When a federal employee with prior active-duty service asks about the military buyback, the first question that follows is almost always the same: how much? The honest answer is — it depends on your basic pay history, the length of service, and how long you’ve been in your federal job.
For most FERS employees, the cost is calculated as 3% of basic pay earned during the period of military service, plus interest if the deposit is completed outside the three-year interest-free grace period. The resulting number is often much smaller than the annuity increase it purchases.
The formula, piece by piece.
Under 5 U.S.C. § 8411 and the implementing OPM regulations, the deposit for FERS-covered military service is calculated as 3% of basic payearned during the period of service, plus interest. For most employees, “basic pay” means the basic military pay tables for the ranks and years of service involved. Special pay, bonuses, and allowances are usually not included.
For older service periods, the deposit rate may be different. The CSRS-era formula was 7% with interest; FERS is 3% with interest. For employees who switched from CSRS to FERS, the calculation can mix periods at different rates.
What interest adds.
If the deposit is completed within the three-year grace period from the federal hire date, the interest is zero. After that, interest accrues at the OPM-published rate and is compounded annually. The rate adjusts each year based on Treasury yields, but it has historically run in the 4% to 6% range.
Interest accrues from the midpoint of the period of military service to the date the deposit is paid. A deposit completed five years after federal hire can carry a substantial interest tail. A deposit completed within three years of hire avoids it entirely.
A representative example.
Suppose a federal employee served four years on active duty in the Army at an average basic pay of $1,800 per month. Total basic pay during the four-year period is roughly $86,400. The 3% FERS deposit is approximately $2,592.
If the deposit is paid within the three-year grace period, that $2,592 is the entire cost. Outside the grace period, interest can add hundreds to thousands of dollars, depending on how many years late.
The annuity benefit of those four years of service at, say, a $100,000 high-3 salary and a 1.0% FERS multiplier is roughly $4,000 per year for life. At a 4% return assumption and a 20-year retirement, the buyback pays for itself many times over.
The variables that swing the estimate.
The estimate HR provides on form RI 20-97 depends on:
- Length of qualifying active-duty service.
- Rank and basic pay at the time of service.
- Whether the deposit is made within the three-year grace period.
- The interest rate in effect when the deposit is paid.
- Whether any of the service has already been used to qualify for a military retirement.
Each of these can move the deposit estimate by thousands of dollars in either direction.
How the deposit is paid.
Once you decide to make the deposit, you can pay it in a lump sum or in installments. The lump sum is straightforward. Installments require HR’s involvement and continue until the balance is cleared. If you leave federal service before completing the installment payments, the partial deposit may or may not be refunded, depending on the rules in effect at the time.
The full deposit must be completed before retirement is finalized. OPM will not credit the service until the deposit is paid in full.
The VA disability offset footnote.
One important caveat applies to employees with VA disability ratings. If you make a military deposit that includes service for which you’re also receiving VA disability compensation, there is a separate offset rule that can reduce or eliminate the additional FERS annuity benefit attributable to that service. We cover this in a dedicated article, but it should be in your thinking before you pay the deposit.