Expert's View

Did you know that there’s a thing called the Alternative Form of Annuity? The AFA once meant a great deal to those retirees who were able to take advantage of it before things took a turn for the worse. When the FERS law was passed, a provision was included that allowed retirees to elect to take their retirement contributions in a lump sum and have their annuities actuarially reduced. The refunded contributions would be tax free because they were made up of dollars that had already been taxed. The annuities would be 100 percent taxable.

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It didn’t take much time for retiring CSRS employees (and those who transferred to FERS) to discover that if you elected the AFA and invested the lump sum payment wisely, you could more than make up for the annuity reduction. That actuarial reduction ranged from 5 to 15 percent of annuity, so, the younger you were when you took the lump sum, the smaller the offset. Even if the money wasn’t being used for investment purposes, it was still a good deal.

The AFA was so popular that it raised alarm bells with high-level federal budgeteers. Money was leaving the system without any counterbalancing taxes to reduce the loss. Congress tried to save the provision by requiring that the lump sum be received in two equal payments rather than one, thus spreading out the loss to the government. Sadly, that compromise only lasted until October 1, 1994. That’s when the AFA was eliminated for everyone except those suffering from a life-threatening condition, who may still receive their lump-sum in a single payment.

If you feel that your health is such that you might be eligible for the AFA, you can get more information by going to OPM’s website at www.opm/asd/hod/pdf/C053.pdf. That’s the handbook chapter on Alternative Annuity Elections. Note: In that address, it’s C-zero-53, not C-O-53.

If you were eligible for the AFA, took it, and then recovered from your life-threatening condition, you would not have to repay the lump-sum you received. And your actuarially reduced annuity would continue as before.

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