NOTE: FPM Letter 550-58, Interest on Back Pay, May 31, 1988, is an historical document that was rescinded. We feel that the information contained in this letter is useful for better understanding how interest on back pay is calculated.

EXCERPTS FROM FORMER FPM LETTER 550-78, MAY 31, 1988 (RESCINDED)

SUBJECT: Interest on Back Pay

SUMMARY

1. On May 20, 1988, OPM published interim regulations with a request for comments in the Federal Register to implement a section of Public Law 100-202, Further Continuing Appropriations for Fiscal Year 1988, which provides for payment of interest on back pay awards to Federal employees. The purpose of this letter is to provide additional guidance to agencies on the method of computing the amount of interest due.

BACKGROUND

2. The statute provides for payment of interest on all back pay awards under 5 U.S.C. 5596 that became final--i.e., no longer subject to reconsideration or higher level review or appeal--on or after December 22, 1987. Under OPM's regulations in 5 CFR Part 550, Subpart H, back pay is payable whenever an "appropriate authority" (including the head of an employing agency or his or her designee) determines that an employee has been affected by an "unjustified or unwarranted personnel action" that resulted in the withdrawal, reduction, or denial of all or part of the pay, allowances, and differentials otherwise due the employee. It should be noted that the term "unjustified or unwarranted personnel action" includes personnel actions and pay actions (alone or in combination).

IMPLEMENTATION

3. Agencies should review their records to determine whether interest must be computed and paid on awards of back pay that became final on or after December 22, 1987. Detailed instructions on the implementation of this provision are contained in the two attachments to this letter. Attachment 1 provides specific computation procedures. Attachment 2 lists the applicable interest rates and contains sample computations.

Attachments

Attachment 1 to FPM Letter 550-78

COMPUTATION PROCEDURES

1. The statute provides for payment of interest on all back pay awards under 5 U.S.C. 5596 that became final on or after December 22, 1987. Agencies are reminded that, in most cases, the actual date of the award or decision is not the date the decision becomes final--i.e., no longer subject to reconsideration or higher level review or appeal. For example, since timely filing of exceptions with the Federal Labor Relations Authority (FLRA) stays an arbitration award made under a negotiated grievance procedure, such an award becomes final only (1) when the time limit for filing exceptions expires, or (2) if timely exceptions are filed, when FLRA renders its decision on the exceptions.

 2. Interest begins to accrue on the effective date of the withdrawal of pay, allowances, and differentials. As a result, most computations will involve a series of effective dates--one for each date (usually a pay date) on which the employee failed to receive an amount of pay, allowances, and differentials because of the unjustified or unwarranted personnel action. 

3. The agency must issue the interest payment within 30 calendar days of the date on which accrual of interest ends. If issuance of the interest payment is delayed more than 30 calendar days after the date on which accrual of interest ends, interest must be recomputed based on a new ending date meeting the 30-day requirement.

4. The applicable interest rate is the "overpayment rate" adjusted quarterly by the Secretary of the Treasury and published in an Internal Revenue Service (IRS) Bulletin issued before the beginning of each quarter. The interest rates for all periods through June 30, 1988, are listed in attachment 2. Agencies may obtain the rates for future quarters by consulting the applicable IRS Bulletin or by contacting IRS.

5. Interest is computed according to the following compound daily interest formula: 

A_n = M times (1 +r)ⁿ

where A_n is the total amount accrued on money amount M after n days at daily interest rate r (expressed as a decimal). Daily interest rates for all periods through June 30, 1988, are listed in attachment 2. For example, the total amount accrued on $1000.00 during April 1986 (30 calendar days), at a 10 percent annual interest rate is computed as follows:

Daily interest rate = 10 divided by 36,500 = .000273972 

A ₃₀ = $1000.00 times (1.000273972)³⁰ = $1008.25 

Interest due = $8.25

6. An agency may choose to perform this computation using either of two basic methods. The first method applies the compound interest formula directly by using calculators or computer programs that perform exponential functions. The second method uses compound interest tables that provide multiplier equivalents for the exponential function. These methods produce virtually identical results. Attachment 2 contains a sample computation using each method. Attachment 3 contains a sample computation worksheet with instructions that may be used with the second method.

7. Regardless of the method chosen, the amount of pay, allowances, and differentials incorporated into the computation on each effective date must be reduced by a prorated portion of the employee's earnings from other employment (if any) during the period covered by the corrective action. This reduction consists of three steps. First, divide the employee's total earnings from other employment by the total amount of back pay. Second, multiply the resulting ratio by the amount of pay, allowances, and differentials due on each effective date. Third, deduct the resulting money amount from the corresponding amount of pay, allowances, and differentials due on each effective date.

8. If an agency applies the compound interest formula directly, it must adjust the daily interest rate on the date of each interest rate change and the 1st day of a leap year or the year following a leap year.

9. An agency using compound interest tables may refer to any publication containing compound daily interest tables, such as IRS Revenue Procedure 83-7. Such tables list the multiplier factors that correspond to any combination of interest rates and elapsed days. Separate tables are provided for leap year computations.

For example, daily compounding for April 1986 (30 calendar days) at 10 percent per annum (a daily rate of .000273972) is equivalent to multiplying by a factor of 1.008251883. Therefore, to compound $1000.00 for April 1986-

Multiply $1000.00 by 1.008251883 = $1008.25

Interest due = $8.25

 

10. Agencies using compound interest tables must adjust the multiplier factor whenever a new effective date occurs, the interest rate changes, a leap year begins or ends, or a payment of back pay is issued. 

11. An agency may round money amounts, daily interest rates, and multiplier factors when required by the limitations of reasonably available computational devices. However, each step of the computation should be carried to at least 4 decimal places, and the final money amount should be rounded to whole cents. Decimals ending in "5" or above should be rounded up--e.g., round .005 to .01.

12. OPM has requested a formal opinion from the Internal Revenue Service concerning the tax status of interest payments. Agencies will be advised when the opinion is received. In the interim, neither Federal Insurance Contributions Act (FICA) nor Federal income taxes should be withheld from interest payments. 

13. If administratively feasible, an agency must issue the back pay and interest payments simultaneously. If simultaneous payment is not feasible (e.g., if back pay had been issued before the interest regulations were implemented), the agency should make the interest payment as soon as possible. When all or part of the payment of back pay was issued on or before the date on which the accrual of interest ends, the amount of the payment of back pay is subtracted from the accrued amount of back pay and interest effective with the date the payment of back was issued. Interest continues to accrue on the remaining amount of unpaid back pay (if any) and accrued interest until the date interest accrual ends.

 

Attachment 2 to FPM Letter 550-78

CHANGES IN RATES FOR COMPUTATION OF INTEREST ON BACK PAY

UNDER 5 U.S.C. 5596

The annual percentage interest rate for periods prior to July 1, 1975 was 6 percent per annum. The daily rates were .000163934 for leap years and .000164383 for non-leap years. The interest rate changed on the following dates: 

DATE OF CHANGE:	ANNUAL INTEREST RATE	DAILY INTEREST RATE "r"
July 1, 1975	9	.000246575
January 1, 1976	9	.000245901
February 1, 1976	7	.000191256
January 1, 1977	7	.000191780
February 1, 1978	6	.000164383
January 1, 1980	6	.000163934
February 1, 1980	12	.000327868
January 1, 1981	12	.000328767
February 1, 1982	20	.000547945
January 1, 1983	16	.000438356
July 1, 1983	11	.000301369
January 1, 1984	11	.000300546
January 1, 1985	13	.000356164
July 1, 1985	11	.000301369
January 1, 1986	10	.000273972
July 1, 1986	9	.000246575
January 1, 1987	8	.000219178
October 1, 1987	9	.000246575
January 1, 1988	10	.000273224
April 1, 1988	9	.000245901

 

COMPUTATION EXAMPLE ONE

DIRECT USE OF COMPOUND INTEREST

FORMULA

FACTS--A decision overturning a suspension and ordering the payment of 4 weeks back pay under 5 U.S.C. becomes final on March 1, 1988. The gross amount of salary withheld for each of the 2 pay periods is $1000.00. The employee had $500.00 in other earnings during the period of the suspension. Accrual of interest ends on March 1, 1988. 

Compute interest on the back pay award as follows:

STEP ONE--Determine the effective dates of the unjustified withdrawals of pay, allowances, and differentials. The pay dates for the 2 pay periods were December 29, 1987, and January 12, 1988. 

STEP TWO--Reduce the amount of pay, allowances, and differentials for each effective date by the prorated portion of the employee's earnings from other employment during the period covered by the corrective action. 

$500.00 in other earnings divided by $2000.00 in total back pay = .25 ratio 

.25 times $1000.00 = $250.00 prorated amount of outside earnings to be deducted on each effective date

$1000.00 minus $250.00 = $750.00 amount of pay, allowances, and differentials on each effective date

STEP THREE--Determine the interest rates to be used. IRS Revenue Bulletin No. 1987-50, dated December 14, 1987, lists the following overpayment rates: 

October 1 to December 31, 1987--9 percent per annum

January 1 to March 31, 1988--10 percent per annum. 

STEP FOUR--Determine the daily interest rates by dividing the annual interest rate by 36,500 (or 36,600 for a leap year.) 

 

DAYS IN PERIOD	ANNUAL RATE	DAILY RATE
3 (Dec. 29-31, 1987)	9	.000246575
11 (Jan. 1-11, 1988)	10	.000273224
50 (Jan 12- March 1)	10	.000273224

 

STEP FIVE--Compute the accrued amount of back pay and interest for the first period using the compound interest formula. 

A₃ = $750.00 times (1.000246575)³ = $750.5549295 

STEP SIX--Carry the resulting accrued amount of back pay and interest over into the computation for each succeeding period, adding the appropriate additional amount of pay, allowances, and differentials on each effective date. 

A₁₁ = $750.5549295 times (1.000273224)¹¹ = $752.813775598 

A₅₀ = ($752.813775598 + $750.00) times (1.000273224)⁵⁰ = $1523.4820065 

CONCLUSION: The employee is due $1500.00 back pay (after deduction of outside earnings), plus $23.48 interest, less other applicable deductions. The interest payment must be issued by March 31, 1988.

 

COMPUTATION EXAMPLE TWO

USE OF COMPOUND INTEREST TABLES

FACTS--same as Example 1.

 

Compute interest on the back pay award as follows:

 

STEPS ONE through THREE--same as Example 1. 

STEP FOUR--Determine the applicable multiplier factors using a book of compound daily interest tables. IRS Revenue Procedure 83-7 lists the following multiplier factors: 

 

Daily compounding at this annual rate:	For this number of days:	Is the same as multiplying by a factor of:
9 percent	3 (Dec. 29-31)	1.000739906
10 percent*	11 (Jan. 1-11)	1.003009568
10 percent*	50 (Jan. 12-March 1)	1.013753022

* leap year table

 

STEP FIVE--Multiply the amount of pay, allowances, and differentials (after deductions for outside earnings as discussed in step two) due on the earliest effective date by the first multiplier factor. 

Dec. 29-31: $750.00 times 1.000739906 = $750.5549295

 

STEP SIX--Carry the resulting money amount over into the computation for each succeeding period, adding the appropriate additional amount of pay, allowances, and differentials on each

of effective date. 

Jan. 1-11: $750.5549295 times 1.003009568 = $752.813775598

Jan. 12-March 1: ($752.813775598 + $750.00) times 1.013753022 = $1523.4820065

 

CONCLUSION: The employee is due $1500.00 back pay (after deduction of outside earnings), plus $23.48 interest, less other applicable deductions. The interest payment must be issued by March 31, 1988.