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How Non-appropriated Fund (NAF) Service Affects Civil Service Retirement

FEDZONE Ed Zurndorfer
A Nonappropriated Fund (NAF) employee is an individual who is employed in and receives compensation from a Nonappropriated Fund Instrumentality (NAFI). NAF employees are federal employees, but they are not covered by most employment rules administered by the Office of Personnel Management (OPM), unless specifically provided by statute.
This column discusses NAF employee benefits including compensation, annual and sick leave, health and life insurance, long-term insurance and retirement. Also presented is how NAF service affects the retirement benefits for those NAF employees who become CSRS- or FERS-covered employees and who retire under CSRS or FERS.

Ed hosts a Financial Planning Webinar for FERS and CSRS Employees -

The Defense Civilian Personnel Advisory Service (DCPAS) establishes policy and provides clarification and interpretation of laws and government-wide regulations for NAF personnel. DCPAS delivers policy, guidance and technical support in the strategic design and analysis of NAF employment, NAF compensation, NAF performance management, NAF employee classification, benefits, work life, wage and salary and transition programs for more than 100,000 NAF civilian employees. NAF programs support Department of Defense Morale Welfare and Recreation (MWR) programs.

NAF Compensation Management

A pay band system covers NAF employees working in white-collar (non-craft and trades) positions. Six pay bands (NF-1 through NF-6) and the General Schedule GS-1 through Senior Executive Service equivalent cover the majority of NAF white-collar jobs. A separate pay band (CY-I and CY-II) covers NAF employees who are child and youth program caregivers. The minimum and maximum pay rates for the CY-I and CY-II pay bands are linked to the GS payrates in the locality where the job is located.

NAF Employee Annual and Sick Leave Policy

The DOD policy covering annual and sick leave for NAF employees is contained in DODI 1400.25 Volume 1406: “DOD Civilian Personnel Management System: NAF Attendance and Leave”. Regular category and approved flexible NAF employees accrue annual and sick leave hours while in pay status.

NAF Employee Insurance Benefits

NAF employees are eligible to enroll in the following group insurance benefits:

  • Health insurance. Employees pay 30 percent of the insurance premiums and the employee’s NAF employer pays the other 70 percent. For 2024, the insurance carrier is Aetna.
  • Life Insurance, and

Long-term care insurance. Offered through the Federal Long-Term Care Insurance Program (FLTCIP),

NAF Retirement Plans

To help attract and retain qualified and productive employees, each NAF employer provides eligible employees with an opportunity to participate in a retirement program consisting of a defined benefit (guaranteed pension) plan and a defined contribution (401(k)) plan. These plans are in addition to and in consideration of Social Security benefits. NAF employees do not receive coverage under CSRS or FERS and do not participate in the Thrift Savings Plan.

The two types of NAF retirements are discussed in more detail:

  • NAF retirement (defined benefit) plan. NAF employees contribute 2 percent of their gross salary each pay period to the NAF retirement plan, which is a guaranteed (defined benefit) pension plan. NAF management contributes 7.6 percent of the NAF employee’s gross. Both employee and management contributions are made to the Army NAF Retirement Trust which pays a retired NAF employee’s retirement benefits when he or she retires.

After contributing to the NAF retirement for 5 years, a NAF employee is guaranteed a monthly benefit for life once he or she retires. In the event of death and spouse can receive a monthly lifetime benefit if that option is selected at retirement. The more years a NAF employee works and contributes to the NAF retirement plan, the larger will be the NAF employees guaranteed pension. As a guaranteed pension, a retired NAF employee can never outlive his or her guaranteed pension.

A NAF employee may purchase up to five years of military service, provided the military service is not already providing the employee a retirement benefit, or the NAF employee has not used the military service in another company’s retirement plan.

  • 401(k) plan. NAF offers a 401(k)-retirement plan (a defined contribution plan meeting the requirements of a qualified retirement plan) to its employees with automatic enrollment. Employer matching schedule is 1 percent to the employee’s 1 percent, 2 percent to the employee’s 2 percent, 2.5 percent to the employee’s 3 percent, and 3 percent to the employee’s four percent. The 401(k) plan is managed by Fidelity Investments.

During 2024, NAF employees can contribute via payroll deduction a maximum of $23,000. Employees who will be over age 49 on December 31, 2024 (that is, employees born before January 1, 1975) can contribute an additional $7,500 in “catch-up” contribution for a total contribution during 2024 of $30,500. Employees are vested in employer matching contributions after three years of NAF service. Rollovers from other qualified retirement plans that a NAF employee may have participated in while working in private industry (for example, private company 401(k) plans) can be rolled over into the NAF 401(k) plans.

NAF Retirement PlansNAF Employees Retiring Under CSRS and FERS

The NAF Human Resources Office (HRO) is responsible for providing and processing forms for NAF employees retiring under CSRS or FERS. The NAF HRO will provide the employee’s completed retirement application package to OPM. Employees applying for immediate retirement under CSRS must complete          Form SF 2801 (Application for Immediate Retirement – CSRS) and accompanying forms. NAF employees applying for immediate retirement under FERS must complete Form SF 3107 (Application for Immediate Retirement – FERS) and accompanying forms.

NAF employees applying for a deferred CSRS annuity must request an application from the Office of Personnel Management (Civil Service Retirement System, Employee Service and Records Center, Boyars, PA 16017). For FERS employees applying for a deferred or postponed retirement, NAF employees should download from  Form RI 92-19 (Application for Deferred or Postponed Retirement).

For both CSRS and FERS immediate retirement, the NAF HRO will provide the NAF employee’s completed application package (Form SF 2801 or Form SF 3107, respectively) to OPM’s Retirement Processing Office.

Disability retirement requires completion of Form SF 3112 (Documentation in Support of Disability Retirement Application). Discontinued service retirement applications must contain OPM Form 1510 (Certification of Agency Offer of Position and Required Documentation) for both CSRS and FERS employees. For all CSRS and FERS retirements, the Individual Retirement Record must be submitted with the retirement package.

Health and Life Insurance for NAF Employees Retiring Under CSRS and FERS

NAF health and life insurance eligibility rules apply. The DoD NAF Health Benefits Program requires 15 years of cumulative participation in the NAF health insurance program in order to continue health insurance coverage in retirement. Continuous time in the FEHB program as of the day from a DoD APF position to a DoD NAF position will be credited towards this requirement. The move must have occurred without a break in service of more than three days.

The 15-year participation requirement is waived for employees who had five years of continuous FEHB enrollment at the time of an involuntary move to NAF. The NAF HRO must complete the NAF life and health forms and submit them to the serving NAF Benefits Office. That office will bill the retiree for the retiree’s share of the premium. If the employee is not eligible to carry NAF health insurance into retirement, the NAF HRO must advise of any Temporary Continuation of Coverage (TCC) eligibility. The applicable NAF Benefits Office is responsible for providing future NAF health and life insurance materials to those CSRS and FERS retirees eligible to continue NAF health and life insurance coverage.

NAF employees retiring under CSRS or FERS are not eligible for FEHB or FEGLI coverage.

Unused Annual and Sick Leave

NAF employees retiring under CSRS or FERS get paid in a lump-sum payment for all unused annual leave hours. The lump-sum payment is fully taxable to the retiring employee in the year the lump-sum payment is received.

NAF employees retiring under CSRS or FERS get credit for any unused sick leave hours. The unused sick leave hours are converted to months and days of service time using OPM’s 2087-hour sick leave conversion chart and added to an NAF employee’s service time under CSRS or FERS for CSRS or FERS annuity computation purposes.

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.

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Federal Retirement: Non-appropriated fund service