has contributed a minimum of five years to the FERS retirement, the employee is fully vested. Fully vested in the FERS system means that the FERS employee is guaranteed a FERS annuity when they have reached the minimum age to start receiving it (discussed below).
- When a FERS employee leaves federal service, either voluntarily or involuntary, the departing employee has the option of requesting a full refund of their FERS contributions that were made during their years of federal service. As discussed below, they are encouraged not to make that request
FERS “Creditable Service” and Vesting
FERS covered service; service in which a FERS employee’s paycheck is subject to FERS retirement deductions (such as service under a career appointment) is called creditable service. Also included as FERS creditable service is temporary service performed before January 1,1989 during which FERS retirement deductions were not withheld from an employee’s salary. When the employee became a full-time employee, the employee made a full deposit. With the exception of Peace Corps and VISTA service, a FERS employe cannot make a deposit for temporary service performed after December 31, 1986.
Deposits for active-duty military service, and unused sick leave hours (when converted to months and days or service) are not included as creditable service and therefore ae not included for FERS vesting purposes. However, unused sick leave hours and active-duty military service deposits are used for computations purposes of the FERS annuity.
It is important for FERS employees who leave their federal jobs to understand that once they have earned at least five years of creditable service, they are eligible for a deferred retirement. This means that they will receive their FERS annuity in the future, as discussed in the next section. While deposits for active-duty military service and unused sick leave hours are not counted towards creditable service, they are included for the purpose of computing the departing employee’s FERS annuity computation.
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FERS Deferred Retirement Option
Employees who leave federal service with at least five years of creditable service and who do not request a refund of their FERS contributions (made via payroll deductions and through deposit for temporary service and/or active-duty military service) are eligible for a deferred retirement. Deferred retirement means that the departed employee will receive his or her FERS annuity at a later date. That date depends on how many years of creditable service the employee had at the time of departing federal service. The following table summarizes when the deferred annuity starts:
| Number of Years of Creditable Service | Deferred Annuity Begins the Month After the Departed Employee Becomes Age |
| 5-19
20-29 30 or more |
62
60 Minimum Retirement Age |
Note that deferred retirement is not “automatic.” A departed employee must apply for his or her deferred retirement within two to three months before the month the FERS annuity starts. OPM Form RI 92-19 is used to apply for the deferred annuity.
Most FERS Employees Are Vested in Their FERS Retirement
Vesting and the TSP
When it comes to the TSP, all TSP participants are immediately vested and keep all of their contributions made via payroll deduction and associated earnings on their contributions. This is the case whether contributions are made to the traditional TSP or to the Roth TSP. Those employees who have directly rolled over traditional IRAs and qualified retirement accounts to their traditional TSP accounts are immediately vested in these rollovers and associated earnings.
FERS-covered employees receive matching contributions from their agencies. The maximum agency matching TSP contribution is 4 percent. In order to receive the maximum annual 4 percent matching contribution from their agency, a FERS-covered employee must contribute at least 5 per cent each pay period to either the traditional TSP and/or to the Roth TSP. FERS-covered employees are immediately vested in their agency matching TSP contributions and associated earnings.
FERS-covered employees are also entitled to receive an automatic 1 percent of their annual SF50 salary contribution from agencies. This is true whether or not the employee contributes to the TSP via payroll deduction. But unlike agency-matching contributions in which there is no vesting period, there is a minimum amount of service time a FERS-covered employee must meet in order to be vested in their agency automatic 1 percent of annual SF 50 salary contribution and associated earnings. That minimum amount of service time is 3 years, starting from the employee’s hire date. This is called the TSP Service Computation Date. There are some employees serving in certain federal positions (Noncareer Senior Executive Service positions, Executive level positions, and Members of Congress and Congressional Employees) in which the TSP vesting period for the automatic 1 percent of SF 50 contribution is two years.
Options for Vested TSP Account for Employees Who Leave Federal Service
Federal employees who leave federal service due to reduction-in-force, job elimination or any reason have options as to what to do with their vested TSP accounts. Departing employees can: (1) Keep all or some of their vested TSP accounts in the TSP; (2) An employee can request a direct rollover of a portion of their traditional TSP to a traditional IRA or to a traditional qualified retirement plan (traditional 401(k) plan) at any time after leaving federal service; and (3) Request a penalty-free withdrawal from their traditional TSP, either through a TSP annuity or payments based on life expectancy.
Departing employees do not have to do anything with their TSP accounts after they leave federal service. Their accounts will accrue earnings, and the employees can make interfund transfers. However, once a TSP participant who has left federal service reaches his or her “required beginning date,” (currently age 73) the TSP participant will be subject to annual TSP minimum required distributions (RMDs). Starting at that time, and for the rest of the TSP participant’s life, the TSP participant must withdraw a minimum amount from their traditional TSP, but not their Roth TSP account, for the rest of their life.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be dependable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
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Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert
A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.
He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.