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Home | 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
in 2012
Edward A. Zurndorfer, Certified Financial Planner
Printer-Friendly Format



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.

VERA

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, the employee:

  • Meets the minimum age and service requirements and who is:
    • at least age 50 with at least 20 years of Federal service* or
    • at any age with at least 25 creditable years of Federal service*
  • Has served in a position covered by the OPM authorization for the minimum time specified by OPM -- usually 30 days prior to the date of the agency request.
  • Serves in a position covered by the agency's VERA plan; and
  • Separates by the close of the VERA early out period.

*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 following retirement.

· 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:

  1. the employee's sick leave balance as of the date of the employee's transfer to FERS, or
  2. 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:

  1. 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;
  2. take early optional retirement under a VERA; or
  3. 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 basis.

·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.

Post-VERA Employment

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 $14,640.

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.

VSIP

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:

  1. be serving in an appointment without time limit;
  2. be currently employed by the Executive Branch of the federal government for a continuous period of at least three years;
  3. be serving in a position covered by an agency VSIP plan;
  4. applying for and receive approval for VSIP  from the agency making the VSIP offer; and
  5. not be included in any of the ineligibility categories listed below.

Employees in the following categories are not eligible for VSIP:

  1. reemployed annuitants;
  2. have a disability such that the individual is or would be eligible for disability retirement;
  3. have received a decision notice of involuntary separation for misconduct or poor performance;
  4. previously received any VSIP from the federal government,
  5. 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;
  6. 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 paid; and
  7. 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.

Posted 1/23/2011

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 employee benefits.



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