What Happens If I Die Before I Retire?
I’ll be blunt. This paper is very long. And pretty darn depressing. And complicated. And about as much fun as guessing what you’re going to die from. But, if you find yourself in this situation, it could very well be the lifeline you’re needing to navigate government bureaucracy, and bring some peace of mind to your loved ones. So while it’s not the palm-tree-and-umbrella-drink side of our benefits, it’s even more important to some. Tragically, we don’t all live until retirement, and I know. I see the emails. They are tough to digest. Reading a husband’s email, speaking calmly about his last few months to live while he diligently researches benefit options to make sure his wife and young children are well cared for is not what any advisor got into this business for. But in all honesty, they are the ones who urgently need the help. This paper is for them.
Recently, I wrote about the spousal survivor benefit in retirement under FERS (see “Survivor Benefit or No”). I got an email shortly thereafter asking what if a person passes away prior to retirement. Unfortunately I have received several emails in the last 6 months dealing with just this scenario: a current FERS employee is terminally ill and is seeking guidance on how to prepare things for their spouse and children prior to their passing. Some benefits are sad to discuss. This is one of them. But it is important nonetheless, and I’ll do my best to provide some guidance and point you in the direction of more research if you find yourself or a coworker in this terrible situation. If nothing else, perhaps this could be printed out and put with your will so that your loved one knows what they are entitled to.
As a word of caution, let me say this—some of these benefits are inextricably tied to tax consequences. In other words, be careful navigating this financial minefield. (I HIGHLY recommend you don’t try to take a guess as to what the tax code means yourself. As someone who just spent a few hundred hours studying tax law for the CPA exam, I can wholeheartedly assure you the DIY approach is not the wisest move.) If you are in one of these unfortunate situations, PLEASE consult a CPA or tax attorney that you can trust.
From time to time in this paper you will see my “Tax Tips”. They are insights into certain tax consequences. However, they are not meant to be substitutes for actual tax advice. They are simply the start of your research and some resources for your CPA to follow up on. And if you have a former spouse, or spouses, (particularly with existing court orders!!!), it is absolutely imperative that you seek some professional guidance. Here is just one example why: A former spouse may have been awarded the entire survivor annuity, while the current spouse is set to receive nothing. Do not think this is a rare occurrence; it happens a lot!
Dying Before Retirement: The Annuity Part
Let’s talk plainly: What happens if I die while I’m still working? How many of you think the answer is simple and straightforward, and that the government makes sure everything is logical and clear? I thought so. Not one person has their hand up. As you might expect, there are many variables that complicate things. So, let’s delve into the first one: length of service.
Less than 18 months. If you pass away before you have 18 months of creditable FERS service, your survivor(s) are not eligible for an annuity. They will receive a lump sum amount that consists of your FERS contribution to the retirement system. These are the payments you make each pay period as a percentage of your salary. Depending on your FERS classification, you contribute .8%, 1.3%, 3.1%, 3.6%, 4.4% or 4.9% of your pay each period. That is what helps fund your FERS retirement annuity when you finally retire. This is not your TSP or Social Security. This is the FERS annuity contributions only. If you pass away before 18 months of service, a lump sum will be paid out made up of all of your contributions plus interest. This payment will be made under the federal order of precedence in the absence of a completed FERS Designation of Beneficiary (Form SF-3102).
At least 18 months but less than 10 years. Die after 18 months on, but before you reach 10 years, and the Basic Employee Death Benefit (BEDB) kicks in. This is payable if the surviving spouse was married to the deceased for at least nine months, OR the employee’s death was accidental, OR a child was born out of the marriage of the employee. If any of these apply, the survivor receives the BEDB. Ok, so what is the BEDB? It is 50% of the employee’s final salary (or 50% of the High-3 if that is greater) plus an amount that is indexed for inflation. That amount is currently around $33,000 ($32,423.56 to be exact).
Example: Jim is a FERS employee and dies of cancer after working 4 years.
Jim has been married to Susie for 10 years. His annual salary is $50,000. Susie will receive 50% of his salary ($25,000), plus the $33,000 (approximately), for a total of $58,000. Susie has the option of taking this as a lump sum or as an annuity spread out over 36 months.
TAX TIP: Remember I mentioned the tax considerations earlier? Here’s a perfect example where Susie may want to get some tax advice. Taking $58,000 in a lump sum may knock her into a higher tax bracket for the year, meaning she may get less of the money than if she spread it out over 3 years.
Also, just as a point of clarification, a small portion of that payment is non-taxable because it is simply a return of what Jim has contributed to his FERS retirement over the years (his .8%, 1.3%, etc. bi-weekly deduction).
No surviving wife or kids? A lump-sum payment of the return of contributions is made under the federal order of precedence or to the FERS designated beneficiary (again, SF-3102).
Over 10 years. If you’ve been an employee for at least 10 years, your surviving spouse will receive something very similar to the maximum survivor benefit they would have received were you to pass away after you retired (see “Survivor Benefit or No?”). However, there’s more than a few steps before we get to that amount, so let’s break it down.
OPM “retires” you at the close of business the day before you passed away. Even if you are not eligible to actually retire. It is sort of a theoretical retirement, if you will. This the beginning of the calculation process.
They determine your High-3 salary. Then they calculate what % of your High-3 you are eligible for. For most FERS employee that is 1% for every year of service. For SCE’s that is 1.7% for the first 20 years of service. Multiplying these two amounts creates the annual theoretical annuity.
The surviving spouse will receive 50% of the final amount in #2. Again, if you read the last paper, this is similar to electing the 10% deduction for your spouse to receive 50% of your annuity for life.
Similarly to the BEDB above, the surviving spouse must be married to the employee for nine months but for a couple of exceptions: if the spouse was married less than nine months, they can still receive an annuity if the employee’s death was accidental, or there was a child born of the marriage.
If there are children under the age of 18, they are eligible for monthly benefits under FERS. However, these benefits are offset by amounts received under Social Security benefits, and in almost all cases, the FERS amount is reduced to zero, due to the larger Social Security payments. So, in all likelihood, the children will receive Social Security survivor payments rather than a FERS survivor annuity.
Here’s an important note. The surviving spouse continues to receive the annuity for life UNLESS THEY REMARRY BEFORE 55! If they remarry before 55, the annuity income stops permanently (even if they divorce and become single again before reaching 55). If they wait to marry until after age 55, they continue to receive the survivor annuity until death. So if anyone out there is dating a widow that’s receiving a FERS annuity and you are thinking of popping the question, you might give some serious thought to waiting until that 55th birthday....
Example: Let’s go back to Jim and Susie. Jim has been married for 5 years and has been a FERS employee for 15. His High-3 is $100,000. Jim is an SCE. 1.7% per year x 15 years = 25.5%. Taking 25.5% and multiplying it by $100,000 produces an annuity of $25,500. Susie will get 50% of that, or $12,750 a year for life. But let’s assume Susie is only 52 and she gets remarried. That $12,750 a year stops. Now, if Susie waits until 55 to marry the Man of Her Dreams Version 2.0... the $12,750 a year continues for life.
No surviving spouse and no children? Again, a lump-sum benefit paid out of FERS contributions.
TAX TIP: An important note: If you are a public safety officer and are killed in the line of duty, the annuity your survivor receives will generally be entirely tax-free. The IRS defines a public safety officer as a law enforcement officer, firefighter, police chaplain, and ambulance and rescue squad crews. The death must be a direct result of the job, and no fault of your own. For example, you can’t be a federal agent, pursuing a fugitive, get killed in the ensuing car chase, and then they find out you crashed because you were drunk. No bueno. Sorry pal, your wife is paying taxes on those monthly checks. Another interesting quirk: if your survivor receives the Basic Employee Death Benefit (BEDB), it is ALWAYS taxable, even if you were a PSO killed in the line of duty.
Any amount of time on AND a job-related death. Here’s a different scenario. Notice how in the three previous examples, I did not specify that the death was on the job (except for the tax tip regarding PSO’s). In those examples, death could have been from a car accident on vacation, falling off a ladder at home, or cancer not acquired on the job. Now we are moving on to a different scenario; one that assumes a job-related death, such as killed in the line of duty, a car accident on the job, or cancer proven to have been a direct result of the working environment (think 9/11 responders, which we’ll get to in a little bit).
If you pass away under these circumstances, you fall under the Federal Employees Compensation Act (FECA). Some of you may have experience with this already as this is also the act that governs workers comp. Hurt your back at work? Ultimately, it was FECA that directed the workers compensation procedures. The FECA website is full of interesting little gems. For example, did you know if you lose any toe in a work related accident, you’re eligible for 16 weeks of compensation? Unless it’s your big toe, then you get 38 weeks. Losing a thumb gets you 75 weeks of compensation. You get 46 weeks for a first finger, but only 25 weeks for a third finger. Yes, there are people in the government just sitting around figuring this stuff out. For our purposes, we are studying the death benefit. Like the OPM payments in the previous example, this is also comprised of several calculations, depending on who is eligible for the benefit.
First the easiest one to figure. If there are no children eligible for the benefit (perhaps they are over 18, or maybe there just aren’t any children), the surviving spouse receives 50% of the employee’s pay at the time of death. Notice this isn’t the average High-3 income, this is the final pay at the time of death, not averaged. For example, if the deceased died while having a salary of $85,000, but the High-3 was only $72,000, the surviving spouse would receive 50% of $85,000—the salary at the time of death.
That’s if there are no children eligible. If there is a wife and children eligible, the wife receives 45% of the last salary and each child receives 15% of the final salary.
Let’s say there are only children and no wife (getting dizzy from all of these different combinations yet?!), the first child gets 40% and each additional child gets 15%. Seems unfair right? Well, all of those amounts get added together and then split equally among the children, so that each child would actually get the same dollar amount. Clear as mud? Let’s do an example.
Example: Jim dies earning $100,000. He has no wife, but has 3 children eligible for this benefit. The entitlement is calculated as follows: 40% for the first child, 15% for the second, 15% for the third, for a total of 70%. 70% divided by 3 children means each child receives 23.33%, or $23,333 annually. How long does this last? Until they turn 18, or under certain conditions, until they turn 23.
Let’s say there are 7 children—what happens then? All benefits under FECA are capped at 75% of the final salary, or 75% of the maximum pay of a GS-15. There is also a minimum benefit; it will always be at least that of a GS-2, no matter how little the employee made.
So, this brings up a very important question: What if an employee’s death is such that it makes his survivor eligible for both an OPM annuity and a FECA annuity? Which do they get? Well, the surviving spouse has the ability to choose between the two. They will probably choose the FECA benefit, as it will most likely be the highest one.
Note that the same 55-year old threshold applies under a FECA annuity as well. Marry before 55 and the annuity stops. Marry after 55 and the annuity continues until death. Remember that annuities for children stop at 18, or possibly 23 under certain conditions. There is one notable difference between the OPM and FECA 55-year old rule: If someone marries before 55 under FECA, they will receive a lump-sum payment equal to 24 months of FECA payments.
Tax Tip: Payments received under FECA, including death benefits paid to survivors are NOT taxable.
Wow, that was a lot to get through. But this pretty much covers the annuity options of those who die while still working. I’ll briefly cover one more option before moving on: Let’s say you no longer work for under FERS currently, but you did at one point earn some credit under FERS. In other words, you worked for the government, but you left prior to a retirement. What happens then? Say you worked for the government as an attorney and after 15 years, you went into private practice. You are a former FERS employee, not a current FERS employee. Is your spouse eligible for an annuity? Yes.
Basically, the eligibility rules are determined by when the deceased would have been able to file for an annuity themselves if they had lived. In this case, that would have been an annuity at age 62. So, the survivor can file when their spouse would have turned 62 had they lived. Or, the survivor can choose a reduced annuity that begins the day after the former employee’s death, regardless of their age. If you’re in this situation, reach out to me and I will explain it in more depth.
What if no surviving wife or kids? § 8133 of FECA allows for annuities to be paid to parents, then siblings, grandparents, or grandchildren.
Ok, enough with the annuities. What about the other stuff? We haven’t even mentioned what happens to TSP or health insurance (FEHB). So let’s get on with it.
Dying Before Retirement: The Other Parts Thrift Savings Plan
If a current employee (or former, or retired employee for that matter), passes away with a balance remaining in their TSP, the funds will be given to the stated TSP beneficiary. Assuming you have completed a TSP-3 form naming your beneficiary (and I highly recommend that you do), the funds will go to that individual or individuals. If you have not, they will be placed under the control of the first eligible individual in the federal order of precedence. The type of account will be determined by who is receiving your TSP balance.
If your spouse inherits the balance, TSP will establish what is called a TSP Beneficiary Participant Account. This is in essence like the surviving spouse taking over the TSP account. They will not be taxed on the actual transfer of the account, but they will be taxed later on the distributions from the account. Other options for the spouse include transferring all of the money into an IRA, an eligible employer plan, or the surviving spouse’s own TSP account, assuming they have one.
If the spouse is not the beneficiary, the beneficiary CANNOT keep the money in a TSP account. The payment will be made either directly to the beneficiary (beware the taxes!), or to an Inherited IRA. These types of IRA’s have complicated rules and I suggest you pay a professional. And check and see if that professional is fully versed in the new law which eliminates the “stretch IRA” in 2020.
TAX TIP: If the surviving spouse receives a TSP Beneficiary Participant Account, and leaves it in there, then passes away, the survivor’s survivors cannot have a TSP Beneficiary Participant Account. The money from the account will be immediately distributed and taxed. This can result in a significant hit to the account.
I know I keep harping on this, but please talk to someone about the taxes. Filling out the wrong form may cause an enormous tax headache. Imagine getting a 6 figure payment when you meant to have the money transferred? In the Resources section at the end, I have included links to the pertinent TSP guides that will help you and your CPA navigate this process.
Federal Employees Health Benefits (FEHB)
Finally--An easy one to understand! If the FERS employee had their spouse covered under FEHB at the time of death, the spouse can continue with FEHB, assuming a couple of criteria are met:
The employee had at least 18 months of FERS service
The spouse must be covered at the time of death. If the employee had
Self+1 with the “1” being the child, the spouse is not covered and cannot
continue.
What about if killed in the line of duty and a FECA annuity is chosen? That annuity satisfies the FERS/OPM rules under the compensationer guidelines to allow continued coverage under FEHB.
Miscellaneous Benefits
Last paycheck and annual leave balance will also be provided to the beneficiary named, or once again, to the order of precedence recipient. (See RESOURCES for beneficiary forms).
TAX TIP: Understand that these payments are taxable. There are no exclusions for paycheck and annual leave amounts, even for survivors of public safety officers killed in the line of duty.
Life Insurance
Clearly, life insurance (both FEGLI and others) will pay out to the beneficiary upon the death of the insured. I will not go into depth on FEGLI—look at my paper dedicated just to that program (FEGLI-What’s the Cost?). I highly encourage the insured to have a copy of their insurance policies somewhere readily available for the beneficiaries upon their death. Having been involved in estates where nothing was organized, it provides a huge amount of stress in an already very stressful time. And without a central location with everything organized, the survivors are often left wondering if they missed anything. Don’t do that to them.
Other Death Benefits
There may be certain other benefits available, depending on the job classification of the employee. Additionally, some agencies may have their own individual benefits (see below). One of these other benefits applies to certain Special Category Employees who are killed in the line of duty:
Public Safety Officer’s Benefit (PSOB)
This is coordinated through the Department of Justice/Bureau of Justice Assistance and relates to law enforcement officers, firefighters, and emergency personnel killed in the line of duty. This benefit is indexed for inflation, so it increases over time. The 2019 benefit is $359,316. I have included the website in the resources if you wish to investigate it further. While many survivor benefits are taxable in some form or fashion, this one is not. Additionally, under this rule, the survivor may be entitled to an emergency payment of $3,000 to help in the days immediately following the death. There are also educational benefits available to dependents, which are currently up to $1,224 per month.
Your Agency May Have Additional Benefits
These next three are examples of what one individual agency (the FBI) offers to its employees. (I’m pretty sure all FBI employees are already aware of these programs; that’s not the point. I include them because they are a good example of what an individual agency can organize. It would be worth it to investigate if your particular agency offers anything in addition to the standard FERS/OPM benefits.)
First, the FBI has what is termed the FBI Employee Benevolent Fund. It is available to all FBI employees, not just agents. It works like life insurance. Employees have the choice to have either $1 or $2 deducted from their check each pay period. Upon their death for any reason, their beneficiary will receive either $17,500 or $35,000, depending on whether they elected the $1 or $2 option. This is available only while they are still employees.
Next is the FBI Special Agents Insurance Fund. This also pays out for any reason, not necessarily a line of duty death, although this one is strictly for agents. Agents who have joined this fund name a beneficiary. That beneficiary will receive $30,000 within 48 hours of the death of the agent. This is set up to assist with funeral expenses and other arrangements. Employees occasionally chip in to replenish this fund.
Third is the Charles S. Ross Fund. This is for agents killed in the line of duty. This is a trust that manages an approximate balance of $352,000 at the time of this writing. A line of duty death pays out $18,000 to the beneficiary, last paid in 2011.
Specific Agency Policies
While not exactly benefits, your agency may have some sort of formal procedure for a death of an employee. For example, the U. S. Marshals Service has an official policy that states, among other things, that the Human Resource Division will work with the deceased employee’s beneficiaries to obtain all necessary forms and certificates. Having some of these forms set aside or at least a list of the forms that need to be filled out would go a long way in assisting the survivor with the task in a very hectic time. I would recommend there be instructions left for a close friend to help the survivor with these tasks. It is often very, very difficult for a survivor to focus on these types of responsibilities during the grief and shock phase of what just happened. Please review your individual agency’s policies to see if there is some information you could leave your loved ones so that they know what to expect.
Benefit Documentation
In certain instances, there may exist documentation issued that verifies a particular experience or circumstance that will be relevant for death or disability payments. One such example is the exposure of first responders to hazardous materials during the terrorist attacks of 9/11. There have been numerous, documented deaths due to cancer from the debris. If you were documented to have worked in that environment, your agency should have issued you a letter stating something to that affect. It should be kept with important documents such as beneficiary forms and life insurance policies as it may become vital in determining additional death benefits.
I know of another agency where employees were exposed to unnecessarily loud noises without adequate hearing protection. Ultimately employees received letters documenting the exposures. While this would be very unlikely to result in death, it may result in added benefits down the road and I include it here only as an example of what documentation may be available.
Department of Energy employees that contract a certain type of cancer due to exposure to radiation or silica are eligible for specific benefits under Department of Labor guidelines and legislation specifically enacted to compensate them. There are many such programs throughout the government and there is no way I can touch on them all. But I would encourage you to become familiar with anything specific to your industry that may help your survivors with additional benefits.
Summary
This is a lot of information. And as I said—it’s downright depressing. I know everyone would rather read the “I Can’t Retire” paper again instead. And it’s my sincere wish that none of you will ever need what I’ve compiled here. May every one of you live to retirement and well beyond. And may OPM pay you waaaymore than you ever paid in!
However, that’s wishful thinking on my part. Life is not all rainbows, marshmallows, and Skittle-pooping unicorns. Bad things happen that we can’t control. Hopefully this paper helps you organize and prepare if you find yourself or your loved one in this terrible situation. Please reach out to me if you are going through something that makes this paper applicable to your life. I’ll do everything I can to help.
Finally, I’ve included a lot more resources than normal since this topic is a little more complicated. Also, depending on your particular circumstances, the authoritative literature may be in different places. For example, are you researching FECA annuities or OPM annuities? They have different rules. I’ve included links below. If you’ve stayed with me this whole time, thank you! I’m sure it wasn’t easy.
RESOURCES
Beneficiary forms:
Last Check/Annual Leave/Other Unpaid Compensation:
https://www.opm.gov/forms/pdf_fill/sf1152.pdf
TSP Beneficiary Form (TSP-3)
https://www.tsp.gov/PDF/formspubs/tsp-3.pdf
FEGLI Beneficiary Form (SF-2823) (if you have FEGLI)
https://www.opm.gov/forms/pdf_fill/sf2823.pdf
Designation of Beneficiary: FERS Employees (SF-3102) For any lump-sum payments under FERS.
https://www.opm.gov/forms/pdf_fill/sf3102.pdf
FECA Statutes
https://www.dol.gov/owcp/dfec/regs/statutes/feca.htm#8192
Filing a claim under FECA
https://www.dol.gov/owcp/dfec/claimantandrep.htm
FECA FAQ’s
https://www.dol.gov/owcp/dfec/fec-faq.htm
FERS Survivor Information Page:
https://www.opm.gov/retirement-services/fers-information/survivors/
IRS Publication 721
I don’t recommend trying to learn a ton of tax law but there is one IRS publication worth bookmarking. IRS Publication 721 “Tax Guide to US Civil Service Retirement Benefits”. It is specifically for government employees and speaks our language: TSP, FERS, etc. It’s about many retirement benefits, not just those related to death. Even if you don’t read it, it’s worth having for no other reason than to throw it at your CPA while you go get lunch. After all, that’s why you’re paying him, right?
https://www.irs.gov/pub/irs-pdf/p721.pdf
OPM Benefits Administration Letter 10-105
A special thanks to Dan Jamison of the FERSGUIDE for explaining this. This applies to SCE’s. If an SCE passes away prior to reaching 20 years, OPM is now required to calculate your years of service at 1.7% per year, rather than the normal 1% per year. This is an area where OPM can make a mistake and survivors need to know their rights. The OPM letter that spells this out is
BAL 10-105. https://www.opm.gov/retirement-services/publications-forms/benefits- administration-letters/2010/10-105.pdf For additional explanation, see FERSGUIDE.com
Federal Order of Precedence
I mention this term a lot. But what does this mean exactly? It’s fairly simple—it is the order money is paid out if you don’t have a beneficiary. Didn’t take my advice and fill out a TSP-3, for example? Then here’s the order of precedence:
First to the widow(er)
If no widow (er), to the child, or children, in equal shares. If a child is deceased, their
share goes to his or her children
If no children, to the parents, in equal shares, if both are living. If not, the remaining
parent receives all of it.
If no parents, to the executor or administrator of the estate
If none of the above, then to the next of kin, according to the laws of the deceased’s state
of residence