On June 6, 1986, the Federal Employee Retirement System (FERS) was created by Congress as a successor to the Civil Service Retirement System (CSRS). FERS became effective on January 1, 1987. All federal civilian employees who have retirement coverage since it became effective are covered under FERS.
FERS is a three-tiered retirement plan that consists of Social Security, the Defined Benefit Plan, and the Thrift Savings Plan (TSP). The Social Security and Thrift Savings Plan (TSP) components of FERS can follow an employee to his or her next place of employment or if he or she decides to leave the federal government before qualifying for a defined benefit retirement.
Federal employees covered under FERS will also be subject to full Social Security taxes. One of the requirements of FERS is that federal employees are responsible for their share of the social security tax every pay period. Any yearly earnings that are more than the greatest taxable wage base will not be subjected to Social Security taxes.
The Federal Retirement Thrift Investment Board directs the Thrift Savings Plan. A TSP account will be set up automatically. Employees may make contributions up to the maximum established by the IRS each year. Contributions to the TSP can be either tax-deferred or Roth in nature. The employees’ respective agency will contribute one percent of basic pay earned for the specific pay period. The employees’ agency will also match a portion of what the employee has contributed. The maximum government contribution is 5 percent.
In what is a rarity for the majority of workers today, the FERS defined benefit will provide a guaranteed stream of income. The FERS defined benefit will be an important stream of income during your retirement. Understanding how it works will help you determine when it is the optimal time for you to retire.
What Is The FERS Defined Benefit?
After your retirement, you will be paid a monthly benefit from the FERS based upon the number of years you worked under FERS, your current income, and the age you retired. Thus, the FERS Defined Benefit is known as the monthly annuity. For this benefit, the majority of federal employees will contribute 0.8 percent of their basic pay each pay period toward their future annuity.
When Will I Be Eligible for the FERS Defined Benefit?
Generally, there will be two eligibility options that will have an impact on the FERS benefits you receive: Immediate Retirement and Early Retirement. To be eligible for unreduced benefits, you will need to fulfill at least one of the following requirements:
- Reach the Minimum Retirement Age (MRAs will range from 55-57, depending on your birth year)
- Are 62 years of age with 5 years of creditable service
- Are 60 years of age with 20 years of creditable service
The FERS Defined Benefit and Early Retirement
According to a report published by the Congressional Research Service, the average voluntary retirement age for federal employees is 63. This is an increase from 30 years ago when the average voluntary retirement age was 61.3. Some federal employees are fortunate enough to leave the workforce early, but this will have advantages and disadvantages. Early retirement can have an impact on your FERS benefits.
Federal employees may have the opportunity to retire early if they have reached the Minimum Retirement Age and have obtained 10 years of creditable service. However, retiring before the age of 62 can lead to the defined benefit being reduced by 5 percent for each year you are under the age of 62 (or age 60 if you have 20 years of creditable service).
FERS Retiree Annuity Supplement
The FERS Retiree Annuity Supplement can be paid in addition to the FERS annuity benefits you receive. The annuity supplement will represent what you would receive from your FERS service from the SSA. The FERS annuity supplement will be calculated as if you met the required age to receive SSA benefits.
Who Will Not Be Eligible For The FERS Annuity Supplement?
If you are 62 when you retire, you will be eligible to receive Social Security retirement benefits rather than the FERS benefits. Federal employees who resign without having enough service or without being old enough to be eligible for immediate retirement will not be eligible for the annuity supplement, but there will be an opportunity to receive a deferred retirement.
Federal employees who have reached their Minimum Retirement Age and have obtained less than 30 years of service, but more than 10 years of service will not be eligible. Also, those retiring at the age of 60 or 61 years of age with less than 20 years of service, but more than 10 years will not be eligible for the annuity supplement. However, he or she may choose to delay the retirement application. Also, disability retirees and anyone who is eligible for a deferred annuity are not eligible.
How Long Will Eligibility For The FERS Annuity Supplement Continue?
Eligibility for the supplement will continue until:
- The last day of the month in which you reach the age of 62
- The last day of the month before the first month for which you would be eligible to receive your Social Security benefits
Once the annuity supplement comes to an end, you will be eligible for Social Security benefits. If you accept the supplemental annuity benefits, you will need to plan to begin your Social Security benefits at the age of 62 or have enough assets that will allow you to cover your cost of living until you file for Social Security.
Social Security Benefits
If you are considering early retirement, the chances are high that you will also file for Social Security benefits early. You can start receiving Social Security benefits as early as age 62, but your benefits will be reduced for each month you begin receiving Social Security before reaching your full retirement age.
Thrift Savings Plan (TSP)
As with the majority of retirement accounts, you will not have complete access to your Thrift Savings Plan until you are 59 1/2 or older. If any withdrawals are made before you reach this age, you will be subjected to an early withdrawal tax penalty of 10 percent (in addition to the standard taxes).
Divorce Decree and FERS
A court order related to a separation or a divorce can have a significant impact on your federal benefits. In community property states, there is a presumption that there will be an equal division upon divorce. Pension plans, including FERS and its TSP will be considered community property and can be divided upon divorce. These types of cases can be very specific and will need to be reviewed individually to perfect and execute claims from the divorce order.
In equitable division states, the court handling the divorce will determine what share of each pension the former spouse of the participant receives. Check with local counsel to determine how your state divides FERS pensions and the TSP.
Willick Law Group has extensive experience in representing and advising federal employees on the FERS retirement and issues related to their retirement plan.
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