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What Benefits and Special Payments Affect the "Earnings" Test for Retiring Federal Employees?
Federal employees covered by either the Civil Service Retirement System (CSRS) Offset or by the Federal Employees Retirement System (FERS) need not be concerned about their lump sum payment for unused annual leave with respect to the "earnings" test.
Salary and self-employment income earned after an employee retires from federal service can affect both the FERS annuity supplement (for FERS employees who retire before 62) and Social Security retirement benefits for those employees who retire between the ages of 62 and full retirement age (FRA).
This column discusses "special payments" an employee receives shortly after their retirement date and their effect on the FERS annuity supplement or Social Security benefits. For CSRS Offset employees, the Social Security benefits that could be affected by the "earnings" test are those benefits earned outside of federal service in private industry or spousal benefits and not the Social Security benefits earned during the years of CSRS Offset service.
What is the Social Security "Earnings" Test?
In general, there are limits as to how much a Social Security beneficiary younger than full retirement age (FRA) or a FERS annuitant younger than age 62 can earn while still working. FRA is age 65 for individuals born before 1938, increasing to age 67 for individuals born in 1960 and later. For example, FRA is age 66 for individuals born in 1943 through 1954.
FERS employees who retire under the normal retirement rules or under an early retirement authority (VERA or VSIP) are eligible to receive the FERS retirement annuity supplement starting with the later of the employee's retirement date or the month the retired employee becomes minimum retirement age (MRA).
The "earnings" test during 2013 for Social Security recipients between the ages of 62 and FRA -- that is, individuals born during 1948, 1949, 1950 or 1951 -- is as follows:
- If a recipient is younger than FRA, then $1 in benefits will be deducted for each $2 the recipient earns above $15,120 during 2013. In other words, the earnings limit during 2013 for these individuals is $15,120.
- If a recipient reaches FRA (age 66) during 2013 - that is, someone born sometime during 1947 -- then $1 in benefits will be reduced for every $3 the recipient earns above $40,080 until the month the recipient becomes age 66.
- Starting with the month a recipient reaches FRA, a recipient will receive full Social Security benefits no matter how much they earn. In other words, the "earnings" test no longer applies once an individual reaches FRA.
Gross wages and net earnings from self employment count towards the earnings test limit. Gross wages are the amount an individual earns before any payroll deductions for income taxes, Social Security (FICA) tax, Medicare Part A (hospital insurance) tax, life insurance premiums, or other employer deductions. If an individual has wages and is self-employed, a net loss from self-employment will reduce the income counted towards the individual's earnings test limit.
The "earnings" test during 2013 for FERS retirement annuity supplement recipients between the ages of MRA and age 62 is identical to the "earnings test" for Social Security recipients between the ages of 62 and FRA with one difference. Instead of the Social Security Administration doing the reduction for Social Security recipients who violate the "earnings" test, it is the Office of Personnel Management (OPM) who reduces a FERS annuitant's FERS retirement annuity supplement if the annuitant violates the "earnings" test.
What are "Special Payments"?
After an employee retires from federal service, the retired employee usually receives payments for work they did before they started receiving Social Security benefits or the FERS annuity supplements. "Special payments" include bonuses, the employee's last paycheck, and the employee's lump sum payment for unused annual leave. These payments could be part of a recipient's "earnings test" limit. However, since these payments were "earned" before an employee retired, they will not be included as part of the "earnings" test. Consider the following example:
Thomas, age 63, retired from federal service on Dec. 29, 2012, with 25 years of FERS service. Thomas applied for his first Social Security check in November 2012 with his first Social Security retirement check scheduled to be issued in January 2013. Thomas will receive his last paycheck for the pay period ending Dec. 29, 2012, and his lump sum payment for 448 hours of unused annual leave sometime during January 2013. Thomas' last paycheck and lump sum payment for unused annual leave will appear on Thomas' 2013 W2 that he will receive in January 2014. Since Thomas' last paycheck and annual leave hours were earned and accumulated respectively before he retired on Dec. 29, 2012, they will not be used in Thomas' Social Security "earnings" test for 2013.
What "Special Payment" Recipients Should Do
Those employees younger than FRA who recently retired from federal service should contact the Social Security Administration if they intend to receive Social Security benefits immediately after retirement. FERS employees who retire before age 62 under a regular retirement should contact OPM about these "special payments" in order that "special payments" be not counted as part of total earnings during 2013.
The Social Security Administration has a special form -- SSA-131, downloadable from http://www.ssa.gov -- in which an employer reports these "special payments". A recently retired employee who intends to start receiving their Social Security retirement benefit should contact their Personnel Offices to make sure this form is filed with the Social Security Administration. FERS retirement annuity supplements are encouraged to make sure that their payroll offices have contacted OPM to ensure that these "special payments" are reported to OPM and are not included as part of total earnings for the purpose of the "earnings" test for the FERS retirement annuity supplement.
About the Author
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, 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. Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.