What Federal Employees Who Retired Dec. 31 and Receiving Social Security Benefits Need to Know

December 31 has always been a popular retirement date among federal employees several reasons. This past December 31, 2022 was no exception, as many CSRS- and FERS-covered employees retired. Perhaps one reason why December 31, 2022 in particular was popular is because December 31,2022 was both the end of the 2022 leave year (at most federal agencies) and the end of the 2022 calendar year.

Those employees who retired on December 31, 2022 could have potentially received payment for the maximum number of hours of unused annual leave. For most employees, that amount is 448 hours of unused annual leave. The lump-sum payment for unused annual leave hours is fully taxable and subject to federal and state income taxes, and Social Security (FICA) and Medicare Part A (Hospital Insurance Tax) payroll taxes.

Those employees who retired December 31, 2022 will have their lump sum payment directly deposited into the same bank account that the federal employee’s bi-weekly paychecks are directly deposited sometime in January 2023. A retiring employee will also get direct deposit of his or her final paycheck for pay period 26 of leave year 2022 into his or her bank account sometime in January 2023.

This column discusses how some employees who retired from federal service on December 31, 2022 and who plan to continue working during 2023 (as a retired annuitant, work for a private company, or be self-employed) and receive Social Security retirement benefits may temporarily lose some or all of those Social Security retirement benefits.

The reason for this temporary loss of Social Security retirement benefits is due to the Social Security “earnings test”, as discussed in this column. Included in the discussion is the possible effect of a retiring employee’s lump-sum payment for unused annual leave hours and final paycheck on the Social Security earnings test.

How Earnings Affect Social Security Benefits

An employee who retires from federal service and continues employment in the public/private sector or by self-employment may also elect to start receiving his or her Social Security retirement benefits if he or she is at least age 62 and eligible for Social Security. Those retired federal employees who have accumulated a minimum 40 credits of Social Security (and are therefore “fully insured” for Social Security benefits) can start receiving their Social Security retirement benefits starting when they become age 62.

As is discussed below, if the retiree is younger than his or her full retirement age (FRA), is receiving Social Security retirement benefits while in receipt of “earned income” (salary/wages or net self-employment income), the Social Security Administration may take back some or all of the Social Security retirement benefit. Once the retiree reaches the month of his or her FRA, there is no longer a Social Security “earnings test” that is imposed. The following chart summarizes an individual’s FRA given the individual’s year of birth:

Each year the Social Security Administration (SSA) has two earnings tests. One earnings test applies to Social Security recipients who are between age 62 and the year they reach FRA. The second earnings test applies to Social Security recipients who are receiving benefits between January 1 and the last day of the month before the month they become FRA.

Here are two examples that illustrate:

Example 1. Jesse was born November 25,1958 and will become age 65 in November 2023. His FRA is 66 years and 8 months, which he will become in July 2025. If Jesse is receiving Social Security retirement benefits during 2023 and has earned income, then Jesse is subject to the first earnings test during 2023.

Example 2. Sheila was born November 10,1956 and became age 66 years in November 2022. Her FRA is 66 years and 4 months, meaning that Sheila will become FRA in March 2023. If Sheila is receiving Social Security retirement during 2023 and has earned income, then Sheila is subject to the second “earnings test” between January 1 and February 28, 2023.

For the year 2023, the following SSA earnings apply:

• Individuals younger than FRA throughout 2023 (born between July 2*,1957 and January 1, 1962) and receiving their Social Security retirement benefits can earn $21,240/year or $1,770/month. For every $2 an individual earns above $21,240, the SSA will reduce their monthly Social Security benefits by $1.

• Individuals who will reach the month they become FRA during 2023, who were born between September 2,1956 and July 1*, 1957, can earn up to $56,520/year or $4,710/month until the month they reach their FRA during 2023. For every $3 an individual earns above $56,520, the SSA will reduce their monthly Social Security benefits by $1.

*Note: For purposes of age, the Social Security Administration considers an individual to be “of age” as of the day before the individual’s birthday. Two examples: (1) An individual born on July 2,1957 is “of age” as of July 1. This means the individual’s FRA (66 years and 6 months) occurs on January 1, 2024; (2) An individual born on July 1,1957 is “of age” as of June 30. This means the individual’s FRA (66 years and 4 months) occurs on December 30, 2023.

Note the following:

1. Once an individual reaches the month he or she becomes FRA, the individual can have an unlimited amount of earned income without losing any monthly Social Security benefits. At that time, the “earnings test” no longer applies.

2. The “earnings test” applies only to earned income. Earned income includes salary/wages and net self-employment income. Not included in the “earnings test” are investment income (interest, dividends, capital gains), pension income (CSRS or FERS annuity income), traditional Thrift Savings Plan (TSP) and traditional IRA income, rental income and “other income” such as gambling or lottery winnings.

3. If an individual younger than his or her FRA during 2023 (born between July 2,1957 and January 1, 1962) who loses all or part of their Social Security benefits during 2023 as a result of violating the “earnings test”, there is some good news. About one year after the individual reaches his or her FRA, the SSA will recalculate and increase the individual’s Social Security monthly benefit. The SSA is doing this in order to consider those months in which the individual received no benefit or a reduced benefit, a result of losing those benefits due to excess earned income.

4. Any earned income subject to Social Security (FICA) taxes an individual earned while receiving a monthly Social Security benefit will most likely get an increase in the individual’s lifetime Social Security averaged index earnings, thus increasing their monthly benefits. This is because the SSA, annually recomputes an individual’s monthly retirement benefits based on the individual’s 35 years of highest Social Security earnings, no matter which years those earnings occurred. The higher earnings associated with post-federal employment may increase a federal annuitant’s Social Security monthly retirement benefit as the annuitant continues to work and has higher Social Security earnings compared to their Social Security earnings during the earlier years of their employment.

When Do Salary/Wages Count Towards the Earnings Test?

For purposes of the limit of salary/wages or net self-employment income used in the Social Security “earnings test, salary/wages and net self-employment will count towards the earnings limit when the salary/wages or net self-employment income are earned and not when they are paid. If an individual has earned income in one year and there is an agreement between the employer and employee to defer payment until the following year, those earnings will not count as earned income in the year the employee actually receives them. That is, the year the check for the salary earned is actually deposited into his or her bank account.

Special Payments After Retirement

After an individual retires, the individual may receive “special payments” for work performed before the individual started receiving monthly Social Security benefits. These payments are not included in the earnings test if these payments were work performed before the individual retired.

“Special payments” for a federal employee who retired on December 31,2022 and who planned to start receiving his or her Social Security retirement monthly benefit early in 2023 include:

(1) The employee’s final paycheck for pay period of leave year 2022. At most federal agencies, pay period 26 for leave year 2022 ended on December 31, 2022; and

(2) The lump-sum payment for unused annual leave hours that a retiring employee has accumulated as of the day of his or her retirement. The reason that both of these payments will not be counted as part of the earnings test for 2023 is that both payments were earned before January 1,2023 and paid during January 2023. The following example illustrates:

Example 3. Cynthia became age 64 in October 2022 and retired from federal service under FERS on December 31, 2022 with 32 years of federal service. She elected to receive her first Social Security retirement check in January 2023. When she retired, Cynthia had 448 hours of unused annual leave (fully taxable and subject to Social Security (FICA) tax and federal and state income taxes) which she will receive in a lump-sum payment in early January 2023, together with her last paycheck for pay period 26 of leave year ending December 31,2022. Cynthia will receive a 2023 W-2 from her agency in January 2024, showing the amount of her lump-sum payment for unused annual leave hours and her last paycheck for pay period 26 of leave year 2022. Those two payments will not be counted towards the 2023 earnings limit for Cynthia’s 2023 Social Security earnings test because both payments were earned during 2022.

To ensure that the SSA does not include the lump-sum payment for unused annual leave hours and last salary check in the earnings test for 2023, Cynthia should download Form SSA-13 (Employer Report of Special Wage Payments) (from www.ssa.gov/forms/ssa-131.pdf). She should give the form to her Human Resource/Personnel Office to be filled out and then sent to the SSA for processing. In so doing, Cynthia’s two payments will not be included in her 2023 Social Security “earnings test” should she elect to receive her Social Security monthly benefit during 2023. A portion Form SSA-131 is presented below: