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FERS Annuity Supplement: Understanding the "Earnings" Test
Those employees covered by the Federal Employees Retirement System (FERS) who retire before age 62 under the FERS normal (voluntary) or early retirement rules are entitled to the FERS annuity supplement.
But a FERS annuitant who retires before age 62 and who is employed after retiring from federal service may lose part, or all, of the FERS annuity supplement if the amount the annuitant earns exceeds the "exempt amount."
This column discusses the "earnings" test that applies to the FERS annuity supplement.
Before explaining the "earnings" test and the FERS annuity supplement, it is important to note that:
- the potential reduction applies only to the retiree annuity supplement and not to the basic FERS annuity;
- the reduction for excess earnings does not apply to employees who retire under the special provisions for law enforcement officers, firefighters, air traffic controllers, and military reserve technicians before they reach their minimum retirement age (MRA); and
- those FERS employees who retire under an early retirement (voluntary early retirement authority -- VERA, or a voluntary separation incentive program - VSIP), need not be concerned about the "earnings" test until they reach their MRA.
The exempt amount is the same as the amount established each year by the Social Security Administration for the purpose of calculating the earnings reduction for Social Security benefits for recipients of these benefits who are between age 62 and full retirement age and who continue to receive earned income. In 2011, the exempt amount is $14,160 without losing any of the retiree supplement to which he or she may be entitled. For 2012, the exempt amount increases to $14,640.
The reduction to the FERS annuity supplement under the "earnings" test rules works as follows: If the FERS annuitant's earnings exceed the exempt amount, then the annuity supplement will be reduced $1 for every $2 that is earned above that amount. Earnings for purposes of calculating the earnings reduction consist of the sum of wages for service performed in the year plus all net earnings from self-employment for the year minus any net loss from self-employment for the year.
Note the following:
- any earnings during a year may not exceed the amount of the annuity supplement payable during that year; and
- for the year immediately following the first year during which a retiree becomes eligible to receive the annuity supplement, the annual earnings reduction amount cannot exceed the total annuity supplement to which the individual was entitled in the first year. Consider the following example.
Lisa retired from federal service on Oct. 30, 2010 and receives a FERS annuity supplement of $800 a month. Since her annuity supplement during 2010 totaled $1,600 (two months at $800 per month), any reduction of her annuity supplement payments during 2011 cannot exceed the earnings of $1,600, no matter how much she earns during November and December 2010.
A reduction in the retiree annuity supplement in a given year is based on excess earnings in the previous year. The reduction is assessed beginning with the year immediately after the first year during which the retiree became entitled to the annuity supplement (or reached the MRA, if already receiving the annuity supplement before the MRA). Consider the following two examples.
Example 1. Thomas retired in June 2009 at age 57 and is eligible for the FERS annuity supplement. His earnings from July through December 2009 were subject to the earnings test. If his post retirement earnings exceeded the 2009 exempt amount of $14,160, his retiree annuity supplement for 2010 would have been reduced.
Example 2. Sylvia retired at age 54 in 2008 and reached her MRA in March 2009. At that time she started receiving the FERS annuity supplement. If her post-MRA earnings during the period of April through December 2009 exceed the 2009 exempt amount of $14,160, then her annuity supplement for 2010 would have been reduced.
A retiring FERS employee's last paycheck and lump sum payment for unused annual leave will be received in the month following the FERS employee's retirement. Although both are considered to be "earned income" for purpose of the earnings test, both payments will not be used for FERS annuity supplement earnings test. This is because both the last paycheck and unused annual leave were "earned" before the FERS employee retired.
Note that if no retiree annuity supplement is payable in the year following a year in which the retiree's earnings exceeded the exempt amount (that is, the annuity supplement was terminated during the previous year due to attainment of age 62), there is no reduction for excess earnings since the reduction can only be applied to the retiree annuity supplement.
The Office of Personnel Management (OPM) asks each FERS annuitant who has reached the MRA for a statement of earnings each year he or she is eligible to receive the annuity supplement. Earnings must be reported by retirees on Form RI 92-22, downloadable from http://www.opm.gov/forms.
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.