Federal workers who plan to switch to the new U.S. pension plan primarily to protect their Social Security spousal or survivor benefits may be outflanked by Congress, which is working on a plan to close a so-called double-dipper loophole in the new Federal Employees Retirement System.
Here is the complicated, but important, situation:
Under the old civil service retirement program -- which covers virtually all federal workers hired before 1984 -- unearned Social Security benefits from a spouse are subject to a partial deduction based on any public pension the retiree gets. That doesn't apply to Social Security benefits earned by the individual civil servant, but rather to benefits based on a spouse's service under Social Security.
For example: A federal retiree who is entitled to a spousal or survivor Social Security benefit is subject to a reduction of $2 in that benefit for every $3 received from a public pension. In some instances that would wipe out the spousal or survivor benefit. The offset does not apply to persons covered by the new FERS plan.
Because the FERS system does not prohibit such double-dipping, many federal workers are considering switching to it. Between July 1 and Dec. 31 employes covered by the older pension plan will have the option of moving into FERS. It is possible, under current rules, for them to switch to FERS and retire within a short time and get the offset exemption that would apply to them if they remained in the old retirement plan.
But the House Ways and Means Committee is drafting legislation that would close that loophole in the FERS system for people who transfer to it for a short time. One proposal being considered would require employes to be under the FERS system (which requires them to pay the full Social Security tax) for at least five years before they would be exempt from the Social Security offset on a spousal or survivor benefit. If that change was made retroactive to July 1 it would catch even those employes who switched at the earliest possible date.
The offset would not be a major factor for civil servants who earn their own Social Security benefit based in whole or part on service under FERS. For most of them their earned benefit would be larger than any spousal or survivor benefit. But for workers who had no Social Security coverage of their own, and who are depending on the spousal or survivor benefit, the offset is important.
In its new handbook comparing the old and new pension plans, the Office of Personnel Management warns that workers shouldn't decide to go into FERS simply to beat the offset. OPM -- which is prohibited from touting one plan at the expense of another -- diplomatically says workers should "consider the possibility that Congress may place restrictions on removal of the public pension offset" and might "set a minimum number of years that must be worked subject to FERS before it does not apply."
This week the Senior Executives Association will issue a warning to members of possible congressional action to close the FERS offset loophole. "If the bill is not passed by July 1 the changes could be made retroactive" SEA says. The legislative office of the National Association of Retired Federal Employees also has warned that offset changes are possible.
There are many good reasons for some employes to switch to the new FERS plan. But all of the above means that anyone who switches simply to beat the offset provision may be outfoxed by Congress.