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Guidelines for Settlement of  Federal Personnel Actions
Involving Civil Service Retirement Benefits

General Principles  |  Technical & Procedural Considerations  |  Conclusions

The Office of Personnel Management (OPM) often receives inquiries from Federal agencies about settling lawsuits or administrative appeals which affect retirement benefits under the Civil Service Retirement System (CSRS), 5 U.S.C. 8331 et seq., or the Federal Employees Retirement System (FERS), 5 U.S.C. 8401 et seq. These Guidelines advise agencies about appropriate settlement terms when the settlement affects retirement benefits. Because of differences in statutory authority, certain settlement terms may be acceptable in settling a discrimination-based appeal that are less appropriate in settling other personnel action appeals. OPM urges Federal attorneys representing agencies in discrimination cases also to consult the Equal Employment Opportunity Commission (EEOC) guidelines on settlement of personnel actions involving allegations of discrimination. Chapter 12 of EEOC's Management Directive (MD) 110 deals with those matters.

The terms of proposed settlements submitted to OPM for review vary from case to case. In some instances, proposed settlements attempt to establish eligibility to an annuity, beyond eligibility based on statutory CSRS or FERS age and length of Federal service criteria. Other proposed settlement terms provide retirement benefits based on artificially created personnel actions that could not be ordered by the court or administrative body adjudicating the case. Still other proposed settlement terms increase the amount of an annuity for which the employee is otherwise eligible, as the sole or primary financial basis of the settlement. In all of these cases, and in other variations of proposed settlements, there is an impact on OPM-managed programs and trust funds. Federal attorneys should consider such impact as they draft settlements. This OPM guidance is intended to help in that process.

We have placed this guidance on the Internet for information purposes and as an additional means of alerting Federal attorneys to this important issue. Please contact the OPM staff listed at the conclusion of this guidance to discuss any proposed settlements that affect retirement benefits and involve any of these principles.

 



Contents At a Glance

General Principles

  1. The Retirement Trust Fund Is Not A Litigation Settlement Fund.
  2. A Settlement May Not Provide Retirement Benefits Beyond What A Court Or Administrative Body Could Order As Relief In The Litigation.
  3. A Settlement Cannot Be Implemented Which Conflicts With Express Provisions of CSRS Or FERS.
    1. Discontinued Service Retirement
    2. Eligibility For Immediate Retirement and Computation of Annuities
    3. Disability Retirement
    4. MSPB Decision in Terrell Parker v. Office of Personnel Management   *
  4. Settlement of Personnel Actions Should Include Consideration Of The Total Cost to the Government.
  5. The Employing Agency Or The Judgment Fund Must Make All Employee And Employer Contributions To Employee Benefits Programs Under A Settlement.
  6. There Are Special Considerations In Settlement Of Cases Involving Reemployment Or Back pay Of An Annuitant.

Technical and Procedural Consideration

Conclusions



General Principles

1. The Retirement Trust Fund is not a Litigation Settlement Fund

A fundamental principle of settlement authority is that the Retirement Fund is not a litigation settlement fund. The Fund's purpose is to provide annuities to Federal employees and their survivors, consistent with statutory lengths of service and at dollar amounts consistent with actual Federal service and pay levels. The appropriate use of the Retirement Fund is limited to payment of benefits under express provisions of CSRS or FERS, and to the costs of administering those systems. See 5 U.S.C. 8348(a).

Congress did not establish the Retirement Fund to underwrite settlement agreements in cases not specifically involving a determination of retirement rights. To create eligibility for an annuity or an enhanced annuity for purposes of a settlement, absent a specific statutory authority other than title 5, United States Code, is inconsistent with the substantive provisions of CSRS and FERS. See id.

By contrast, the Judgment Fund, 31 U.S.C. 1304, is available and appropriate for the specific purposes of paying judgments and settlements in litigation involving Federal employment issues. Therefore, the Judgment Fund, not the Retirement Fund, should bear the financial burden of settlements.

Settlement provisions enhancing retirement benefits should be entered into only where there is appropriate legal authority for the settlement, such as the Back Pay Act, 5 U.S.C. 5596 or title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. 2000e-16. The substantial costs to the Retirement Fund of providing the employee enhanced retirement benefits over a lifetime should be considered as part of the Government's settlement costs. When determining whether the settlement is in the Government's best interest, those costs must be considered in addition to the amounts of retirement deductions and agency contributions under CSRS or FERS. Examples of the total cost to the Government of EEO settlements affecting retirement provisions are included in the EEOC's MD110, Chapter 12.

2. A Settlement may not Provide Retirement Benefits Beyond What a Court or Administrative Body Could Order as Relief in the Litigation.

Settlement terms may not be more detrimental to the Retirement Fund than the court or administrative body could impose. This is true for those cases alleging prohibited discrimination, as well as others.

For example, assume that an employee who meets the statutory age and service requirements for immediate retirement is discharged on grounds of misconduct. A court or administrative body could order reinstatement of the individual with back pay if it determined that the discharge was erroneous. It could not order a two-grade level promotion effective three years prior to the removal at issue. A claimant may urge that such a provision be included in a settlement, to create a higher annuity, by altering the "high-three" year average pay that is part of the annuity computation formulas under both CSRS and FERS. Because the court or administrative body could not order such a retroactive promotion, the settlement may not provide it.

3. A Settlement Cannot be Implemented Which Conflicts With Express Provisions of CSRS or FERS.

Settlements must abide by the annuity calculation formulas and limitations on retirement eligibility that Congress has imposed by statute. Again, this principle applies to all cases.

A. Discontinued Service Retirement

Under both FERS and CSRS, an employee meeting certain age and service conditions who is involuntarily separated for reasons not involving "misconduct or delinquency" is entitled to an immediate annuity. Such annuity is called a discontinued service retirement (DSR). 5 U.S.C. 8336(d)(1), 8414(b)(1). If an individual's separation is based on misconduct or delinquency, however, the employee is not entitled to a DSR. Agencies may agree in a settlement to change a misconduct separation into a DSR-qualifying separation only when the agency makes a good faith assessment that the court or administrative tribunal could order such a remedy. This would apply if an agency originally chose a misconduct separation rather than an action that could have been a basis for a DSR. If the agency concludes that a reviewing court or administrative body would overturn its misconduct separation, it may agree to settle for the DSR-qualifying result. Without such analysis and determination, an employee and an agency may not agree to the DSR related relief.

B. Eligibility for Immediate Retirement and Computation of Annuities.

Under both CSRS and FERS, an employee can retire with an immediate annuity if the employee has met specific age and service requirements including:

  • Reached age 55 and completed 30 years of service before separation;
  • or
  • Reached age 60 and completed 20 years of service before separation; or
  • Reached age 62 and completed 5 years of service before separation.

5 U.S.C. 8336, 8412. Settlements must be consistent with these specific statutory requirements. For example, a settlement cannot legally provide that an employee who separated at age 53 with 30 years of service receives an annuity commencing at age 55. Under both CSRS and FERS, such individual may receive only a deferred annuity commencing at age 62.

C. Disability Retirement

CSRS and FERS provide for retirement based on medical disability. 5 U.S.C. 8337, 8451 et seq. Both statutes require OPM to determine that the individual is unable to perform the duties of his position because of disease or injury. No settlement agreement may concede or guarantee disability retirement under either CSRS or FERS, without independent OPM approval.

Under both CSRS and FERS, an application for disability retirement must be filed with OPM within one year of separation. The law allows tolling of this time period only on grounds of mental incompetence. If a settlement agreement is to permit an individual to apply to OPM for disability retirement, the application must be within this one-year statutory period. For example, an individual may be retroactively reinstated on the agency's employment rolls, with full back pay and benefits, for the period necessary to bring the individual to a date within the statutory one-year rule. A settlement should not permit the individual to be in a non-pay status solely for a period designed to meet the statutory one-year requirement, in the absence of compelling evidence that the individual was, in fact, mentally incompetent at the time of the involuntary separation, or became so within one year after the date of separation. A different issue is presented when an employee is discharged on grounds of inability to perform the job. When that employee later applies to OPM for disability retirement, the individual is presumed disabled for purposes of entitlement to disability retirement. Bruner v. Office of Personnel Management, 996 F.2d 290 (Fed. Cir. 1993). OPM, however, will not unconditionally apply this presumption. For example, an individual is separated for misconduct or other non-medical related performance grounds, but, by agreement, documentation is changed to base the separation on medical inability to perform the job. Where this is done merely to enhance the individual's application for a disability annuity, OPM will not apply the Bruner presumption. If the medical evidence demonstrates that the original personnel action was erroneous because the individual was unable to perform the job and the agency was unaware of the medical conditions at the time of separation, OPM then will apply the presumption.

4. Settlement of Personnel Actions should Include consideration of the Total Cost to the Government

Both CSRS and FERS expressly provide that entitlement to an annuity requires completion of specific periods of Federal service in conjunction with a specified age. Both retirement systems also expressly provide that annuities are to be calculated upon the basis of Federal service performed and pay levels attained. The entitlement to annuity benefits and the amount of the annuity is based on specific pay levels and periods of service. It is not consistent with congressional intent to regard periods of service to have been served (or pay to have been received) only for retirement purposes. This may be appropriate in those few cases that present unusually high litigation risk or that could set a precedent resulting in substantial future costs to the Government.

If an agency is considering such a settlement, it must determine the total cost to the Government of the settlement. That means that the full projected value of a lifetime annuity must be considered, as well as the sum of the agency and employee contributions. This total will then reflect whether the settlement is in the best interest of the Government. Chapter 12 of EEOC's MD 110 sets forth several examples of how this calculation may be made. Even in those unusual cases, the settlements may not exceed the relief that could be awarded upon a finding of a wrongful or erroneous personnel action. Those settlement terms may include only the enhancement of retirement benefits that could have been awarded as part of an adverse decision.

In all circumstances, the settlement must provide that applicable retirement deductions and agency contributions be paid into the Retirement Fund. If a settlement provides that an individual is to receive enhanced retirement benefits because of a deemed increase in pay levels or an additional period of service, the deductions and contributions must be paid into the Retirement Fund in full.

Application of this principle places the financial burden resulting from alleged improper personnel actions on the agency that took the action, and to the Judgment Fund. The Retirement Fund bears the burden as the sole or primary source of funding only in exceptional and unusual cases.

5. The Employing Agency or the Judgment Fund Must Make All Employee and Employer Contributions to employee Benefits Programs Under a Settlement.

A settlement affecting employee benefits must provide for full payment directly to OPM for the amounts of applicable employee deductions and agency contributions for OPM administered programs. These include:

  • retirement deductions;
  • applicable payments to the Federal Employees Group Life Insurance (FEGLI) Act, 5 U.S.C. 8701 et seq.; and
  • appropriate payments for benefits under the Federal Employees Health Benefits (FEHB) Act, 5 U.S.C. 8901 et seq. (See discussion, supra.)

Settlements should provide for payment of such deductions to OPM from the agency, even where a cash lump sum payment is involved. If the deductions are not otherwise paid, OPM will look directly to the agency involved for payments involving OPM administered programs.

6. There are Special considerations in Settlement of Cases Involving Reemployment or Back Pay of an Annuitant

A litigant may not receive both back pay and an annuity for the same period of time.

For example, an employee meeting age and service requirements chooses to retire during the processing of a discrimination case involving a failure to promote. A settlement is reached in which the person is retroactively promoted with full back pay for a portion of the period that person was in a retirement status. The settlement must provide that the amount of annuity paid for that period must be repaid to the Retirement Fund. The total amount of any annuity payments made to the person while in an annuitant status should be withheld from the gross back pay award, in order that it be deposited as reimbursement to the Retirement Fund. 5 CFR 550.805(e). In those situations where there is no lump sum award of back pay, some arrangement must be included in the terms of the settlement for reimbursement of the Retirement Fund for the amounts of the previously paid annuity. If not, OPM will be required to take steps to recover those amounts directly from the litigant, which could result in attempts to nullify the settlement and reopen the litigation.

Technical and Procedural Considerations

The following are specific technical and procedural concerns that will have an impact on civil service retirement issues. Consideration of these issues will help the agency develop settlements that are proper and consistent with retirement laws and these guidelines.

SPECIFICATION OF GRADE OR PAY LEVEL FOR RETIREMENT COMPUTATIONS

Under the provisions of both CSRS and FERS, annuity rates are computed on the basis of formulas using length of Federal service and "average pay" computations. Such computations require knowledge of grade or pay levels for specific periods of service. A settlement providing merely for reinstatement of an individual and payment of a lump sum amount representing back pay cannot support computation of the intended higher annuity rates. See Reed v. Office of Personnel Management, 32 M.S.P.R. 290, aff'd, 837 F.2d 1097 (Fed. Cir., 1987) (table); 5 U.S.C. 8339, 8415. To implement any retirement benefit, the agreement must provide for personnel actions that include all necessary documentation, such as date of a promotion or a within grade increase.

EMPLOYEE AND AGENCY DEDUCTIONS FOR RETIREMENT

If a settlement provides for retroactive reinstatement of an employee with entitlement to additional civil service retirement credit, CSRS or FERS retirement, deductions must be paid into the Retirement Fund covering such service. The amounts due as employee deductions and employing agency contributions will vary dependent upon whether the employee is subject to CSRS, FERS, or the hybrid "CSRS Offset" requirements. In some cases, the computation will further depend on the employee's occupation. In any case where the question of which retirement program is applicable to a particular employee or the rate of individual or agency retirement contributions is uncertain, please consult OPM in advance.

SOCIAL SECURITY DEDUCTIONS

Employees subject to the FERS or CSRS Offset systems are subject to Federal Insurance Contributions Act (FICA) deductions from their pay. (CSRS employees are not subject to FICA deductions.) Therefore, in any case involving a FERS or CSRS Offset employee, FICA deductions (which are offset against the total employee retirement deduction) must also be withheld.

DEDUCTIONS FOR THE FEDERAL EMPLOYEES GROUP LIFE INSURANCE (FEGLI) PROGRAM AND THE FEDERAL EMPLOYEES HEALTH BENEFITS (FEHB) PROGRAM

The FEGLI Act, 5 U.S.C. 8701 et seq., and FEHB Act, 5 U.S.C. 8901 et seq., create two programs for which most Federal employees are eligible. Unlike the CSRS and FERS retirement programs, participation is optional. If an employee or former employee has or had FEGLI or FEHB coverage, payments to these accounts should be considered in a settlement. FEHB - Consider a case involving the involuntary separation or suspension without pay of an employee enrolled under FEHB. If the case is settled by reinstating the employee retroactively, or deeming the employee to have been in a pay status retroactively, both the employee deductions and agency contributions for the employee's FEHB coverage must be deposited into the FEHB Fund, if the employee intends to file claims for benefits for the affected period. If the employee does not intend to file claims for benefits under FEHB for the period of separation or suspension, no employee deductions or agency contributions need to be deposited into the FEHB Fund.

FEGLI

  1. In a case not involving an involuntary separation or suspension without pay, such as a retroactive promotion, settled with a retroactive adjustment in pay, both employee deductions and agency contributions for applicable FEGLI coverage must be deposited in the Federal Employees' Life Insurance Fund.
  2. Consider a settlement that involves an involuntary separation or suspension without pay where the employee is deemed to have performed service or been in a pay status for the period covered by the settlement. In such case, employee deductions and agency contributions for basic FEGLI coverage must be deposited in the Federal Employees' Life Insurance Fund only if the employee died during the intervening period or suffered dismemberment entitling benefits under FEGLI.

THRIFT SAVINGS PLAN

Both CSRS and FERS employees are entitled to participate in the Thrift Savings Plan (TSP) although under different rules governing contribution rates. The Federal Retirement Thrift Investment Board, not OPM, administers this program. If an employee participated in the TSP at the time of the personnel action, it would be necessary to include appropriate deposits to the Thrift Savings Fund in any back pay award.

 

Conclusions

We hope that this general guidance clearly outlines OPM's interests and concerns in agency litigation. Our goal is to help structure settlements that are consistent with all Federal personnel laws, including those civil service benefit laws that are OPM's responsibility. We encourage you to consult with OPM about specific issues as you begin to consider and draft settlement language. OPM encourages amicable settlements of personnel disputes, and will work with you to structure settlements that are fair, equitable, and consistent with Federal personnel law and the integrity of Federal benefits programs.

For specific inquiries, please contact:

Associate General Counsel James Green OR Special Counsel
Earl Sanders
  U.S. Office of Personnel Management
Office of General Counsel
Compensation, Benefits, Products & Services Division
Room 7351
1900 E Street, NW,
Washington, DC 20415-1300
 

The telephone number is (202) 606-1700, and the fax number is (202) 606-0082.


*   Appeal Pending

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