Expert's View

Years ago retiring federal employees were allowed to elect to have their retirement contributions paid to them in a lump sum and, in exchange, have their annuity actuarially reduced based on their age.

The up-front cost to the government of that “lump-sum option,” though, drew scrutiny of deficit hawks. It was replaced by a provision called the “alternative form of annuity” that only applies to employees suffering from a life threatening condition that results in a life-expectancy of less than two years. While little-used, it’s important to know that this option exists in case you find yourself in that situation.


To find a list of medical conditions that provide automatic proof of eligibility, go to and scroll to Section 53C1.1-4. If you have one of those conditions, and wish to apply for the AFA, your application would have to be certified by a physician. With one exception, you’d also have to bear the costs associated with providing the necessary documentation. Here’s the exception. If OPM exercises its right to chose a physician, it will cover the costs.

If your AFA application is approved, the reduction in your annuity will be based on your total contributions to the retirement fund (without interest) using standard life expectancy tables.

The law requires that both your lump sum payment and your annuity contain a mix of employee and government contributions. The proportion is determined by the Internal Revenue Service and is spelled out in their Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits, available for download at

As you might expect, the government’s portion of the lump sum payment is taxable. While you can roll over the taxable portion of your lump-sum distribution into an IRA, to avoid the 20 percent federal tax withholding, it has to be a direct account-to-account transfer.

On the other hand, your annuity will be treated the same as the annuity of any other retiree. In other words, a portion of your annuity will be tax free while the rest will be taxable as regular income.

To learn more about the AFA go to, which provides alternative annuity election information for employees.

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