Ed Zurndorfer explains the Spousal Survivor Benefits for CSRS and FERS- the Basic Employee Death Benefit
The basic employee death benefit (BEDB) is a lump sum death benefit payment made to the surviving spouse of a deceased employee covered by the Federal Employees Retirement System (FERS). This column discusses what the requirements are in order for a surviving spouse to receive the BEDB, the amount of the BEDB, payment options to the surviving spouse, and the Federal income tax consequences of the BEDB.
Requirements for a Surviving Spouse to Receive the BEDB
In order for a surviving spouse to receive the BEDB, the surviving spouse must have been married to a FERS-covered employee who, at the time of his or her death while in Federal service, must have had at least 18 months of Federal service. In determining whether an employee completed 18 months of potentially creditable civilian service, the following service times are included:
- Prior service included in a CSRS component, including refunded CSRS service;
- Prior CSRS Offset service for which the employee received a refund before being covered by FERS;
- Prior FERS service for which FERS retirement contributions remain to the employee’s credit; or
- Nondeduction (temporary or seasonal) service performed prior to Jan 1, 1989, regardless of whether a deposit for such service has been made.
For purposes of the 18-month requirement, creditable civilian service does not include:
- Refunded FERS service;
- Nondeduction (temporary or seasonal service) performed after Dec. 31, 1988; and
- Service performed on or after Jan. 1, 1989 under another retirement system for Federal employees. Such service is not creditable under FERS for any purpose. The exception is service that is creditable under the Foreign Service Pension System (FSPS) provided that the survivor: (1) waives credit for the service under the FSPS; and (2) makes a deposit for the service.
Amount of the Basic Employee Death Benefit
The BEDB is equal to: (1) $15,000 increased by all CSRS cost-of-living allowances or COLA’s beginning Dec. 1, 1987 plus; (2) 50 percent of the employee’s final gross salary – the employee’s current SF 50 salary, or the high-3 average salary, if larger. The $15,000 has increased since Dec. 1, 1987, to its current (2018) amount of $33,072.03.
The high-3 average salary for the BEDB is computed the same way as for the FERS annuity purposes. If the deceased FERS employee had less than three years of service at the time of his or her death, then the salary is simply averaged for the total period of service. The following example illustrates:
Wendy, age 45 and a FERS employee, had 12 years of Federal service when she died on Aug. 31, 2018. Wendy was married to Thomas at the time of her death. Wendy’s SF 50 salary at the time of her death was $106,500 while her high-3 average salary was computed to be $105,000. 50 percent of $106,500 is $53,250. Thomas is therefore entitled to a BEDB equal to:
$33,072 plus $53,250, or $86,322.
Note that with the recent announcement that the 2019 CSRS COLA effective Jan. 1, 2019 will be 2.8 percent, the $33,072 amount in effect during 2018 will increase effective Jan. 1, 2019 to:
$33,072 times 1.028, or $33,998.
Payment Options of the BEDB for the Surviving Spouse
Using Form SF 3104B, a surviving spouse must elect whether to receive the BEDB in: (1) one payment, including a rollover option (see below); or (2) in 36 monthly payments.
The reason why a surviving spouse may elect not to receive a lump sum payment (that is paid out entirely shortly after the deceased employee’s payroll office determines the exact amount) is because of income tax reasons. The lump-sum payment is fully includable in the surviving spouse’s income and taxable, and a lump sum payment received in a particular year could result in dire tax consequences for the surviving spouse. By having the BEDB paid out over three years (36 months), the tax burden can be spread over that period and will likely result in less overall taxes paid.
To determine the amount of each monthly payment, the BEDB amount is multiplied by the factor appropriate for the employee’s date of death. The current factor used to determine the monthly installment is 0.0299522. Additional information on this can be found in the Federal Register.
Returning to the example, if Thomas elects to receive his BEDB in 36 monthly payments, then his monthly installment payment will be computed as:
BEDB $86,322
Factor x .0299522
Monthly installment payment $2,585.53
The total amount paid in 36 installment payments will exceed the BEDB since the installment payments include interest. In this example, over 36 months Thomas will receive:
36 times $2,585.53, or $93,079
The $93,079 less $86,322, or $6,757, is the total interest paid over 36 months.
The spouse may at any time elect to stop receiving the BEDB in installment payments and receive a lump sum payment of the unexpended balance. The amount of the lump sum payment will be less than the sum of the remaining payments because the interest stops on the date of the last payment.
If the surviving spouse elects installment payments but dies before the completion of these payments, then any unexpended balance is paid in a lump sum to the surviving spouse’s next of kin. The amount of the lump-sum payment will be less than the sum of the remaining payments since the interest stops on the date of the last payment.
BEDB Rollover into a Traditional IRA or the TSP
Surviving spouses have the opportunity to directly rollover the BEDB into a traditional IRA. If the surviving spouse is a Federal employee or was a Federal employee with a traditional Thrift Savings Plan (TSP) account, then the surviving spouse can request a BEDB direct rollover into his or her TSP account. If not rolled over, taxable lump sums paid directly to a surviving spouse are subject to mandatory 20 percent Federal income tax withholding.
Any surviving spouse who is eligible to receive a BEDB should be given the IRA or TSP rollover option information. The rollover election can be submitted with the application for FERS death benefits,
Form SF 3104B. The IRA/TSP rollover option is included in section 5 of Form SF 3104B.
If no rollover election is made with SF 3104B, then OPM will send the surviving spouse of a deceased FERS employee the rollover election information and an election form after OPM computes the BEDB. This takes 30 to 60 days after OPM receives Form SF 3104B and supporting documentation.
Federal Income Tax Consequences of the BEDB
BEDB payments made to a spouse are fully taxable to the receiving surviving spouse, subject to both Federal and, if applicable, state income taxes. Since the BEDB is subject to ordinary and not preferential income tax rates, a lump sum payment could result in a surviving spouse being pushed into the highest marginal tax brackets.
Surviving spouses should, therefore, consider the alternatives to a lump sum payment including installment payments over 36 months or the rollover option to a traditional IRA. A disadvantage to a rollover to a traditional IRA is that the surviving spouse would have to be at least age 59.5 to avoid paying a 10 percent early withdrawal penalty when withdrawing from the rollover traditional IRA. On the other hand, BEDB installment payments are not subject to any early withdrawal penalty, no matter the age of the surviving spouse.
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.
