What Is the FERS Basic Benefit Plan?

It’s never too early for individuals to begin planning for retirement, and the earlier, the better. Retirement benefits vary based on whether someone is employed by the government or a private business. Private and non-profit businesses frequently offer 401(k) defined contribution plans as part of their retirement benefits, with a few still offering pension plans. Employees of private and non-profit organizations also have access to social security benefits set up through the federal government.

For federal employees, retirement benefits are offered as part of the Federal Employees Retirement System (FERS). FERS was created by Congress in 1986 and became effective on January 1, 1987. Federal employees receive retirement benefits that consist of three components:

• Social Security
• Thrift Savings Plan (TSP)
• Basic Benefit (also referred to as a Pension or Annuity)

Social Security is what most are familiar with and what U.S. citizens will receive upon retirement. A certain amount is taken out of employees’ paychecks until retirement, at which time they can begin drawing Social Security, assuming certain criteria are met.

Thrift Savings Plans (TSP) are defined contribution plans for federal employees. Employees contribute to the TSP. An agency or service can also contribute to a TSP if the employee is eligible to receive agency or service contributions.

If a federal employee chooses to leave a federal employer, their TSP and Social Security go with them. However, the FERS Basic Benefit Plan remains with the agency until the employee retires.

What Is the FERS Basic Benefit Plan?

Federal employees have access to the FERS Basic Benefit plan that allows them or their agencies to contribute a portion of the employee’s pay into a plan that will payout in the form of a monthly pension upon retirement. Receiving benefits is contingent upon the employee meeting specific requirements under the plan’s provisions for participation.

How Much Is Contributed to the FERS Basic Benefit Plan?

Like Social Security benefits that most U.S. citizens will receive, the Basic Benefit Plan is an income stream for federal employees guaranteed upon retirement if requirements for the plan have been met. The level of benefits is based on the federal employee’s age, salary, and length of credible service.

One part of the Basic Benefit Plan is funded by the agency, and the other is funded by the employee. The amount the employee contributes is based on their hire date.

• For an employee hired between January 1, 1987 and December 31, 2012, a total of 7% of their base salary would be deducted, with 6.2% going towards Social Security and 0.8% going towards the FERS Basic Benefit Plan.
• For those hired between January 1, 2013 and December 31, 2013, a total of 9.3% of their base salary would be deducted, with 6.2% going towards Social Security and 3.1% going towards the FERS Basic Benefit Plan.
• For those hired after January 1, 2014, a total of 10.6% of their base salary would be deducted, with 6.2% going towards Social Security and 4.4% going towards the FERS Basic Benefit Plan.

As people continue to live longer lives with the advancement of medical support, the FERS Basic Benefit Plan contribution is adjusted by Congress.

Is the FERS Basic Benefit Plan a Pension or an Annuity?

A FERS Basic Benefit Plan is sometimes referred to as a pension and other times as an annuity.

A pension is a retirement benefit that you can only receive from an employer. With a pension, employees work for a certain period of time for an employer, and the employer agrees to pay them a retirement benefit for the rest of their lives once they retire.

An annuity can come from an employer but doesn’t always. For example, several insurance companies sell annuities, and you don’t have to work for them to purchase them.

Based on these definitions, a FERS Basic Benefit Plan is easier explained as a pension plan vs. an annuity when attempting to clarify retirement benefits. However, the OPM website frequently refers to the benefit calculation as an “annuity.”

How Is the FERS Pension Benefit Calculated?

The hire date of a federal employee only indicates how much they will contribute to the FERS Basic Benefit Plan. It does not indicate how much their benefits will be upon retirement.

An employee’s FERS Basic Benefit is calculated by multiplying the average pay of the “high 3”, the length of credible service, and a factor of typically 1% of credible service.

FERS Basic Benefit Calculation

(The “High 3” Average X Length of Credible Service X Multiplier)/12 = Monthly Annuity Payment

The “High 3” Average

The average of the “high 3” is the average of the highest basic pay from 36 consecutive months of employment before retirement. The “high 3” could be the last three years of employment, or it can be another consecutive 36 months of employment—the determining factor is the highest base pay average of any given 36 months. Basic pay does not include cash awards, military pay, bonuses, holiday pay, overtime pay, or travel pay.

Length of Credible Service

Length of credible service is calculated by adding the number of years, months, and days of civilian service, unused sick leave, and military leave. The total is then rounded down to the nearest month. For example, if someone has 21 years, 9 months, and 20 days of credible service, their credible service total would be 21 years and 9 months, or 21.75 years.

Multiplier/Percentage

The percentage generally used to calculate the FERS Pension amount is 1% of credible service. There are some exceptions to this rule:

• When a federal employee retires after the age of 62 with a minimum 20 years of credible service, the percentage used increases to 1.1%.
• Exceptions exist for law enforcement officers, firefighters, nuclear materials couriers, supreme court police, air traffic controllers, capitol police, and congressional employees or congress members or a combination of the two.
• A different percentage is used for disability computation.
• Exceptions exist for those that transferred into the FERS.

Details regarding these exemptions can be found on the OPM website.

Example Calculations

Suppose Jim retires at age 60 with 33 years and 10 months of credible service. His high-3 average is $55,000.55. Since he isn’t yet age 62, his percentage multiplier is 1%.

Monthly FERS Benefit: (33.30 X 1% X $55,000.55) / 12 = $1,526.40

Suppose Julia retires at age 62 with 33 years and 10 months of service. Her high-3 average is $55,000.55. Since she is age 62 with 20 years of credible service, her percentage multiplier is 1.1%.

Monthly FERS Benefit: (33.30 X 1.1% X $55,000.55) / 12 = $1,678.89

How Do Survivor Benefits Impact FERS Benefit Calculations?

For married federal employees, their FERS Pension is reduced for survivor benefits. Survivor benefits can be waived or reduced if the spouse consents to a portion that is less than the full survivor annuity.

If the total survivor benefit elected equals 50% of the employee’s benefit, the employee’s pension is reduced by 10%. If the total survivor benefit elected equals 25%, the employee’s pension is reduced by 5%.

Do FERS Benefits Include Cost of Living Adjustments?

FERS Benefit Plan payments are increased for cost-of-living adjustments based on the following:

• If the retiree is over age the age of 62
• If the retiree retired under the special provisions for firefighters, air traffic controllers, or law enforcement personnel
• If the benefit payment includes a potion computed under the Civil Service Retirement System (CSRS) rules.
• If one retired on disability, with the exception of when the retiree is receiving a disability annuity based on 60% of their high-3 average salary.

How Does One Vest in the FERS Pension?

To vest in the FERS Basic Benefit Pension, a federal employee needs to have 5 years of creditable service. Those younger than the minimum retirement age that retire with at least 5 years of service need to either postpone or defer the pension.

Postponing FERS retirement means one can resume their Federal Employee Health Benefits (FEHB) at the time they start their pension, assuming they were eligible to maintain FEHM at the time they separated from service.

Deferring FERS retirement means one can start their PERS pension back up later but they cannot resume their FEHB coverage.

For those with at least 5 years of creditable service that choose to no longer work for the federal government, if they keep their FERS Basic Benefit contribution within the FERS, their benefit can be grandfathered into the current vesting schedule if they decide to return to work as a federal employee in the future.