Questions & Answers

Q&A

EMPLOYMENT

THE FOLLOWING QUESTIONS

& ANSWERS were compiled by NARFE’s Federal Benefits Institute experts. NARFE does not provide legal, financial planning or tax advice or assistance.

CONTRIBUTIONS TO THE CIVIL SERVICE RETIREMENT AND DISABILITY FUND (CSRDF)

QI had previously taken a refund of my civil service retirement contributions upon leaving federal service many years ago. However, I was rehired in 2018 and I have now paid that back (plus interest). Is the amount I paid back tax deductible?

AThe Civil Service Retirement System (CSRS) or Federal Employees Retirement System (FERS) retirement contributions that are deducted from your salary or that you pay as a deposit/redeposit into the CSRDF are paid with after-tax money. However, once you are retired and begin receiving CSRS or FERS retirement benefits, you will be able to claim a small portion of your benefit each year on a tax-free basis, as it represents money you are receiving that was already taxed. Once your retirement application has been fully processed and adjudicated and you file your tax return, the total contributions that you have paid to the CSRDF are recovered through a calculation based on your life expectancy. If you take a refund of your retirement contributions rather than collect a life annuity under CSRS or FERS, you will only report the interest, if any, as taxable income.

You can learn more about reporting your retirement income in IRS publication 721, Tax Guide to U.S. Civil Service Retirement Benefits: www.irs.gov/forms-pubs/ about-publication-721.

THRIFT SAVINGS PLAN ANNUITY

QI plan to separate from federal service at age 57 with 22 years, but I will be postponing my FERS retirement benefit until age 60 to avoid a permanent reduction for early age under the MRA + 10 retirement rules. Will I be able to use money that I’ve saved in my Thrift Savings Plan (TSP) account to buy an annuity after I’ve left government service? Later, I would like to buy another TSP annuity when annuity rates are more favorable. Can I purchase more than one?

AOnce your agency payroll office has notified the TSP that you have separated from federal service, you can exercise any of your TSP withdrawal options at any time. Be aware that an annuity is not the same as a TSP installment payment. Once you purchase an annuity, you will not be able to change that election; however, you are permitted to purchase more than one TSP annuity. The minimum amount required to purchase an annuity is $3,500. In addition to the amount used to purchase your annuity, there are other factors that affect the amount of your monthly annuity payments: • The annuity option you choose.

For example, you can choose level payments or increasing payments that rise by 2 percent

each year. You can also protect your beneficiaries by adding a cash refund or 10-year certain feature, or you may purchase a joint life annuity. The features that are added to protect your annuity will lower your monthly payment. • Your age when your annuity is purchased. Remember that your payments will be larger if you are older at the time of purchase. • The age of your spouse or other joint annuitant if you choose a joint annuity, because the annuity will be computed over both life expectancies. Again, payments are larger if your joint life expectancy is lower. • The interest rate index when your annuity is purchased.

Since 2002, these rates have been as low as 1.375 percent and as high as 5.625 percent.

The rate is fixed for the life of your annuity at the time of purchase. Unlike buying a mortgage, when buying an annuity higher interest rates are more favorable.

In addition to the purchase of a TSP annuity, you may consider taking monthly, quarterly or annual installment payments directly from the balance of your TSP investment. With this option, you can change the frequency of the payments and the amount of each payment, and you can start and stop the payment. You can also exercise as many partial withdrawals as you need, as there is no limit on the number of withdrawals you can take after you retire—but processing times limit you to no more than one every 30 calendar days. You may also transfer some or all of your TSP balance to an IRA.

For more details on TSP withdrawal options, check out NARFE’s Guide to TSP Withdrawal Options, available on the NARFE website (www.narfe. org). You can also refer to the following booklets: Withdrawing From Your TSP Account, www. tsp.gov/publications/tspbk02. pdf, and TSP Annuities Fact Sheet, www.tsp.gov/publications/ tspfs24.pdf.

INVOLUNTARY SEPARATION/SEVERANCE VS. VOLUNTARY SEPARATION/VSIP

QI am age 63 with six years of FERS service. My position is being relocated to an office 600 miles away, and if I don’t relocate, my agency has informed me that it might have to terminate me involuntarily. If that happens, I was told that I would not qualify for severance pay. Is this true? Will I be entitled to a buyout payment or Voluntary Separation Incentive Payment (VSIP)?

ASince you are over age 62 with more than five years of service, you are entitled to an immediate retirement benefit under FERS. When eligible for an immediate retirement, regardless of whether you are being separated involuntarily or leaving by choice, you are not eligible for severance pay. This is true even if you choose not to apply for the retirement benefit. Here is a fact sheet regarding the rules for severance pay: www.opm.gov/policy-dataoversight/pay-leave/payadministration/fact-sheets/ severance-pay/.

VSIP authority, also known as buyout authority, allows agencies that are downsizing or restructuring to offer employees a lump-sum payment as an incentive to voluntarily separate. If offered, you would qualify for a VSIP (buyout) payment. You may want to ask your agency HR department whether it plans to offer a VSIP. The amount of the payment is computed based on the formula for a severance allowance, which means that even if the buyout has a maximum payout of $25,000, you will be entitled to one week’s basic pay for each year of civilian service up through 10 years, plus two weeks’ basic pay for each year of creditable service beyond 10 years. In addition, an age adjustment allowance of 2.5 percent is added for each full quarter of a year that you are over 40 years of age. This means that with six years of service, the allowance would be computed as six weeks of pay plus the age adjustment up to the maximum VSIP payment allowance. To learn more, go to www.opm. gov/policy-data-oversight/ workforce-restructuring/ voluntary-separation-incentivepayments/.

RETIREMENT

LONG-TERM CARE INSURANCE ELIGIBILITY

QAre those who already have dementia or Alzheimer’s still eligible to obtain long-term care (LTC) insurance through the Federal Long Term Care Insurance Program (FLTCIP)?

AUnfortunately, if someone has been diagnosed with dementia or Alzheimer’s disease before applying for LTC insurance through the FLTCIP, that’s a disqualifying condition. You can refer to Page 4 of the underwriting application using the following weblink to see a list of medical conditions that could disqualify an individual from securing LTC insurance: https://cdn.ltcfeds.com/planningtools/downloads/3.0-FullUnderwriting-Application.pdf.

Once you have purchased a FLTCIP policy, it will not be canceled as long as the insured doesn’t miss a premium payment on their LTC insurance. Premiums typically cease when the benefits are being used by the insured. You may be eligible to receive the benefits under your plan if a licensed health care practitioner has certified in the past 12 months that you are unable to perform, without substantial assistance from another person, at least two activities of daily living for an expected period of at least 90 days due to a loss of functional capacity, or you require substantial supervision due to a severe cognitive impairment.

The maximum number of years of coverage (known as the benefit period) that you can purchase with the currently available 3.0 version of the FLTCIP is five years (in addition to two-year and three-year benefit periods). The benefit period that you choose is the length of time benefits will be paid if you receive benefits each day equal to your full daily benefit amount (DBA). If you receive services that cost less than your DBA or you don’t receive services every day, your benefits can last longer than your benefit period. The benefit period and DBA are used to calculate the maximum lifetime benefit (MLB), the maximum amount your coverage can pay. To calculate your MLB, multiply your DBA by your benefit period (in days).

Of course, depending upon which inflation option you choose (future purchase versus automatic compounding), that will affect both your premium and the value of your policy in the future.

For more details, visit www. ltcfeds.com or give them a call at 1-800-LTC-FEDS (1-800-5823337 or TTY 1-800-843-3557 or international 1-571-730-5938) if you have additional questions regarding the program.

RECENTLY RETIRED CSRS OFFSET

QI retired recently as a CSRS Offset employee with 26 years of federal service. I have 29 years of substantial Social Security earnings. Ten of those years were while I was CSRS Offset, and the other 19 years comes from work that I did outside of my federal career. Would one additional year of substantial Social Security earnings negate any offset?

AFirst, congratulations on your retirement. In your case, there are two different reductions to discuss. First, the reduction or “offset” to your CSRS annuity. Second, the potential reduction to your earned Social Security benefit.

Since you have officially retired from federal service, the reduction to your CSRS annuity from OPM will be based on your 10 years of CSRS Offset service when you paid into both CSRS and Social Security. Those years and the total Social Security amount payable at retirement or age 62 (whichever is later) will be used to compute this offset. For more details about the offset to your annuity, refer to the Retirement Facts 13 Pamphlet titled, “CSRS Offset Retirement,” available at www.opm.gov/ retirement-services/publicationsforms/pamphlets/ri83-19.pdf.

In addition to the offset to your CSRS benefit, your earned Social Security benefit may be subject to a modified formula that will lower the amount of your benefit due to the Windfall Elimination Provision (WEP). You can be exempt from this provision by having 30 years of “substantial” earnings covered by FICA tax withholding. Since you have 29 years of such earnings, earning another year of substantial wages would make your Social Security benefit exempt from the WEP. Learn more about the WEP at www.ssa.gov/planners/retire/ wep.html.

TSP REQUIRED MINIMUM DISTRIBUTIONS

QIf I choose a specific monthly dollar amount that I want to receive from the TSP, how will I know whether that amount will meet the IRS required minimum distribution (RMD) for the year once I reach age 72? Do I have to compute this amount myself each year?

AAs you noted, per the Internal Revenue Code (IRC), you must begin receiving distributions from your account in the calendar year you become age 72 and are separated from federal service. Your entire TSP account—both traditional and Roth—is subject to these required minimum distributions (RMDs). RMDs are calculated using your age, your prior yearend account balance, and the IRS Uniform Lifetime Table.

You will fully or partly satisfy your RMD with any withdrawals you choose to make. If you don’t

make any withdrawals or if your withdrawals fall short of the required amount, the TSP will automatically send you the amount that’s still required.

The first year you are age 72 or older and separated from service is called your first distribution calendar year. If you do not withdraw enough to meet the requirement during your first distribution calendar year, the TSP must disburse your first RMD to you by April 1 of the following year. That date is called your required beginning date, and it happens during your second distribution calendar year. For administrative purposes, the TSP will issue this RMD on March 1 or the last business day before March 1 of your second distribution calendar year. Your RMD deadline for your second distribution calendar year is December 31 of that same year. If you do not withdraw enough to meet the requirement for that year, the TSP will send your remaining RMD in December. In the years that follow, you’ll have just one RMD, due December 31, and the TSP will continue to send any remaining RMD in December of each year should you fail to meet the requirement through withdrawals you initiate on your own.

For more details about RMDs, visit www.tsp.gov/publications/ tsp-775.pdf.

To obtain an answer to a federal benefits question, NARFE members should call 800-456-8410 and select option 2 for the Federal Benefits Institute; send the question by postal mail to NARFE Headquarters, ATTN: Federal Benefits; or submit it by email to fedbenefits@narfe.org.

NARFE AT YOUR SERVICE

At NARFE Headquarters, experts are available to answer questions and assist in helping with a variety of benefit matters.

CALL NARFE AT 800-456-8410,

OPTION 2

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