If you’re a federal government employee, you have access to no-cost disability coverage.
While this is a nice benefit for federal workers, it may not adequately replace your income if an injury or illness limits your ability to work.
Learn more about the various types of disability insurance for federal employees here.
Disability coverage for federal employees is part of the Federal Employees Retirement System (FERS). In fact, the coverage is referred to as “disability retirement.” FERS is administrated by the U.S. Office of Personnel Management (OPM), which serves as the chief human resources agency and personnel policy manager for the federal government.
Congress created FERS in 1986, and it became effective on January 1, 1987. Federal civilian employees who have retirement coverage are covered by FERS. This includes having disability coverage.
While disability coverage is a free benefit to employees covered by FERS, it is not easy to collect disability benefits. To do so you must:
- Have worked in the federal government for at least 18 months.
- Have a disability expected to last at least a year and that affects your ability to perform “useful and efficient service in your current position.”
- Have the agency you work for certify that cannot accommodate your disabling medical condition in your present position.
- Be considered unable to work, because of your condition, in a vacant position in the same agency at the same grade or pay level, within the same commuting area, and for which you are qualified.
- Apply for Social Security disability benefits first. If you qualify for both SSDI and FERS, the SSDI benefit your receive is deducted from your FERS benefit.
- Fill out two forms: Application for Immediate Retirement and the Documentation in Support of Disability Retirement.
To keep your benefits, FERS may require you to provide updated medical information throughout the disability period. If this requires a medical exam, you will have to pay the cost. If you do not fulfill the request for evidence of continuing disability, it is likely that your benefit payments could be suspended until your continuing eligibility is established.
Benefits will stop if have medically recovered or you are reemployed by the federal government in a position equivalent to what you held at retirement. They will also stop if your income during a calendar year is at least 80 percent of the current rate of basic pay from the position you retired from.
If you qualify for disability benefits under FERS, your benefit amount will depend on your age, salary, the length of your disability, and SSDI benefits.
If your disability occurs at either age 62 or if you meet the age and service requirements for immediate voluntary retirement, you receive your “earned” retirement annuity based on the general FERS annuity computation.
If neither scenario applies, then your disability benefit essentially covers 60 percent of your salary for the first 12 months. After that, you’ll receive either 40 percent of your last salary or your “earned” retirement annuity amount, whichever is higher.
You will receive a cost-of-living adjustment after the first 12 months.
If you are married, your benefit will be reduced for a survivor benefit, unless your spouse consents to not receiving a survivor benefit.
If you’re a federal employee, you can still buy your own individual disability insurance policy to supplement your federal benefits.
However, the private insurer will take in account the amount of your government disability benefits when determining how much coverage they will sell you. This is done to avoid a situation where you become overinsured and have an incentive to become disabled and miss work. Carriers also do this in cases where people are covered by a private group plan through their employers.
Because of how federal benefits are calculated, you will need to talk to the carrier or your agent to determine how the insurer is quantifying your existing government benefits. Insurance companies may calculate your existing coverage differently. Knowing a carrier’s calculation method before you buy can help you avoid having too little coverage from the private insurer.
There are a number of reasons you should consider supplementing your FERS benefits with a private, individual plan.
One reason is that FERS disability benefits are taxable income. FERS disability benefits will be taxed as ordinary income because they are employer-provided. On the other hand, an individual insurance policy benefit is non-taxable because you pay the premiums for it.
As mentioned above, there are two other reductions in your FERS benefits than an individual policy can replace. One is that FERS disability benefits will be offset dollar-for-dollar by up to 100 percent of Social Security benefits received in the first year of a disability claim and up to 60 percent each year thereafter. The other reduction is that FERS benefits decline from 60 percent of income to 40 percent of income after the first year.
Another benefit of having your own individual policy is that it provides protection if you decide to leave the federal workforce. In fact, many individual policies have a future increase rider that you can use if you lose your federal coverage or have another major life event. A future increase rider enables you to increase your coverage amount without going through underwriting a second time.
An individual policy can also provide disability benefits based on the loss of earnings you incur from a covered condition. This is known as a residual disability benefit, and it essentially makes up the difference between what you earned before disability and what you can still earn with your disability.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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