Disability Decisions

Most federal employees understand the benefits associated with their health and life insurance. But as one Retirement Planning reader asks, do feds also need disability coverage?

According to the Social Security Administration, three in 10 workers entering the labor market will become disabled before retiring. While federal employees receive some coverage for prolonged illness, injury or disability, in certain cases purchasing private disability insurance could provide additional financial security.

Federal employees can be compensated for disability through:

• Paid sick leave
• Disability retirement
• Workers' compensation benefits for injuries sustained on the job

Employees who become permanently disabled before age 62 can apply for disability retirement. The government's two retirement programs -- the Civil Service Retirement System and the Federal Employees Retirement System -- calculate disability annuity benefits differently, which influences the decision on whether to buy private insurance.

Social Security Disability Insurance also is available, but bear in mind that the average monthly benefit is $1,004 -- and less than half of the 2.1 million workers who applied for SSDI benefits in 2005 were approved, according to SSA data.

So, you've concluded you need disability benefits. Where do you start?

• Sick leave: Use your sick leave before applying for disability retirement, as it can be considered a form of short-term disability insurance. Federal employees accrue 104 hours of sick leave annually that can be carried over from one year to the next. After 10 years of federal service, an employee has earned about six months of sick leave.
• FERS or CSRS disability retirement: Employees who decide to apply for disability retirement must prove they've become disabled by providing medical documentation and statements from their supervisor. This would occur after the employee has exhausted their sick leave and the agency has made a reasonable effort to accommodate the employee in their current position or a similar position of the same pay grade. The employee also has to fill out a FERS or CSRS application for immediate retirement. The Office of Personnel Management decides whether to approve such requests.

Crunching the Numbers

FERS

Calculating disability benefits under FERS varies, depending on the retiree's age and years of service at retirement. Here's the quick and dirty:

• Under Age 62
  
  If you are younger than 62 at the time of disability retirement and are not eligible for voluntary retirement you will, for the first year, receive 60 percent of your high-three average salary minus all your Social Security benefit for any month in which you are entitled to Social Security disability benefits. After the first year, you will receive 40 percent of your high-three average salary minus 60 percent of your Social Security benefit for any month in which you are entitled to Social Security disability benefits.
  
  But, you are entitled to your earned annuity (1 percent of your high-three average salary multiplied by years and months of service), if it is more than the disability annuity computed under the aforementioned formula.
  
  When you reach age 62, your annuity will be recomputed using an amount that represents the annuity you would have received if you had continued working until the day before your 62nd birthday and then retired under FERS nondisability provisions.
  
  The total service number used in the retirement annuity will include the years in which you received a disability annuity. The average salary will be increased by all FERS cost-of-living increases that occurred during the time you received a disability annuity (even if the adjustment did not affect your annuity). The FERS basic annuity formula -- 1 percent of your high-three average salary multiplied by total years and months of service -- is then applied, using the adjusted time base and average salary. If your actual service plus the credit for time as a disability retiree equals 20 or more years, the formula would be: 1.1 percent of your high-three average salary multiplied by the total of years and months of service, using the adjusted time base and average salary.
  
• Age 62 or Older
  
  If at disability retirement, you already are 62 years old, or you meet the age and service requirements for immediate voluntary retirement, you will receive the amount you earned based on the general FERS annuity calculation: 1 percent of your high-three average salary multiplied by years and months of service.
  If you are at least age 62 at disability retirement and have at least 20 years of federal service, then the annuity formula would be: 1.1 percent of your high-three average salary multiplied by your years and months of service.

CSRS

The math is simpler under CSRS than it is under FERS. A disabled worker is eligible for a retirement annuity equal to the greater of either the annuity that he or she would receive under the regular retirement formula, or a minimum benefit that is the lesser of:

• 40 percent of the employee's high-three average salary or;
• The actual annuity that the employee would have received if he had retired at age 60.

The method of computing a CSRS disability retirement annuity ensures that an employee will not receive a larger annuity through a disability retirement than he or she would receive from having worked to the minimum age and years of service required for a normal retirement. In general, a worker who becomes disabled after 22 or more years of federal service will receive an annuity calculated under the regular CSRS annuity formula, regardless of age.

The bottom line is that between FERS and Social Security benefits or the CSRS disability benefit, approved disability benefits will be as much as a 40 percent or more replacement of your pre-retirement wages. Social Security will approve a disability request only if there is evidence that the individual is disabled from all work -- not just a federal job.

Costs and Benefits

Supplemental plans and individual insurance policies often will cover up to 70 percent or 80 percent of your salary, but generally are reduced by the amount of employer-sponsored and Social Security benefits provided. If you pay the premium out of pocket -- meaning your employer doesn't cover the tab -- benefits are tax-free.

But buying an individual plan can be tricky and expensive. As with life insurance, prices vary based on several factors, including age, gender, amount of coverage and health status.

How much does coverage cost? Here's one example from MetLife: A 40-year-old male nonsmoking business executive would pay $1,150 in annual premiums to qualify for $3,500 in monthly benefits delivered up to age 65, after a 90-day waiting period.

If you purchase a private policy and the company goes belly up, then state insurance regulators will cover most of the policy benefits. But that protection is capped at $300,000 in most states.

It makes sense to consider long- and possibly short-term disability insurance to cover a shortfall in income in the event you can't work because of a disability. Before shopping, however, it's important to evaluate the amount of sick leave you have and would be eligible for if you had a permanent disability and qualified for CSRS, FERS and Social Security benefits. If the government benefits aren't adequate to meet your monthly financial obligations, then a disability insurance policy could be the answer.

Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.

For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.