While many retired and former servicemembers serve as federal civilian employees after hanging up their uniform – and many of their spouses spend time in civil service at various points of their careers – not all federal workers put in enough time to become eligible for retirement pay.
When that happens, workers covered under the Federal Employees Retirement System (FERS) can ask that retirement contributions be returned in a lump-sum payment. Before diving into details, two notes to consider:
- Those with at least five years of creditable service can wait until retirement age to apply for monthly retirement benefit payments via a deferred retirement. Learn more about that option at this link.
- Those who request a refund and then return to federal service, and were covered under FERS on or after Oct. 28, 2009, can redeposit the refund so it will be included in a civil service retirement annuity.
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How to Obtain a Refund
Those about to leave civil service should talk with their benefits adviser and request a refund of retirement contributions. The adviser will provide the proper form for completion.
Former civil servants can download Standard Form (SF) 3106, Application for Refund of Retirement Deductions (FERS), from the Office of Personnel Management (OPM) website; the form includes an SF-3106-A, Current/Former Spouse's Notification for Refund Retirement Deductions.
Those who’ve been out of the civil service for 30 days or less can send their form to their servicing personnel office. Those out longer should submit it to: OPM, Retirement Operations Center, PO Box 45, Boyers, PA 16017.
Interest Earned and Taxes
Interest accrues on retirement contributions for those who worked more than a year and is paid at the same rate that is paid for government securities.
Retirement contributions are not taxable, but the interest payment is.
Rollover of Refund Payment
Instead of taking a lump-sum payment, former employees may roll over the amount, including voluntary contributions and applicable interest, to an eligible Individual Retirement Account (IRA) or employer-sponsored plan. Payment can be made either to the former employee or directly to the IRA/plan.
OPM is required to withhold federal income tax from taxable payments over $200 at the rate of 20% However, former employees may choose to take all or part of these payments in a direct rollover to an IRA or an employer-sponsored retirement plan that accepts rollovers. The taxable portion can be rolled over into the Thrift Savings Plan. Former employees who make this election will not have federal taxes withheld by OPM.
In other cases, the payment will be taxed in the year in which it is received unless, within 60 days after receiving it, the former employee rolls it over into an IRA or retirement plan that accepts rollovers. Up to 100% of the eligible distribution (including the 20% withholding) may be rolled over; the 20% must be replaced within the 60-day period.
Taxes are owed on any amount not rolled over. Example: If 80% of the distribution is rolled over, taxes are owed on the remaining 20%. Find more information about the taxation of payments from qualified retirement plans in the following Internal Revenue Service publications:
- IRS Publication 575, Pension and Annuity Income
- IRS Publication 590, Individual Retirement Arrangements
- IRS Publication 721, Tax Guide to U.S. Civil Service Retirement System Payments
- IRS Form 4972, Tax on Lump-Sum Distributions
OPM will not withhold any amount for federal income tax if the total taxable lump sum is less than $200. Former employees with payments above $200 will be asked about a rollover election.
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