topic VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but not paid back in Retirement tax questions

VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but not paid back

itr674 — Sat, 08 Feb 2025 20:39:13 GMT

Question:

For NC Bailey Act purposes, is a federal employee, with 5 years vested service prior to 12 Aug 1989, still vested if withdrawn retirement funds are not paid back by 12 Aug 2989?

- NC DOR makes that specific requirement for state and local government employees, but not specifically for federal employees. See below statements.

NCDOR Directive PD-99-1 dated March 4, 1999:

"Vesting" Period for Qualifying State or Local Retirement Systems

An employee in a qualifying State or local government retirement system who was vested prior to August 12, 1989, and who leaves employment remains vested if the employee later returns to work, provided the employee did not withdraw his or her contributions to the retirement system.
- If the employee withdrew his or her contributions, the employee is no longer vested in the retirement system, even if the employee subsequently buys back the service time, unless the employee returned to employment in time to become vested again before August 12, 1989.

"Vesting" Period for Qualifying Federal Retirement Systems

Generally, participants in the qualifying federal retirement systems listed above, including military retirees, are vested for purposes of the settlement if they had five or more years of creditable service as of August 12, 1989.
- The general rule, however, does not apply to the Thrift Savings Plan.

Re: VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but...

SusanY1 — Sun, 23 Feb 2025 21:01:32 GMT

Yes, the Baily Settlement applies in the same manner for federal employees except for Thift Savings Plan distributions.

Re: VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but...

itr674 — Mon, 24 Feb 2025 01:06:34 GMT

But the question is:

For NC Bailey Act purposes, is a federal employee, with 5 years vested service prior to 12 Aug 1989, still vested if withdrawn retirement funds are not paid back by 12 Aug 2989?

The federal vesting statement does not have in it the "- If the employee withdrew his or her contributions, the employee is no longer vested in the retirement system, even if the employee subsequently buys back the service time, unless the employee returned to employment in time to become vested again before August 12, 1989. " part in it.

Re: VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but...

DaveF1006 — Wed, 26 Feb 2025 22:51:27 GMT

No. Under the North Carolina Bailey Act, a federal employee who had five or more years of creditable service as of August 12, 1989, is considered vested for the purposes of the Act. This means that their retirement benefits are exempt from North Carolina state income tax, regardless of whether they have withdrawn and not repaid their retirement funds by August 12, 19891.

The key factor is having the required years of service by the specified date, not the repayment of withdrawn funds. So, if the employee met the service requirement by August 12, 1989, they would still be vested under the Bailey Act.

NCDOR

Re: VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but...

itr674 — Thu, 27 Feb 2025 02:45:56 GMT

DaveF1006, thank you for replying!

BLUF: Would the only way to flesh this out be to hire a tax attorney? If so, I could start working on it for next year.

2020 thru 2024 NCDOR Personal Tax Bulletins all have the same vesting verbiage for the NC local/state government retirees vs Federal government retirees. NC qualified plans are written to require the payback but the federal qualified plans paragraphs don't mention the payback.

I definitely meet the 5 year criteria, CSRS, Aug79 -Apr85, then then left for 11 months, and came back in May86, and finally retired in 2020.

Called NCDOR two weeks ago and after going through about 4 people and numerous phones calls I finally had a call back from an NCDOR expert, and they said the NC local/state government pay back requirement applied to the federal CSRS retirees..

I asked why are paragraphs in the state section and federal section are written differently? Basically they did not know.

Re: VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but...

eversylvid — Sat, 14 Feb 2026 18:09:58 GMT

My spouse and I both were Civil Service Retirement System employees and never participated and 401K type of retirement plan and therefore is not from a combination of Social Security, Thrift Savings, like the new and current Federal Employee Retirement systems. I began my civil service career in 1968 within the same system, after serving four years in the USAF, until my retirement in 2002. My spouse also started her civil service work in 1971 under the same system and that also continued until she retired in 2002. Our monthly income deductions included a payment into the Civil Service Retirement System, Federal Income Taxes, and or State and Local Income Taxes, Health Benefit Insurance etc. Our retirement pay was and is not from withdrawals from an IRA or 401K. It is just straight Civil Service Retirement Pay, similar to Social Security Retirement Pay.

Therefore, our retirement income does not come from any self investment plans, like those that exist today. This is an anomaly for sure, and for sure, the Bailey Act should include our Civil Service Retirement Pay as it does for any military retirement pay.

Re: VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but...

eversylvid — Sat, 14 Feb 2026 18:11:34 GMT

If that is the case, then why does Turbo Tax calculate that we owe North Carolina State Income Tax?

Re: VESTING: NC Retirement Vesting vs Federal CSRS Retirement when retirement funds withdrawn but...

SteamTrain — Sat, 14 Feb 2026 19:44:54 GMT

@eversylvid

Hard to know what your issue is...note tat other income (but Not SS) can be taxed by NC.

Another person had a (maybe) similar issue with marking their CSA-1099-R as being Bailey Settlement eligible, and the fix was that , during the entry of their CSA-1099-R in the Federal section, that their box 15 had to at least have "NC" in it on the TTX form, before selecting Bailey Settlement on the next page. Without "NC" in box 15, apparently, the distribution is stateless...or something like that, and has to be "NC" or the Bailey exemption isn't applied.