Unexpected disability poses one of the most significant financial risks to working Americans. It is also one
of the most overlooked aspects of financial planning. While most federal employees are covered by solid
disability benefits, it is important to understand these benefits and integrate them into your financial plan.

Disability benefits available to federal employees come from a variety of sources, often depending on the
type, severity and duration of the disability involved. Disabilities can be categorized as being work-related
or not work-related.

Federal benefits

Work-related disabilities are generally covered by the Federal Employees Compensation Act (FECA).
FECA provides for disability compensation, including a portion of lost pay, medical expenses and the right
to return to work or an equivalent position when recovered. The Labor Department administers the pay
benefits provisions and the Office of Personnel Management administers the job restoration provisions of
the act.

Workers’ compensation under FECA covers disabilities of all severity and duration, as long as they are
work-related. In general, you should expect FECA to replace about two-thirds of your pay if you are single
or three-quarters of your pay if you have dependents. Most or all of your medical expenses should be
covered, and you will have access to comparable employment at your agency should you recover.

Disabilities that are not work-related are covered by a combination of sick leave, disability retirement and
Social Security, if the worker is eligible. A loss of income due to relatively short periods of disability may
be offset by sick leave. Longer periods will require the use of either the Social Security disability benefit or
disability retirement under the rules of your retirement system. Social Security’s notoriously strict definition
of disability rules out benefits for all but total disability, including the inability to earn a living in any
occupation. Still, in the event of a qualifying total disability, employees eligible for Social Security can
expect to receive benefits, currently up to about $2,800 per month for a young worker with dependents.

Eligible employees covered by the Civil Service Retirement System receive the higher of two values
under disability retirement:

  • The amount of your earned annuity using the standard formula.
  • The lower of 40 percent of your high-three (the average of your highest three consecutive years of pay), or the earned annuity you would receive if your service were extended to age 60. If you have at least 22 years of creditable service or are age 60 or older, you probably will receive your earned annuity. Otherwise, expect to have about 40 percent of your high-three replaced.

Eligible employees covered by the Federal Employees Retirement System may receive disability
retirement, with or without Social Security benefits. The requirements for benefits differ between the two
programs, so it is possible to qualify for FERS disability retirement but not for Social Security.

In any event, an applicant for FERS disability retirement is required to apply for Social Security disability.
The benefits, if paid, will be coordinated between the two. The coordination provisions are complicated,
but the FERS benefit will be reduced by a portion of any Social Security disability benefit. These benefits
last until age 62, when Social Security retirement benefits begin and the FERS annuity is recomputed as
if you had continued to work with all cost-of-living adjustments applied.

During the first year under FERS disability retirement, eligible employees should expect to receive 60
percent of their high-three. In subsequent years, they should plan to receive about 40 percent.

Additional coverage

Once you understand the benefits to which you might be entitled, consider whether they will be adequate
to meet the needs of you and your dependents. Because of the way federal benefits and private
insurance policies work, it is usually not possible to replace all of your predisability income should you
become disabled. Most income replacement plans are designed to limit your benefits to between 60
percent and 70 percent of your income. Therefore, it’s almost always necessary to reduce spending in the
event of a disability that reduces your earning power.

The goal of planning is to find effective ways to close any gap between your needs and the potential
benefits you would receive. One possibility is to plan for changes in lifestyle that will reduce your spending
to fit your disability income budget. The other is to buy private insurance to supplement the other
programs that cover you.

But when it comes to traditional disability income replacement policies, federal workers will have a hard
time finding options. This is because private insurers are reluctant to provide insurance that might result in
total disability income equal to more than 60 percent of a worker’s pre-disability income, and disability
retirement benefits alone could meet or exceed this limit. There are supplemental private policies
available that are designed to work with federal benefits, though they can be difficult to find. A good
insurance broker should be able to help with this search, but be prepared — the policy terms tend to be
restrictive and the premiums relatively high.

When it comes to a disability not related to work, federal benefits address only the resulting loss of
income. But a disability may also lead to substantial ongoing expenses for medical and other care.
Medical insurance will likely take care of the majority of the medical bills, but will do nothing for assistance
with the activities of daily life. This is the job of long-term care insurance, which can supplement disability
benefits, giving you coverage similar to that offered for a work-related disability.

This strategy attacks the gap between income and the cost of living, while it encourages entry into longterm care insurance at a younger age, when insurability is high and costs are locked in at relatively low
rates. The long-term care insurance can then continue into retirement when loss of earned income is no
longer a risk and traditional disability coverage is withdrawn.

Written by Mike Miles
For the Federal Times
Publication August 23, 2004