With a new Presidential administration and a new Congress taking office in January 2025, there has been much discussion in Washington on reducing the size of the federal workforce. Possible reductions-in-force (RIFs), discontinued service retirements and early retirements are resulting in many FERS-covered employees seriously considering voluntarily retiring in 2025. To do so, these employees must be eligible to retire immediately by meeting minimum age and minimum service years requirements.
While there are employees who have met the minimum age retirement requirement, some of these employees have not met the minimum number of years of service requirement. These employees have worked as full-time or part-time permanent FERS-covered employees. Prior to being hired as a permanent employee, some of these employees may have been employed as temporary employees in the federal government and/or served on active duty in the Uniformed Services and may be eligible to make full deposits for temporary (“non-deduction”) service and/or active-duty military service. The purpose of these deposits is to get service credit for retirement eligibility purposes. Other employees may have been initially hired as permanent employees, worked a certain number of years and then left federal service. When they left federal service, they voluntarily withdrew their contributions to the FERS Retirement and Disability Fund. They subsequently returned to federal service and had the option of “redepositing” their withdrawn FERS contributions but have not.
In the first of three FEDZONE columns discussing deposits and redeposits, this column discusses deposits for temporary (“non-deduction”) time. The purpose of these columns is to make FERS-covered employees aware of how important deposits and redeposits are with respect to adding to an employee’s existing number of years of permanent service, possibly allowing an employee to retire earlier.
Making a deposit for “non-deduction” service
A permanent federal employee covered by FERS may have had prior service with the federal government in which the employee was not contributing to any retirement system covering permanent federal employees. They were not contributing to the CSRS, FERS, Foreign Service Pension System, Federal Reserve System Bank Retirement or any other retirement system available to permanent employees. This service is called “non-deduction” federal service. For example, a FERS-covered employee prior to being hired as a permanent employee served in the Peace Corps or in VISTA.Upon being initially hired as a permanent employee under FERS, an individual who previously had “non-deduction” service with the federal government should have been asked by his or her Personnel or Human Resources Office whether he or she would like to make a deposit for the “non-deduction” service. By making a full deposit for the “non-deduction” time, the employee gets credit for the purposes of: (1) Eligibility: eligibility to retire; and (2) Computation: computation of the FERS annuity. Making a full deposit for prior “non-deduction” service could allow the employee to retire sooner by adding years of service to help meet the minimum years of service requirement. A full deposit for “non-deduction”
service will also result in the employee receiving a permanently larger FERS annuity. This is because additional years of service are used in the computation of the FERS annuity.
Types of federal “non-deduction” service for which a FERS deposit can be made
A deposit for “non-deduction” service for FERS retirement may be made for:
- Any period of creditable civilian service performed before January 1,1989 during which no FERS retirement deductions were withheld from an employee’s bi-weekly salary.
- Any period of civilian service during which CSRS deductions were withheld form a CSRS employee’s salary and were then refunded to the employee based on application SF 2802 (Application for Refund of CSRS Retirement Contributions) filed by the employee before he or she became reemployed in federal service and covered by the FERS retirement system.
- Certain periods of civilian service performed under other retirement systems for federal employees, such as the Federal Reserve Bank retirement system.
- Any period of Peache Corps or VISTA volunteer service, excluding training time, regardless of when the service was performed.
A deposit for temporary service cannot be made for the following types of service:
- Temporary federal service occurring after December 31, 1988, with the exception of Peace Corps and VISTA volunteer service.
- Any federal service which is not creditable under FERS, such as non-appropriated fund (NAF) service.
- Time covered by a lump-sum payment for unused annual leave hours.
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Amount of a deposit for temporary (“non-deduction”) service under FERS
The amount of a deposit for temporary (“non-deduction”) service FERS is 1.3 percent of the “basic pay” a FERS employee earned during a period of temporary service. The 1.3 percentage rate applies regardless of whether FERS deductions would have been taken at a percentage rate higher or lower than 1.3 percent at the time of the employee’s temporary service. If there are multiple periods of temporary service in which deposits can be made, then a full deposit for each period should be made in order for an employee to receive full credit for FERS retirement eligibility and FERS annuity computation purposes.
Interest will likely be owed on temporary (“non-deduction”) service deposits. The interest charges start accruing on the unpaid balance of the deposit starting on the two-year anniversary of the FERS employee’s initial hire into federal service as a permanent employee. Interest rates vary by year, as shown in the following table:.
FERS Interest Rates by Year for Temporary Service Deposits
| 1985 | 13.00% | 2005 | 4.375% |
| 1986 | 11.125% | 2006 | 4.125% |
| 1987 | 9.00% | 2007 | 4.875% |
| 1988 | 8.357% | 2008 | 4.75% |
| 1989 | 9.125% | 2009 | 3.875% |
| 1990 | 8.75% | 2010 | 3.125% |
| 1991 | 8.625% | 2011 | 2.75% |
| 1992 | 8.125% | 2012 | 2.25% |
| 1993 | 7.125% | 2013 | 1.625% |
| 1994 | 6.25% | 2014 | 1.625% |
| 1995 | 7.00% | 2015 | 2.00% |
| 1996 | 6.875% | 2016 | 2.00% |
| 1997 | 6.875% | 2017 | 1.875% |
| 1998 | 6.75% | 2018 | 2.125% |
| 1999 | 5.75% | 2019 | 2.750% |
| 2000 | 5.875% | 2020 | 2.25% |
| 2001 | 6.375% | 2021 | 1.375% |
| 2002 | 5.50% | 2022 | 1.375% |
| 2003 | 5.00% | 2023 | 1.875% |
| 2004 | 3.875% | 2024 | 3.750% |
It needs to be emphasized that a FERS employee with prior temporary (“non-deduction” )service is not required to make a deposit for his or her temporary service and will not be penalized if a deposit is not made. But making a full deposit can only benefit a FERS employee for the purpose of FERS retirement eligibility (namely, adding years of service that could allow the employee to retire earlier than expected) and for the purpose of FERS annuity computation (namely, permanently increasing the FERS annuity by adding the years of service when OPM’s Retirement Office computes the annuity).
The following two examples illustrate these two benefits associated with making a full temporary deposit.
Example 1. Elizabeth, age 60, entered federal service in 2008. As of January 1, 2025, Elizabeth has 16 years of federal service under FERS. During 1985 -1989, Elizabeth served in the Peace Corps. When she entered federal service in 2008, Elizabeth was not told of her eligibility to make a deposit for her four years of Peace Corps service. When she contacted her Personnel Office that she wanted to make a full deposit, her Personnel Office said that she owes a deposit of $3,945 including interest. If Elizabeth makes a full deposit of $3,945, the following will occur:
- Elizabeth’s will be eligible for immediate retirement at age 60 because she will then have 20 years of service, and
- Elizabeth’s annuity will increase by four percent (one percent per year for four years of “non-deduction” service) .Assuming Elizabeth’s high-three average salary is $110,000, her FERS annuity will be increased annually by four percent of $110,000, or $4,400 per year.
In other words, by making a full deposit of $3,945 for her four years of Peace Corp service Elizabeth will be able to retire immediately and recoup her “non-deduction” service deposit of $3,945 in less than 11 months after she retires, as shown here:
($3,945/$4,400) x 12 months = 10.76 months
Example 2. Frank, age 65, was employed in federal service between 1980 and 1983. He left federal service in 1984 and requested a refund of his three years of CSRS contributions. Frank reentered federal service in 2021 and currently has three years of FERS-covered service. Since Frank has three years of federal service under FERS as of January 1, 2025, he is not eligible to retire. But if Frank makes a full deposit for his three years of withdrawn CSRS service, he will then have a total of six years of FERS service and eligible to retire immediately. This is because he is over age 62 and will have at least five years of creditable FERS service.
How FERS employees can make a deposit for “non-deduction” service?
FERS employees who have prior “non-deduction” service for which they want to make a deposit need to download Form SF 3108 (Application to Make Service Payment). They should fill in as much of the form as they can, and then submit the form to their Human Resources Office or Personnel Office. Either office must certify the form and then send the completed form to the Office of Personnel Management’s Retirement Operations center. That office will process the application, computing the amount of the deposit including interest, and then send a bill to the employee for the total amount due. Instructions for how the employee can make payment will also be included in the instructions.
Employees with prior “non-deduction service” and who plan to retire within the next six months are advised to not file Form SF 3108. If an employee wants to make a deposit for “non-deduction” service, then the employee should be aware that it will take OPM at least six months to certify the application and for the employee to then complete making the full amount of the deposit before the employee’s retirement date.
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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.