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Understanding the CSRS Voluntary Contribution Program

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Federal employees who are covered by the Civil Service Retirement System (CSRS) (including CSRS Offset employees) are eligible to make additional contributions to the Civil Service Retirement and Disability Fund.

This column discusses the CSRS Voluntary Contribution Program (VCP) including an overview of the VCP, CSRS/CSRS Offset employee eligibility requirements for participation in the VCP, filing an application for VCP participation, contributions to the VCP and how they are made, limits on the amount of VCP contributions, and withdrawal options from the VCP.

The VCP allows CSRS and CSRS Offset employees to voluntarily contribute after-taxed monies into the CSRS Retirement and Disability Fund.

When a CSRS employee is paid bi-weekly, among the mandatory withholdings from the employee’s salary is a 7 percent deduction that is deposited into the CSRS Retirement and Disability Fund. CSRS Offset employees have 0.8 percent of their salary deducted and deposited into the CSRS Retirement and Disability Fund. The other 6.2 percent of the 7 percent deduction is the Social Security (FICA) payroll tax.

Employee CSRS and CSRS Offset contributions, together with the employee agency contributions into the CSRS Retirement and Disability Fund (approximately 27 percent of the employee’s salary) are used in the calculation of the CSRS annuity that a CSRS or CSRS Offset employee when the employee retires and receives throughout his or her retirement.

When a CSRS or CSRS Offset employee who participates in the VCP retires from federal service, he or she receives a CSRS annuity and the option of receiving another annuity called the VCP annuity (discussed below).

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Employee VCP Participation Requirements

CSRS and CSRS Offset employees can participate in the VCP. This means that they are able to contribute to the VCP. Once a CSRS/CSRS Offset employee retires from federal service, the retiree can no longer contribute to the VCP.

A CSRS/CSRS Offset employee who owes a deposit for temporary service and/or owes a redeposit for refunded contributions cannot participate in the VCP until they pay in full their deposit and/or redeposit.

Filing an application to Participate in the VCP

Eligible CSRS/CSRS Offset employees must complete Form SF 2804 (Application to Make Voluntary Contributions (downloadable at https://www.opm.gov/forms/pdf_fill/sf2804.pdf) and submit the form to their agency’s Personnel or Human Resources Office. The Personnel or Human Recourse Office will complete the agency certification portion of the application form and forward the application to OPM. No payment should be sent with Form SF 2804. Once the CSRS/CSRS Offset employee’s application is accepted by OPM, OPM will send instructions to the employee as to how to make VCP contributions.

VCP Contributions and How to Make Contributions

Once an employee is approved by OPM to participate in the VCP, the employee can make payments in multiples of $25. For example: $25, $50, $100, $200, $275, $500, $700, $1,000, $2,500, $5,000, $20,000, etc.

OPM will provide the VCP participant with specific instructions on how to make contributions. VCP contributions can be made at regular intervals or whenever a VCP participant decides to make a contribution. OPM will provide a voucher booklet which contains individual vouchers that the VCP participant will fill out and send with his or her VCP payment. The voucher contains the VCP participant’s name, VCP account number and a space in which the VCP participant shows the amount of the VCP contribution. Contributions cannot be made via payroll deductions.

VCP contributions are always made with after-tax dollars. Therefore, when VCP contributions are withdrawn, they are not taxed as will be explained in the VCP “Withdrawal Options” section below.

Limit on Amount of VCP Contributions

A VCP participant’s contributions cannot be more than 10 percent of the aggregate pay the participant has received while in federal service as of the date any contribution is made. Basic pay is the pay an employee receives for civilian service that appears each year on an employee’s Form SF 50. VCP participants may not circumvent the 10 percent limit by making contributions based on anticipated future earnings.

Interest Paid on VCP Accounts

VCP contributions earned interest at a rate of 3 percent per year through December 31, 1984. Starting January 1, 1985, VCP accounts earned interest at a rate equal to the average yield earned by the new investments purchased by the Civil Service Retirement and Disability Fund during the preceding year. Each December 31, interest is compounded. Table 1 summarizes the interest percentages by year, starting in 1985 and through 2024.

VCP Withdrawal Options

Shortly after retiring from federal service, a CSRS/CSRS Offset employee who has participated in the VCP must decide what he or she wants to do with his or her VCP account. The decision as to what to do with a VCP account is made on Form RI 38-124 (Voluntary Contributions Election) which can be downloaded at https://www.opm.gov/forms/pdf_fill/ri38-124.pdf. The following is the top portion of Form RI 38-124 which the CSRS/CSRS Offset employee fills out and submits to OPM.

There are two withdrawal options for a VCP account, namely: (1) VCP annuity or (2) Lump-sum payment of VCP contributions and accrued interest, including the option of the direct rollover of VCP contributions to a Roth IRA and accrued interest to the traditional TSP or to a traditional IRA. These two options are discussed in more detail below.

VCP Annuity

A VCP account owner can request an additional annuity (called a VCP annuity) by completing section 1 on Form RI 38-124 as shown here:

The VCP annuity is calculated as follows: for each $100 in a VCP account – the $100 includes both principal (VCP contributions) and accrued interest – provides a VCP annuity of $7 per year if the VCP owner (the CSRS/CSRS Offset employee) retires at age 55. The VCP annuity amount is increased by $0.20 per year for each full year beyond age 55 in which the CSRS/CSRS Offset employee retires.

The following two examples illustrate:

Example 1. Jenny retires at age 60 as a CSRS employee. Jenny has $120,000 in her VCP account. At age 60, each $100 in a VCP account purchases $7 plus 5 (years past age 55) times $0.20 per $100, or $8 per $100. With a $120,000 VCP account balance, the amount of Jenny’s VCP annuity is equal to:

$120,000/$100 = $1,200 x $8 = $9,600 per year ($800 per month).

Note that the $9,600 per year VCP annuity is in addition to Jenny’s regular CSRS annuity.

Example 2. Sam retires at age 70 as a CSRS employee. He has a VCP account balance of $500,000. At age 70, each $100 in a VCP account purchases $7 plus 15 (years past age 55) times $0.20 per $100, or $10 per $100. With a $500,000 VCP account balance, the amount of Sam’s VCP annuity is equal to:

$500,000/$100 = $5,000 x $10 = $50,000 per year ($4,167 per month).

Note that the $50,000 per year VCP annuity is in addition to Sam’s regular CSRS annuity.

Unlike the regular CSRS annuity, there are no cost-of-living adjustments (COLAs) applied to the VCP annuity.

Lump-Sum Refund of VCP Contributions and Accrued Interest

The other withdrawal option for a VCP account is for the VCP account owner to request a refund of all of their voluntary contributions plus all accrued interest. This option is requested by completing Section 3 of Form RI 38-124, as shown here:

A VCP account owner can request a lump sum refund of his or her VCP account at any time, including before the VCP account owner retires. Once a VCP account owner is paid a lump-sum refund, the VCP account is closed. The VCP account owner cannot open another VCP account and make VCP contributions unless he or she is separated from civil service for more than three calendar days and then is reemployed in a position subject to CSRS deductions.

In filling out Section 3 of Form RI 38-124, the VCP account owner has two choices as to how the lump-sum payment is made. They are:

• Lump-sum payment paid directly to the VCP account owner.

The payment consists of VCP contributions, which were made with after-taxed dollars, and are therefore not taxable. The other portion of the lump-sum payment is accrued interest which is fully federal and state taxable. Federal income tax of 20 percent will be withheld from the interest payment. If the VCP account owner is younger than age 59.5 at the time of the payment, the payment is subject to a 10 percent early withdrawal IRS penalty.

• Lump-sum payment directly rolled over to the appropriate account.

The payment consists of:

(1) VCP contributions, which were made with after-taxed dollars and are therefore not taxable; and

(2) Accrued interest portion of the VCP account. The VCP contribution portion can be directly rolled to a Roth IRA. The accrued interest portion can be directly rolled over to either a traditional IRA or to the VCP account owner’s traditional TSP. Note that in requesting a direct rollover of the accrued interest to either a traditional IRA or to the traditional TSP, the VCP account owner will not have to pay federal or state income tax until the interest is withdrawn from the traditional IRA or the traditional TSP.

Death or Survivor Benefits Associated with a VCP Account

An important question for VCP account owners: What happens when the VCP account owner dies? Are there any death or survivor benefits upon the death of the VCP account owner?

The answer is that there are two options available for the VCP account owner to pass on what remains in the VCP account upon the death of the VCP account owner, namely:

(1) VCP survivor annuity and

(2) lump-sum payment to a designated beneficiary of any VCP contributions that were not paid to the VCP account owner as part of the VCP annuity prior to the account owner’s death. These two death benefits are discussed in the following section.

•VCP survivor annuity.

When a VCP account owner chooses to receive a VCP annuity (via Section 1 of Form RI 38-124) the account owner can choose (via Section 1 of Form RI 38-124) to name a survivor annuitant. Any individual (related or not related) to the VCP account owner may be designated as a VCP survivor annuitant.

This individual need not be the same person designated as the survivor annuitant of the VCP account owner’s CSRS annuity. If the VCP account owner elects a VCP survivor annuity, then the VCP annuity is reduced by a percentage. The percentage reduction in the VCP annuity depends on the age difference between the VCP account owner and the designated survivor annuitant. Table 2 presents the percentage reduction to the VCP annuitant as a function of the age difference between the VCP account owner and the designated VCP survivor annuitant.

The VCP survivor benefit is equal to 50 percent of the VCP annuitant’s net VCP annuity (VCP gross annuity less reduction for VCP survivor annuity). The following example illustrates:

Example 3. Jenny, from Example 1, names her younger sister Carol as her designated VCP survivor annuitant. Jenny is age 60 when she retires from federal service and her sister Carol is age 55 (5-year age difference).

Jenny’s gross VCP annuity (see Example 1) is $9,600 per year. In order to calculate the reduction to a VCP annuity in which there is a five-year age difference between the VCP annuitant and the designated VCP survivor annuitant, go to Table 2. The reduction is 15 percent. Therefore:

Note the following:

(1) There is no COLA applied to the VCP annuity or to the survivor VCP annuity;

(2) When a VCP survivor annuity is chosen by the account owner, the reduction in the VCP annuity is permanent. The reduction will not be eliminated if the designated VCP survivor annuitant predeceases the VCP annuitant. The VCP survivor annuity cannot be transferred to a different individual.

• VCP account owner can name a beneficiary(s) of his or her account. This beneficiary designation is made on Form SF 2808 (Designation of Beneficiary of CSRS Contributions) and is done instead of naming a VCP survivor annuitant. Upon the death of the VCP account owner, the remaining VCP contributions and accrued interest will be paid in a lump-sum to the named beneficiary(s) as shown on Form SF 2808.

Note the following:

(1) The VCP contribution portion of the lump-sum payment (the contribution portion is what the deceased VCP account owner contributed to the VCP) is not taxable to the beneficiary;

(2) The accrued interest portion of the VCP lump-sum payment is fully taxable to the beneficiary but is not subject to any early withdrawal IRS penalty, no matter the age of the beneficiary(s); and

(3) A beneficiary who inherits the VCP account cannot purchase a VCP survivor annuity.

About Edward A. Zurndorfer

Edward A. Zurndorfer is a Certified Financial Planner (CFP®), Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019
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