While they are in federal service, federal employees earn annual leave and sick leave.
Annual leave is paid time off for almost any reason, mostly for vacation time. Sick leave is paid time off due to sickness, doctor and dentist visits for themselves as well as paid time off to take care of family members in need of medical care. Full-time employees accrue 4 hours of sick leave very two weeks throughout their federal service, with any unused sick leave hours carried over from one leave year to the next leave year.
During the first 3 years of their federal service, full-time employees accrue 4 hours of annual leave every pay period, during years 4 through 14 full-time employees accrue 6 hours of annual leave every pay period (10 hours during the last pay period). Upon reaching 15 years of service and for the remainder of his or her federal service, a federal employee accrues 8 hours of annual leave every pay period.
For most employees, there is an annual ceiling as far as how many hours of unused annual leave can be carried over from one leave year to the next.
The question is: When a federal employee retires from federal service under the immediate retirement rules, (or when an employee elects to leave federal service, and the departing or retiring employee has unused annual leave and unused sick leave hours) what happens to the unused annual leave and unused sick leave hours?
This column discusses the treatment of unused annual hours and unused sick leave hours at the time of an employee’s departure or retirement from federal service.
Treatment of Unused Annual Leave Hours
A retiring or a departing employee receives a lump-sum payment for all unused annual leave hours as of the day that the employee retires or leaves federal service (usually because the employee has elected a deferred retirement).
A lump-sum payment will be equal to the total pay the employee would have received had the employee remained in federal service until the expiration of the period included in the total amount of unused annual leave hours. The following two examples illustrate:
Example 1. Dawn, age 52, had 15 years of federal service when she decided to leave federal service at age 52, opting for a deferred retirement starting when Dawn becomes age 62. When Dawn left federal service, she had accrued 160 hours of unused annual leave hours. 160 hours of unused annual leave is the equivalent of Dawn’s working two full (80-hour) pay periods. She received a lump sum payment (directly deposited into the same bank account used for her payroll deposit) within one month of leaving federal service.
Example 2. William, age 62, retired from federal service on Dec. 31, 2021 under an immediate retirement with 440 hours of unused annual leave hours. 440 hours of unused annual leave is the equivalent of five and one-half pay periods. William will receive a lump-sum payment (via a direct deposit) of his unused annual leave hours in the same bank account that his paycheck was directly deposited throughout the year 2021. The direct deposit showed up in William’s bank account during January 2022.
As explained in the next section, the lump-sum payment for unused annual leave hours is fully taxable for federal and state tax purposes and is subject to Medicare Part A (Hospital Insurance) and Social Security (FICA) payroll taxes. No other deductions (no CSRS or FERS retirement plan contributions, no type of insurance premiums, or TSP contributions) are made from the lump-sum payment for unused annual leave hours.
Calculating a Lump-Sum Payment for Unused Annual Leave
An agency calculates a lump-sum payment for a departing or retiring employee by multiplying the number of unused hours of annual leave by the employee’s applicable hourly rate of pay. The lump-sum payment also includes other types of pay the employee would have received while on annual leave, excluding any allowances that are paid for the sole purpose of retaining a federal employee in federal service (for example, retention incentives and physicians’ comparability allowance).
Salary or pay included in the determination of a departing or retiring employee’s hourly rate of pay are:
(1) Basic and locality pay adjustments, as shown on the employee’s SF 50 (Notice of Personnel Action);
(2) Within grade increases, if the waiting period has been met as of the day of separation;
(3) Administrative uncontrollable overtime pay, availability pay and standing duty pay;
(4) Night differential for Federal Wage System (FWS) employees only;
(5) Regularly scheduled overtime pay under the Fair Labor Standards Act for employees on uncommon hours of duty;
(6) Supervisory differentials;
(7) Non-foreign area cost-of-living allowances and post-differentials; and
(8) Foreign area post differentials. The hourly rate of pay is determined by taking an employee’s current gross salary and dividing that amount by 2087 hours (total hours per leave year a federal employee is employed).
Many federal employees are aware that the end of December is a popular time of year for employee to retire from federal service. There are two reasons, namely:
(1) A retiring employee could in fact be paid for the maximum number of unused leave hours at the end of leave year and before the beginning of the next leave year; and
(2) Assuming there is a government-wide pay increase and a locality pay increase taking effect on the first day of the new leave year in early January, at least a portion of the retiring employee’s lump-sum payment for unused annual leave hours will include the effect of the government-wide pay increase and locality pay increase. This is because when calculating a retiring employee’s lump-sum payment for unused annual leave hour, the employee’s Payroll Processing Office takes the retiring employee’s unused annual leave hours and “projects” a portion of the unused annual leave hours into the new leave year. If there is a government-wide and locality pay increase, the increases become effective on the first day of the new leave year. The payment for unused annual leave hours would therefore include the effect of the government-wide pay increase and locality pay adjustment.
The following two examples illustrate:
Example 3. Rick retired on Dec. 31,2021 with 440 hours of unused annual leave. At the time of Rick’s retirement his SF 50 salary was $128,000. His hourly rate of pay was therefore $128,00/2087 hours, or $61.33/hour. At the start of the new leave yar 2022 (Jan. 2, 2022) federal employees received a 2.7 percent pay increase. Since Rick retired at the end of pay period 26 of leave year 2021, his lump-sum payment for unused annual leave, Rick’s payroll processing office “projected” Rick’s 440 hours of unused annual leave hours into the 2022 leave year. Thus, Rick’s payment for unused annual leave hours was calculated at the hourly rate of $61.33 (2021 hourly rate) times 1.027 (2.7 percent government pay increase) equals $62.99/hour
440 hours (of unused annual leave) times $62.99/hour = $27,715.60
Note that the $27,715.61 is fully taxable, subject to federal and state income taxes, Social Security (FICA) and Medicare Part A (Hospital Insurance) payroll taxes. Also, no portion of the lump-sum payment for unused annual leave can be contributed to the TSP.
Example 4. Charlotte retired on July 31,2021 with 300 hours of unused annual leave. Charlotte’s SF 50 salary at the time of her retirement was $156,000. Her hourly wage rate was therefore $156,000/2087 hours, or $74.75/hour. Because Charlotte retired during the middle of 2021, all of Charlotte’s 300 hours of unused annual leave were paid within the 2021 leave year and using Charlotte’s 2021 hourly wage rate. Charlotte’s lump-sum payment for unused annual leave was therefore calculated as:
300 hours (of unused annual leave) times $74.75/hour = $22,424.53
Treatment of Unused Sick Leave
Both CSRS/CSRS Offset and FERS employees receive credit for the total number of unused sick leave hours on the day that they retire. Retiring CSRS and FERS employees should be aware of the following with respect to the treatment of unused sick leave hours:
• Unused sick leave hours are converted to months and days of service using the OPM 2087 Hour Sick Leave Conversion Chart (see link below)
• Unused sick leave credit when converted to service time is used only for computation purposes of the CSRS or FERS annuity and cannot be used for eligibility purposes (eligibility to retire)
• Employees who leave federal service and elect a deferred annuity will permanently lose all unused sick leave hours at the time they leave federal service, and
• There is no limit as to the number of unused sick leave hours that can be used for computation purposes.
OPM’s sick leave conversion table for converting unused sick leave in hours to months and days of service time may be found here on page 51 (PDF download from OPM.gov).
The following example (based on the information from example 3) illustrates the treatment of unused sick leave:
Example 5. Same information as in Example 3. When Rick retired from federal service on Dec. 31, 2021, he had 813 hours of unused sick leave. Rick’s service computation date (SCD) for retirement is Nov. 15, 1989. The following chart summarizes the total service time in the computation of Rick’s FERS annuity.