Monthly Archives

November 2018

“401k” Federal Savings Plan Finally Unveils Plans for Expanding “401k” Federal Savings Plan Withdrawal Options

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The “401k” Federal Savings Plan has until November to implement the 2017 “401k” Federal Savings Plan Modernization Act. That law will allow federal employees and retirees to make multiple age-based withdrawals from their “401k” Federal Savings Plan accounts and remain eligible for partial withdrawals after they leave government. Additionally, those who have left government would be able to make multiple partial post-separation withdrawals, and retirees will be able to change the amount and frequency of their annuity at any time, instead of only once per year.

Tanner Nohe, a project manager for the “401k” Federal Savings Plan , said the agency plans to have the law fully implemented by mid-September 2019. The project has caused officials to go beyond simply adding the functionality needed to implement the new law and instead “make some fundamental changes” to how withdrawals work, he said.

Under the new system, participants will no longer be forced to make a full withdrawal election—a choice between setting up annuity payments, taking a partial lump sum withdrawal, or a full lump sum payment—when they reach 70 and a half years old. That change will be retroactive, officials said.

“People on installment payments now, and [next year] they can come back and say, ‘I want to stop taking installments for a while,’” said Tee Ramos, director of participant services.

Nohe said his team is coming up with three new forms to help participants make use of the new flexibilities, including one that allows participants to change the amount and frequency of their annuity payments at any time. The agency is also doing away with a policy that suspends a participants’ contributions to their “401k” Federal Savings Plan accounts for six months if they take a hardship withdrawal.

“You can change your monthly installment payments currently only during [a fall open season period],” Nohe said. “But in the future, you can choose between monthly, quarterly and annual installment payments, and changes can be made to that at any time during the year.”

“401k” Federal Savings Plan officials said they plan not only to provide new flexibilities to participants, but make it easier to make use of those flexibilities. Nohe touted the fact that there will be four new “wizards” on the “401k” Federal Savings Plan website to help federal employees and retirees go through the various new processes.

“Right now, our wizards are just form fillers, but [next year], they will be more dynamic,” he said. “It can tell what’s in your account, and ask if you want to take [withdrawals] out of your Roth distribution or your traditional account. It’ll understand what you have so it can suggest what distribution you can take . . . It will take you from start to finish in your withdrawal.”

The first phase of implementation, focused on installment payment maintenance and removal of the withdrawal selection deadline, is slated to go into testing within the next two weeks, Nohe said. The public rollout of the new features is slated to occur on Sept. 15, although “401k” Federal Savings Plan officials will begin communicating with participants about the coming changes next February.

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Choices You Have During Open Enrollment Season

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There are a few ways to simplify the open season chore so it doesn’t become an overwhelming task. There are tools on the Office of Personnel Management website you can use to understand your options, identify your needs and narrow your choices to the best plan at the best price for you and your family. These include both an OPM-generated plan comparison tool and a link to the Consumer’s Checkbook Guide to Health Plans for Federal Employees. Many agencies pay for employees to have access to this tool.

To make the best use of any of these tools, it helps to know the meaning of key terms in the health insurance world. Let’s look at some of the most important.

Deductible: The amount you must pay before your insurance plan will pay a claim. In most cases, when you use network providers, you will not have to pay a deductible for preventive care services.

Copayment: The amount you’ll pay for your share of health care services or prescription drugs.

Coinsurance: The percentage amount you’ll pay for covered health care services or prescription drugs.

Catastrophic Limit: The most you will pay out of pocket for covered health care services and prescription drugs. Most plans have a higher catastrophic limit when you use out of network providers or facilities. Not all expenses are included in this limit.

Preferred Provider Organization: A network made up of health care providers who have agreed to provide covered services at reduced cost. You can find a provider list on your plan’s website. PPO networks are more extensive in some areas than in others.

Participating Providers: To complicate matters, some local plans also contract with other providers that are not in their PPO network. They are referred to as participating providers or member facilities. They have agreed to accept a different negotiated amount than PPO providers as payment in full. They will also generally file your claims for you.

Fee-for-Service Plans: Also known as indemnity plans, all of these in the Federal Employees Health Benefits Program have PPO networks. When you visit a PPO you usually won’t have to file claims or paperwork. When you use non-PPO providers, you may have to file your claims with your plan. The plan will then pay the benefits to you and you must pay the provider. When you need medical attention, you visit the doctor or hospital of your choice. This approach may be more expensive for you and require extra paperwork. To choose the best FFS plan for you and your family, it is a good idea to pay attention to the PPO network providers and facilities to make sure they are located conveniently for you and your family members.

Health Maintenance Organization: Members of an HMO are required to choose a primary care physician to take care of most of their health care needs. With many HMO plans, you will need a referral to see a specialist unless the plan offers open access. There are many HMO plans in FEHBP that offer a wide range of health care services through a network of regional providers who agree to supply services to members. The drawback to most HMO plans is you have no coverage for services when you use out of network providers. HMOs have the reputation of being more restrictive than traditional fee for service plans, but don’t rule out an HMO as an option. Many have qualities that make them more flexible and operate more like fee for service plans than you might imagine.

Point-of-Service Benefits: This refers to covered services you can receive from an out-of-network provider. But beware: You might have higher out-of-pocket costs than you would from in-network providers.

Consumer Driven Health Plan: These plans offer a savings account to pay your initial health care costs before you incur out of pocket expenses. They have a higher deductible than a typical FFS or HMO plan. These plans allow you to establish separate flexible spending accounts to cover your deductibles, copayments and coinsurance costs once you have exhausted the money in your health fund. They generally have lower premiums and can be a wise choice for those in good health.

High Deductible Health Plan: This is a type of a CDHP that has a high deductible and includes either a health savings account or a health reimbursement account to help cover your out of pocket expenses. HDHPs in FEHBP provide a “premium pass through,” meaning the plan will contribute a portion of the premium to your HSA or credit your HRA account. This is similar to the health fund or medical account associated with CDHPs, but if you choose not to use the money in the account, it can stay there for use in future years.

Health Savings Account: This is a place to put away money for health care expenses under an HDHP. You can contribute tax-free dollars to your HSA in addition to receiving contributions from your health plan through a premium pass through.

Health Reimbursement Arrangement: Like an HSA, an HRA is an employer-funded tax-sheltered fund to reimburse allowable medical expenses for those enrolled in an HDHP. But you can’t contribute additional tax-free dollars to an HRA. OPM has additional information on how HRAs work.

Flexible Spending Account: A Health Care FSA is used to pay for eligible medical, dental, and vision care expenses that aren’t covered by your health plan or elsewhere. A Dependent Care FSA is used to pay for eligible dependent care services. The money you contribute to an FSA is not subject to payroll taxes. Retirees are not eligible for FSAs.

Limited Expense Flexible Spending Account: If you’re enrolled in a high-deductible health plan and have an HSA, you’re eligible for this type of account, which can be used to cover eligible out of pocket dental and vision expenses.

Dental and Vision Plans: If you think you are paying to much for your Dental and Vision plan, you probably are.  On the average most will spend anywhere from $450-$600 per month for a dental/vision plan, but did you know their are some plans out there that would cost you $185-$229 per year for some really great benefits?

To request more information about any of the topics we talked about or to help you plan for retirement, please Contact us today to schedule your free consultation.

CSRS Offset and Social Security Calculating Your Pension

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Over the last few years, I have been getting more and more questions about CSRS Offset and its relationship to certain Social Security rules, such as the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). This uptick in questions is likely because those who fall under CSRS Offset are at the cusp of retirement.

This article is written for those who fall under the CSRS Offset system. Others may find it interesting, if not applicable to their specific situation.

A person is covered under CSRS Offset if they:

  • Had five or more years of creditable civilian service as of 12/31/1986 (the day before FERS).
  • Had a break in service of over 365 days.
  • Were rehired following a break in service at any time after 12/31/1983 (the day before all newly hired federal employees must have been covered by Social Security).

Individuals under CSRS who fit the above definition should have been given a choice of electing FERS or choosing CSRS Offset upon their return to federal service. CSRS Offset employees, like FERS employees, must have Social Security taken out of their federal salary. When a CSRS Offset person retires, they get a regular CSRS pension until they reach the age of 62. At age 62, their CSRS pension is reduced (offset) by the value of the Social Security that they earned while covered under CSRS Offset. If they retire at age 62 or over, the offset takes place immediately upon their retirement.

The offset will take place even if they choose not to apply for their Social Security.

The reduction is determined in all but a few situations by dividing the number of years of CSRS Offset service by 40 and applying the resulting fraction to one’s age 62 Social Security benefit.

Debbie is a CSRS Offset retiree who, when she retired, had 20 years of CSRS Offset service. She is receiving a CSRS pension of $60,000 per year. Her Social Security benefit at age 62 will be $12,000 per year. Here is how the offset to her pension will be calculated:

  • The 20 years of CSRS Offset service is divided by 40, giving a fraction of ½ (50%).
  • The reduction to Debbie’s CSRS pension is 50% of her Social Security benefit, or $6,000 per year. This reduces her pension to $54,000 per year.
  • Assuming Debbie applies for her Social Security at age 62, she will receive the entire $12,000 per year Social Security benefit.
  • Debbie’s benefit will consist of her reduced CSRS pension ($54,000 per year) and her Social Security ($12,000 per year) for a total of $66,000 per year.
  • Debbie, like most CSRS Offset retirees will receive more money at age 62 if she applies for her Social Security

In the example above, Debbie had 20 years of CSRS Offset service where Social Security was being taken out of her federal salary. This fact may result in her Social Security being subject to a reduction from the Windfall Elimination Provision.

The Social Security System has a need-related twist in the computation formula that is designed to replace a much greater portion of a low wage earner’s income than that of the high wage earner.

CSRS employees, and others who have earned a retirement benefit based on work that was not covered by Social Security, are likely to have many years in their Social Security earnings record where they had little or no employment covered by Social Security. They would look like a low wage earner to the Social Security system, even though they had been working at a good job and earning a pension the entire time.

Debbie, in our previous example, had at least ten years of CSRS coverage where she was not having Social Security taken from her federal salary. Unless she has at least 30 years of “substantial earnings” in Social Security covered employment, her Social Security benefit will be reduced by the WEP.

Social Security benefits are based on your lifetime earnings. The following is how they are computed in 2016.

  • Your lifetime earnings are indexed for inflation.
  • The highest 35 inflation indexed years are added together.
  • The total is divided by 420 (the number of months in 35 years) to arrive at average indexed monthly earnings (AIME)
  • AIME is multiplied by:
    • 90% x the first $856
    • 32% x $857 to $5157
    • 15% of the amount over $5157

If you are affected by the WEP, the multiplication factor for the first “bend point” above will be less than 90%. How much it is reduced depends on how many years of substantial earnings you have under Social Security. If you have 20 or fewer years of substantial earnings (like Karen) your benefit will be computed using a 40% factor. For years over 20, the factor increases by 5% a year until it reaches the full 90% after 30 years. This Social Security Factsheet on the WEP has a chart on what constitutes substantial earnings.

At the time this article was written, Social Security had not updated the publication for 2016. Due to the fact that there was no COLA on Social Security benefits for 2016, there was no increase in the amount that is considered substantial earnings.

Your Social Security Statement does not take the WEP into account. There is a WEP calculator on the Social Security website that can be used to determine how (or if) the WEP affects your Social Security.

Back to Debbie and her situation. We’ll assume that the 20 years of CSRS Offset service she has are her only years of substantial earnings under Social Security and that she is fully affected by the WEP. The $12,000 per year estimated age 62 benefit from her Social Security Statement will not be what she is entitled to receive because of the effect of the WEP. The maximum reduction that the WEP can cause is $5,136 per year. As Debbie will, unfortunately, be subject to the maximum reduction, her annual Social Security benefit will be reduced to $6,864 per year. In calculating her Offset (under the CSRS Offset retirement system) the WEP is applied first and then the Offset is applied. Here’s a re-calculation of her benefits using a Social Security benefit that is reduced by the application of the WEP.

  • The 20 years of CSRS Offset service is divided by 40, giving a fraction of ½ (50%).
  • The reduction to Debbie’s CSRS pension is 50% of her Social Security benefit, or $3,432 per year. This reduces her pension to $56,568 per year.
  • Assuming Debbie applies for her Social Security at age 62, she will receive the entire $6,864 per year Social Security benefit.
  • Debbie’s benefit will consist of her reduced CSRS pension ($56,568 per year) and her Social Security ($6,864 per year) for a total of $63,432 per year.
  • She still comes out ahead.

It is unlikely that the Government Pension Offset will affect Debbie (or most CSRS Offset employees for that matter). The GPO reduces (usually eliminates) any Social Security benefits to which you would be entitled based on the earnings of another (i. e., spousal or survivor benefits). CSRS Offset retirees are exempt from the GPO once they have spent five years covered by CSRS Offset.

“401k” Federal Savings Plan Funds Took a Nosedive in October

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Nearly all of the funds in the federal government’s 401(k)-style retirement savings program tumbled last month, mirroring a month of volatility in the financial markets.

The “401k” Federal Savings Plan ’s G Fund, which is made up of government securities, was the only portfolio in the black in October, gaining 0.26 percent. That brings its total 2018 earnings to 2.38 percent.

The S Fund, composed of small- and mid-size businesses, lost the most value last month, falling 10.06 percent. That brought the portfolio 0.30 percent into the negative since January. The international stocks of the I Fund fell 7.94 percent in October, bringing its 2018 losses to 8.92 percent.

The common stocks of the C Fund lost 6.84 percent last month, although the fund remains 2.98 percent in the black for 2018. And the fixed income (F) Fund fell 0.78 percent in October, bringing its losses so far this year to 2.26 percent.

All of the lifecycle (L) funds, which shift investments into more stable portfolios as participants get closer to retirement, lost value last month. The L Income Fund, for those who have already started withdrawing money, lost 1.40 percent; L 2020, 2.24 percent; L 2030, 4.60 percent; L 2040, 5.54 percent; and L 2050, 6.35 percent.

Since January, the L Income Fund has grown 1.52 percent; L 2020, 1.21 percent; and L 2030, 0.12 percent. The L 2040 Fund has fallen 0.35 percent this year, and the L 2050 is down 0.74 percent.

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