Since any early out authority extends only for a short period, this column will discuss some of the financial consequences of an early retirement. The information presented will hopefully help those employees eligible for early retirement make the right decision in deciding whether they should retire at such a time.
It is important to discuss why an agency wants to offer early retirement to eligible employees. Voluntary Early Retirement Authority (VERA) allows agencies that are undergoing substantial restructuring, reshaping, and 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 and helps the agency complete the needed organizational change with minimal disruption to its workforce.
An agency must first request VERA and receive approval from OPM before the agency may offer early retirement to its employees. The approval will stipulate a period of time during which the option will remain available. By offering these short term opportunities, an agency can make it possible for employees to receive an immediate CSRS or FERS annuity. In some cases, this may happen several years before the employees would be otherwise eligible to retire under the normal retirement rules.
As a financial incentive for eligible employees to retire early, an agency may offer a Voluntary Separation Incentive Payment (VSIP). A VSIP is generally the lower of an employee’s gross salary (as shown on their current SF 50) or a fixed dollar amount, typically capped at $25,000 at most federal agencies. Note that the VSIP payment is fully federal and state taxable, and may not be rolled over to an IRA.
Employee Eligibility Requirements for a VERA/VSIP
An employee who is covered either by the Civil Service Retirement System (CSRS, including CSRS Offset employees) or the Federal Employees Retirement System (FERS, including “Trans” FERS employees) may apply to retire on an immediate annuity if the employee satisfies all of the following conditions:
- Meets the age and service requirements;
- meets the minimum civilian service requirement:
- separates from a position subject to CSRS or FERS coverage;
- meets the “one-out-of-two” requirement (CSRS employees only);
- has served in a position covered by the OPM authorization for the minimum time specified by OPM (usually at least 30 days); and
- separates by the close of the “early out” (VERA/VSIP) period. These requirements are now discussed in more detail.
• Minimum age and service. The following chart summarizes the minimum age and service requirements.
Note that if an employee has the minimum 5 years of creditable civilian service, then creditable military service may be used to meet the balance of service time necessary for an early voluntary retirement. A CSRS employee with prior military service may not have to make deposit in order to get CSRS service credit. But in order for a FERS employee to get credit for post-1956 military service, the employee must make a full military deposit before retirement. Also, for both CSRS and FERS employees, accrued and unused annual leave may not be used to meet the creditable service requirements noted in the table above.
• Minimum civilian (creditable) service. An employee must have at least five years of creditable civilian service in order to be eligible for an early voluntary retirement. Creditable civilian service for this purpose includes:
- Service for which full CSRS deductions were taken, even if employee CSRS deductions were refunded and not redeposited;
- service for which full employee FERS deductions were made and not refunded. If employee FERS were refunded, then service time will include fully redeposited deductions including interest charges;
- service for which full Social Security taxes and reduced CSRS deductions were taken (even if CSRS deductions were refunded and not redeposited);
- nondeduction service — that is temporary intermittent or seasonal service — for CSRS employees; and
- nondeduction service that is temporary, intermittent or seasonal and was performed before Jan. 1, 1989 by a FERS employee if a full deposit including interest charges was made.
• “One-out-of-two” (year) requirement (CSRS employees only). A CSRS employee must be covered by CSRS for at least one year within the two year period immediately preceding the separation on which the annuity is based. The one year of service does not have to be continuous. The year of service, however, has to be subject to CSRS deductions.
• Separated from covered positions. The employee must be separated from a position covered by either CSRS or FERS deductions from the employee’s paycheck.
• Minimum time requirement. An employee must have been on the agency’s payroll for which the early retirement is authorized for at least 30 calendar days before the agency’s initial request to OPM. The service must have remained continuous with the agency, without a break of service for more than four days since being hired. This minimum length of time may vary depending on the specific early optional authority from OPM.
• Separation by close of early out period. The employee must be separated by the end of the last day of OPM’s authorized early out period. If the agency has exercised its discretion to end the early out period earlier than the date authorized by OPM, then the employee must be separated by the end of the last day permitted by the agency.
Effect of Early Voluntary Retirement on Benefits
Under an early retirement, a CSRS retirement is the same as a normal or regular CSRS retirement in the sense that if the employee retires on the 1st, 2nd or 3rd day of a month, then the CSRS retirement takes effect the following day. Otherwise, the retirement becomes effective the first day of the month following retirement.
A CSRS annuity is calculated based on the average high-three salary and years and months of creditable service. All unused sick leave is added to service time for the purpose of annuity computation. By retiring earlier than later in federal service, an employee will receive a smaller annuity compared to the employee retiring in a future year. In particular, for each additional year the employee works the CSRS annuity will increase by two percent per year. If the employee is due a step increase and/or there are government-wide pay increases and the employee continues in federal service, then the employee’s high-three average salary will be larger, resulting in a larger CSRS annuity. If the employee is under age 55 at the time of retirement, then the CSRS annuity will be reduced by one-sixth of one percent for each full month or two percent per year the retiring employee is under age 55. The annuity rate will not be increased when the annuitant reaches age 55.
Under an early retirement, a FERS retirement is like a normal or regular FERS retirement in the sense that a FERS retirement becomes effective the first day of the month following retirement. Effective January 1, 2014, all unused sick leave will be added to total service time for the purpose of calculating the FERS annuity. Annuity is calculated based on the high-three average salary and years and months of creditable service. By retiring earlier than later in federal service, an employee will receive a smaller annuity. In particular, for each additional year the employee works the employee will receive one percent of their high-three average salary per year of additional service (1.1 percent if the employee has at least 20 years of service and retires after age 62). If the employee is expecting a step increase or promotion in the next few years and the employee retires early, then the employee’s high-three average salary will not include these pay adjustments and the high-three average salary will therefore be smaller. Unlike a CSRS annuity, there is no reduction in the FERS annuity for employees under the age of 55 who retire under a VERA/VSIP.
Employees retiring in conjunction with a VERA/VSIP and who want to continue their federal health benefits into retirement must have minimum coverage under the Federal Employees Health Benefits (FEHB) program. They must have been covered:
- for the five years of their federal civilian service leading up to their retirement date in order to have coverage in the FEHB program throughout retirement; or
- if less than five years, for all service since the employee was eligible for these benefits unless these requirements are waived. FEHB coverage for an annuitant is identical to coverage for an employee. Like it does for employees, the federal government pays 72 to 75 percent of the FEHB premiums, and annuitants pay the remaining 25 to 28 premiums of the premiums, deducted from their annuity checks.
Federal Employees Group Life Insurance (FEGLI) can be continued through the retirement system provided the employee has carried the coverage for at least five years prior to retirement. Value and cost depend on elections made at retirement via form SF 2818.
The special retirement annuity supplement is for FERS employees who retire before age 62, including those FERS employees who retire early under a VERA/VSIP. However, those FERS who retire before their minimum retirement age (MRA) will not receive the special retirement annuity supplement until the month they become MRA. The special retirement annuity supplement stops the month that a FERS annuitant becomes age 62.
By retiring earlier than later in their federal service, an employee will not be able to contribute additionally to the Thrift Savings Plan (TSP). This is especially important for FERS employees who, in addition to not being able to contribute to the TSP, will not receive their agency’s automatic one percent of gross salary contribution and agency matching contribution.
Most FERS annuitants will need a sizable TSP account at the time of retirement in order to survive financially throughout retirement. Many financial advisors would recommend that a retiring FERS employee’s TSP account should have a minimum value of $500,000. A FERS employee who less than $500,000 in their TSP account at the time of retirement should give serious consideration to not retiring unless they find other employment that allows to contribute to another qualified retirement plan such as a 401(k) plan. Also, if a FERS employee retires before the year they become age 55, the employee will have to wait until age 59.5 to make penalty-free withdrawals from their TSP accounts. The only options for pre-age 55 penalty-free TSP withdrawals are:
- A TSP annuity; or
- monthly payments based on life expectancy according to Internal Revenue Code Section 72(t).
Since an individual’s Social Security retirement benefits are based on an individual’s 35 highest years of Social Security wages, a FERS employee who retires early from federal employment and who does not or cannot find private sector employment or self-employment, will ultimately receive less in Social Security retirement benefits.
Employment After Voluntary Early Retirement
Employees who take voluntary early retirement are not subject to any restrictions regarding their FERS annuity in the event that they accept non-federal employment. The only problem is for FERS employees who qualify for the FERS annuity supplement could have their annuity supplement reduced or discontinued due to an “earnings limitation”.
If an annuitant is hired under a federal appointment, then the annuitant is considered a “reemployed annuitant”. This means the annuity will continue and the new federal salary will be offset by the annuity amount. The only exception is the new “phased retirement” which started at some agencies in 2013.