Over the last several weeks, there have been thousands of federal employees who have received notice that they are or will be involuntarily separated from federal service. Those employees who have 20 or more years of creditable federal service may be eligible for a discontinued service retirement (DSR).
A discontinued service retirement means that an employee is eligible to retire and be able to immediately start collecting their CSRS or FERS annuity. This column discusses the DSR option and rules for CSRS and FERS employees.
SEE ALSO: Understanding the FERS Retirement Options
What is an involuntary separation?
An involuntary separation that may qualify an employee for a DSR is any separation against the will and without the consent of the employee other than a separation for cause on charges of misconduct or delinquency. These non-disciplinary actions are documented on the employee’s Form SF 50 (Notice of Personnel Action) as “terminations”. The following are examples of separations that are considered involuntary for DSR purposes:
• Reduction-in-force (RIF)
• Abolishment of position
• Lack of funds
• Transfer of function outside commuting area
• Reassignment outside commuting area when no ability agreement exists, and
• Separation during probation because of failure to qualify due to performance (not misconduct).
An employee who is involuntarily separated is eligible for a DSR CSRS or FERS annuity if all of the following conditions are met:
• Age and service requirements.
• Minimum civilian service requirement
• “One-of-of-two” years requirement (CSRS only), and
• No declination of a reasonable offer.
Minimum age and service
At separation, the employee must meet one of the age and service requirements in the following table:
Note 1: If an employee has the minimum five years of creditable civilian service, creditable military service and temporary service may be used to meet the balance of service necessary for a DSR.
Note 2: Public Law 104-208 gives employees who are involuntarily separated the right to use their unused annual leave hours for retirement eligibility, and continued FEHB program health benefits and FEGLI life insurance benefits.
Note 3: If an employee does not qualify for a DSR but is eligible for voluntary (immediate) retirement and the nature of separation is involuntary, then the commencing date of the annuity is the day after separation/last day of pay. However, accrued and unused sick leave hours may not be used to meet the minimum service requirements for both a DSR and a voluntary retirement.
Minimum civilian service
An employee must have at least five years of civilian creditable service to be eligible for a DSR. Creditable civilian service for this purpose includes:
1. Service for which CSRS deductions were deducted from a CSRS or a CSRS Offset employee’s salary. This is the case even if the CSRS deductions were refunded and not redeposited.
2. Service for which FERS deductions were deducted from a FERS employee’s salary, even if FERS deductions were refunded and not redeposited.
3. Non-deduction service (temporary or intermittent service) for CSRS and CSRS Offset employees, and
4. Non-deduction service (temporary or intermittent service) before January 1989 for FERS employees for which a full deposit was made.
Separation from a covered job position
An employee who is applying for a DSR must be separated from a job covered by either CSRS or FERS retirement deductions.
“One-out-of-two” requirement for CSRS/CSRS Offset employees
A CSRS/CSRS Offset employee who is eligible for a DSR must be covered by CSRS/CSRS Offset for at least one year within the two-year period immediately preceding the separation for which the CSRS annuity is based. The following examples illustrate. The CSRS or CSRS Offset employees in both examples are assumed to be at least 50 years old.
Note that FERS employees have no “one-out-of-two” service requirement.
Reasonable offer
An employee does not qualify for DSR if an agency makes the employee a reasonable offer of another position in the employee’s agency. A job offer that meets all of the following conditions is a “reasonable” offer:
1. The agency offering the position must be in writing.
2. The employee must meet established qualified requirements for the position.
3. The position offered must be in the employee’s agency.
4. The position offered must be within the employee’s commuting area unless the employee is under a geographic mobility agreement.
5. The position offered must be of the same tenure, meaning with the same expectations of continued employment and the same:
– Service (competitive, excepted, Services Executive Service).
– Type (career, indefinite, etc.).
– work schedule. A full-time employee must be offered a full-time position. A part-time employee must be offered a part-time position with at least the same number of hours.
6. The offered position’s salary must not be lower than the equivalent of two grade/pay levels below the employee’s current grade/pay level.
Benefits under Discontinued Service Retirement
A CSRS or FERS employee who is eligible for a DSR will have his or her CSRS or FERS annuity calculated based on the number of years of creditable service he or she has on the day the employee separates from federal service. The employee’s high-three average salary is also determined as of the day of separation from federal service. Unused sick leave hours on the retirement day will be converted into months and days of service and added to existing creditable service time for the purpose of calculating the CSRS or FERS annuity.
For CSRS or CSRS Offset employees, the CSRS annuity is reduced one-sixth of one percent for each full month (two percent per year) if the employee is under age 55. The CSRS annuity will not revert back to what it is without the penalty when the CSRS or CSRS Offset retiree becomes age 55.
There is no reduction to the calculated starting FERS annuity for FERS employees who qualify for a DSR if the employee is under minimum retirement age (MRA) (age 55 to age 57, depending on the year the employee was born).
Commencing date of CSRS or FERS annuity
A DSR CSRS or FERS annuity commences on the earlier of the day an employee separates from federal service or on the day after the employee’s salary ceases and the DSR applicant meets the age and service requirements for the annuity.
Annuity cost-of-living adjustment (COLA)
A CSRS or CSRS Offset employee who meets the requirements for a DSR is eligible to receive his or her first CSRS annuity the year after he or she retires. A FERS employee who meets the requirements for a DSR is not eligible to receive his or her first FERS annuity COLA until the year after he or she becomes age 62.
FERS Retiree Annuity Supplement
A FERS employee who meets the requirement for a DSR will not be eligible to receive the retirement annuity supplement (RAS) until the month the annuitant reaches his or her MRA. The RAS will cease the month the FERS annuitant becomes age 62.
FEHB program health insurance and FEGLI life insurance benefits
Both CSRS and FERS employees who are eligible to retire under a DSR may retain their FEHB program health insurance benefits in retirement, for themselves and for their eligible family members. In order for this to occur, the employee must have been enrolled continuously in the FEHB program during the five-year period ending on the employee’s separation date from federal service.
The same five-year continuous enrollment rule for keeping FEGLI life insurance applies to retiring employees under a DSR who want to keep their FEGLI life insurance throughout retirement.
Thrift Savings Plan
In general (with the exception of Special Provision employees), federal employees can make penalty-free (no 10 percent early withdrawal penalty) withdrawals from their traditional TSP account if they leave federal service, or retire from federal service, sometime during the year or after the year they become age 55. If they retire from federal service under a DSR before age 55, then they will have to wait to age 59.5 to make penalty-free withdrawals from their traditional TSP account.
However, there are three ways an employee under age 55 retires under a DSR can make a penalty-free withdrawal from their traditional TSP. The three options are:
• Purchase a TSP annuity using all or a portion of a traditional TSP account.
• Elect to receive monthly TSP distributions based on the TSP participant’s life expectancy.
• Direct rollover of a portion of a traditional TSP to a traditional IRA and set up a “72(t) distribution” from the traditional IRA. The distribution from the traditional IRA under Internal Revenue Code Section 72(t) can be made in one of three ways: (a) Life expectancy; (b) Amortization; and (c) Annuitization.
Federal employees cannot access their Roth TSP accounts until they are age 59.5 and it has been at least five years since January 1st of the year an employee made his or her first Roth TSP contribution.
Survivor benefits
An employee who is eligible for DSR can provide CSRS and FERS survivor benefits for eligible family members, including:
• A CSRS or FERS survivor annuity to one individual. The most logical and most often designated beneficiary is a current spouse.
• Children survivor annuities pad to children under the age of 18, or age 18 to 22 if the children are full-time students, and
• FEHB program and Federal Employee Dental and Vision Insurance Program (FEDVIP) benefits.
Beneficiary forms
Those employees who meet the requirements of DSR are advised to make certain all beneficiary forms are completed and up-to-date. These beneficiary forms include:
• Form SF 2802 (Designation of beneficiary, CSRS contributions) (CSRS and CSRS Offset employees).
• Form SF 3102 (Designation of beneficiary, FERS contributions) (FERS employees).
• Form TSP-3 (Designation of beneficiary, TSP), and
• Form SF 2823 (Designation of beneficiary, FEGLI life insurance).