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Articles | Increasing Number of Agencies May Offer Early Retirements and Buyout Incentives in 2012
Increasing Number of Agencies May Offer Early Retirements and Buyout Incentives
With pressure to reduce their payrolls given the current federal budget-cutting
environment in Congress, during 2012 an increasing number of federal agencies
may have Voluntary Early Retirement Authority (VERA) and offer Voluntary
Separation Incentive Payments (VSIP) to eligible employees.
This column discusses VERA and VSIP, including which employees are eligible
for them, the effect of a VERA and a VSIP on CSRS and FERS annuities and health
and life insurance benefits, and post-retirement employment issues following a
VERA or a VSIP, including non-federal and federal employment.
A VERA allows agencies that are undergoing substantial restructuring,
reshaping, downsizing, transfer of function or reorganization to temporarily
lower the age and service requirements in order to increase the number of
employees who are eligible for retirement. The authority encourages more
voluntary separations from federal service and helps the agency complete the
needed organizational changes with minimal disruption to the workforce. By
having VERA, an agency can make it possible for employees to receive an
immediate annuity years before they would be eligible, as well as minimizing the
need for reductions in force (RIF).
Note that an agency must request VERA and receive approval from the Office of
Personnel Management (OPM) to grant it before the agency may offer early
retirement to its eligible employees. The approval from OPM will stipulate a
period of time during which the VERA option will remain available.
VERA offers apply to eligible employees covered under both the Civil Service
Retirement System (CSRS) and the Federal Employees Retirement Systems (FERS).
When an agency has received VERA approval from OPM, an employee who meets the
general eligibility requirements may be eligible to retire early. In particular,
*Note that unused sick leave or annual leave cannot be included for
purpose of fulfilling the minimum service requirement.
If an eligible employee chooses to retire early under a VERA, what will be
the effect on the retiring employee's annuity and other benefits? The following
summarizes the effects of an eligible employee's retiring benefits under a VERA:
· CSRS annuity. Annuity is calculated based on the average
high-3 salary and years and months of creditable service. Unused sick leave will
be used only for additional service credit for the purpose of calculating the
CSRS annuity. If the retiring employee is under age 55, then the annuity
calculation is reduced by one-sixth of one percent for each month the retiring
employee is under age 55 as of the retirement date. The penalty is permanent;
the annuity will not be readjusted once the retired employee becomes age 55. If
the employee retires on the 1st, 2nd, or 3rd day of a month, then annuity begins
the following day. Otherwise, the annuity begins the first day of the month
· FERS annuity. Annuity is calculated based on the
average high-3 salary and years and months of creditable service. If the
employee retires before Jan. 1, 2014, then half of the retiring employee's
unused sick leave will be used for additional service credit for the purpose of
calculating the FERS annuity.
A FERS transferee -- that
is, a FERS-covered employee who previously had at least five years of
CSRS-covered service and transferred to FERS -- with a CSRS annuity component
receives credit for unused sick leave for the purpose of calculating the CSRS
annuity component of his or her retirement. The amount of the sick leave credit
will be the lesser of:
- the employee's sick leave balance as of the date of the employee's transfer
to FERS, or
- the employee's sick leave balance as of the date of retirement. If the FERS
transferee retires before Jan. 1, 2014, then half of the unused sick leave --
half of the lesser of the sick leave balance at the time of the employee's
transfer to FERS and the employee's sick leave balance at the time of retirement
-- will be added to the FERS transferee's FERS service time for the purpose of
calculating the FERS annuity component of his or her retirement.
There is no annuity reduction in FERS for employees under age 55 who retire
on an early voluntary retirement. However, a FERS transferee with a CSRS
component to his or her retirement and who retires before age 55 will have the
CSRS portion of the payable annuity reduced by one-sixth of one percent for each
full month he or she is under age 55. No reduction will be applied to the FERS
annuity component of the retirement. The FERS annuity begins the first day of
the month following retirement.
· FERS retirement annuity supplement. A FERS annuity
supplement will be payable to an employee who has completed at least one
calendar year of FERS service once he or she reaches minimum retirement age
(MRA). The annuity is payable until a retired employee reaches age 62.
· Health benefits. Employees retiring in conjunction with a
VERA or a VSIP must have been covered under the Federal Employees Health
Benefits Program (FEHBP): (1) for the last five years of their Federal civilian
service in order to continue such coverage in retirement; or (2) if less than
five years, for all service since the employee was eligible for these benefits
unless these requirements are waived.
OPM has granted pre-approved waivers to employees who have been:
- covered under the FEHBP since the beginning date of the agency's latest
statutory VSIP authority or OPM-approved VSIP or VERA authority, and retire
during the statutory VSIP or OPM-approved VSIP/VERA period and receive a VSIP;
- take early optional retirement under a VERA; or
- take discontinued service retirement based on an involuntary separation due
to reduction in force (RIF), directed reassignment, reclassification to a lower
grade, or abolishment of position. Health insurance coverage as an annuitant is
identical to coverage as an employee, but premiums are not paid on a pre-tax
·Life insurance. Federal employees group life
insurance (FEGLI) can be continued through the retirement system provided the
employee has carried FEGLI coverage for at least five years prior to retirement.
Value and cost depend on elections made at retirement. But as noted in a
recent column: "OPM changes FEGLI
Premium Rates for 2012; Many Annuitants Will Pay More", OPM announced that
effective Jan. 1, 2012, some premium rate increases for some FEGLI categories.
Federal annuitants -- and this includes employees who retire under a VERA or a
VSIP - and who intend to keep the full amount of their pre-retirement FEGLI will
pay significantly more in FEGLI premiums after they retire.
Employees who take voluntary early retirement are not subject to any
reduction in their annuities or other post-retirement benefits should they
subsequently accept non-Federal employment. But employees covered under FERS who
qualify for the FERS retirement annuity supplement could have the supplement
reduced or discontinued due to an "earnings" test (see column "FERS Annuity
Supplement: Understanding the "Earnings Test". In particular, during 2012 a
FERS annuitant between the ages of MRA and age 62 and who is employed or
self-employed (has "earned income") could lose some, if not all, of the
retirement annuity supplement if the annuitant's earned income is more than
If a retired federal employee -- either a CSRS or a FERS annuitant -- is
hired under a Federal appointment, then the annuitant is considered a
"reemployed annuitant". As such, the CSRS or FERS annuity will not be reduced;
however, unless a waiver has been granted, the reemployed annuitant's salary
will be offset by the amount of the CSRS or FERS annuity. If the reemployed
annuitant works full time for at least one year, then the annuitant may apply
for a supplemental annuity. If the reemployed annuitant works full time for at
least five years, the annuitant may then choose either a supplemental annuity or
a recomputed annuity.
A VSIP also known as "buyout authority", is identical to VERA as it allows
agencies that are downsizing or restructuring to offer early retirement to
eligible employees. In addition, VSIP offers an added early retirement incentive
of a lump-sum payment (up to $25,000) to voluntarily separate.
Those employees who meet the following general requirements may be
eligible to receive VSIP:
- be serving in an appointment without time limit;
- be currently employed by the Executive Branch of the federal government for
a continuous period of at least three years;
- be serving in a position covered by an agency VSIP plan;
- applying for and receive approval for VSIP from the agency making the
VSIP offer; and
- not be included in any of the ineligibility categories listed below.
Employees in the following categories are not eligible for
- reemployed annuitants;
- have a disability such that the individual is or would be eligible for
- have received a decision notice of involuntary separation for misconduct or
- previously received any VSIP from the federal government,
- during the 36-month period preceding the date of separation, performed
service for which a student loan repayment benefit was paid, or is to be paid;
- during the 24-month period preceding the date of separation, performed
service for which a recruitment or relocation incentive was paid or is to be
- during the 12-month period preceding the date of separation, performed
service for which a retention incentive was paid or is to be paid.
An agency computes the amount of VSIP on the basis of the lesser of: (1) an
amount equal to the amount of severance pay the employee would be entitled to
receive without adjustment for any previous payment made; or (2) an amount
determined by the agency head, not to exceed $25,000.
Note that a VSIP lump sum payment is subject to federal and state/local
income taxes, as well as to Social Security (FICA) and Medicare Part A (hospital
insurance) payroll taxes. A VSIP lump sum payment cannot be rolled over or
transferred to the TSP or to a traditional or Roth IRA.
An employee who receives VSIP and later accepts employment for compensation
with a federal agency within five years of the date of separation on which the
VSIP is based must repay the entire amount of the VSIP to the agency that paid
it. Note that this repayment must be made before the individual's first day of
reemployment. Under certain circumstances the OPM Director may, at the request
of the head of the agency, waive the repayment requirement.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Registered Health
Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in
Silver Spring, MD and the owner of EZ Accounting and Financial Services, an
accounting, tax preparation and financial planning firm also located in Silver
Spring, MD. He is an instructor at federal employee retirement
seminars throughout the country and writes numerous columns and books on federal