Expert's View

On October 28, 2009, the Non-foreign Area Retirement Equity Assurance provision in the National Defense Authorization Act for FY 2010 became law. It changed forever the way federal employees outside the 48 contiguous states will be paid.

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Since shortly after World War II, these employees received cost-of-living adjustments to compensate them for the difference between their base salaries and the cost of living in non-foreign areas, such as Alaska, Hawaii, Puerto Rico and the Virgin Islands.

One of the advantages employees enjoyed with these COLAs was that they were non-taxable. One of the disadvantages was that they weren’t included in the computation of their annuities when they retired. When most employees accepting employment in non-foreign areas came from and returned to the continental U.S., this made sense. With so many of them now being born, raised and retiring where they worked, it didn’t, especially after employees in the lower 48 began receiving locality pay, which was included in their annuity computations.

The new law has made it possible for these employees to begin receiving credit for those COLAs by allowing them to elect to credit them to basic pay on a phased in basis. For those retiring between January 3, 2010 and December 31, 2012, they can deposit retirement contributions on the portion of the COLA that equals the difference between the basic pay plus locality pay for the RUS (rest of the U.S.) and the basic pay plus locality rate for employees in their non-foreign area. The election to have that happen and the payment must be made no later than the time they retire. Just as is true of other deposits to get service credit, interest accrues annually on December 31 of each year.

For further details on the whats, whys and wherefores, and to see the forms needed to apply for credit, go to www.opm.gov/retire/pubs/2010/10-102.pdf. FYI: OPM has just provided updated interest calculation sheets to agencies. So, if you want to learn what it would cost to hold off making a payment, check with your personnel office.

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