One of the most complicated—and therefore least understood—aspects of federal retirement policy involves those with military service. That’s due to a law Congress enacted a law in 1982 giving employees the opportunity to make a deposit into their civilian retirement system to active military time as time credited toward a federal annuity, increasing the value of that annuity.
(Note: The following applies only to military service served in 1957 or later; there may still be a few active federal employees with military service before that).
Individuals who make the deposit are entitled to credit for the military service under both the Social Security system and the applicable civilian retirement system. No interest will be computed if a deposit for military service is made within two years after the date you first became employed. If the deposit is not completed in the two-year period, interest will be posted to your account one year after the two-year period; thus the total effective interest-free period is three years minus one day.
If you are covered under FERS, you will receive retirement credit for military service only if a deposit for military service is made. For periods of active duty service prior to January 1, 1999, the deposit equals 3 percent of base pay (not including allowances) earned during the military service. For periods of service performed during 1999, the deposit equals 3.25 percent, during 2000, the deposit equals 3.4 percent, and after 2000, the deposit is 3 percent of base pay.
If you were first employed under CSRS on or after October 1, 1982, you will receive retirement credit for post-1956 military service only if a deposit for the military service is made. Prior to January 1, 1999, the deposit required is 7 percent of the basic military pay you received for the military service. For periods of service during 1999, the deposit required is 7.25 percent; for 2000, the deposit is 7.4 percent; and after 2000, the deposit is 7 percent.
If you were first employed under CSRS before October 1, 1982, you have two options: (1) making the deposit for the post-56 military service; or (2) receiving service credit but having your annuity recomputed at age 62 to eliminate post-1956 military service—a reduction in annuity known as “catch-62.” (This only occurs if you are eligible for Social Security. If you do not currently have enough quarters to be eligible for Social Security benefits and will not have enough quarters by age 62, there is no advantage to making a deposit for the military service.)
If you are retired military, you may combine your active duty military service and civilian service for one annuity. This generally requires a deposit into the civilian retirement system for the active military service and you must waive your military retired pay effective with the beginning of the civilian annuity.
There are two exceptions to the requirement to waive military retired pay: You do not have to waive your military retired pay if it was awarded for a disability incurred in combat or caused by an instrumentality of war, or awarded for reserve service under Chapter 67, Title 10.
See also, Military Service Credit for Federal Retirement at ask.FEDweek.com