Under an executive order signed by President Biden on December 22, 2023, federal employees will receive a 2024 pay raise averaging 5.2 percent with more in high-salary areas of the US and less in low-salary areas of the US. The 5.2 percent average pay increase is the largest in 44 years since the 9.1 percent average pay increase that occurred in 1980.
This column discusses how the 2024 federal employee pay increase affects the lump-sum annual leave payment for unused annual leave hours made to those employees who retired at end of pay period 26 (December 30, 2023) and to those employees who will be retiring at the end of pay period 27 (January 13, 2024) of leave year 2023.
- 2024 Federal Pay Raise Finalized in Executive Order
- What Happens to Unused Annual Leave and Sick Leave at Retirement?
General Rule: Entitlement to Lump-Sum Payment for Unused Annual Leave Hours
A federal employee is entitled to receive a lump-sum payment for any unused annual leave hours when the employee separates from federal service. Separation from federal service includes an employee’s resignation and employee’s retirement from federal service.
In order to retire from federal service an employee must meet the minimum number of years of creditable service under either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement Service (FERS) and have reached the minimum age to retire. For example, an employee under either CSRS or FERS could retire at age 60 with 20 years of creditable service.
In general, a lump-sum payment equals the pay the employee would have received had he or she remained employed until expiration of the period covered by the annual leave. The examples below will illustrate.
Calculating a Lump-Sum Payment for Unused Annual Leave Hours
An employee’s agency calculates a lump-sum payment for unused leave hours by multiplying the number of hours of accumulated and accrued unused annual leave hours by the employee’s applicable hourly wage rate of pay, plus other types of pay the employee would have received while on annual leave. Other types of pay exclude any allowances that are paid or the sole purpose of retaining a federal employee in government service.
The following example illustrates:
Example 1. Jason retired from federal service on December 30, 2023, with 448 hours of unused annual leave. At the time he retired, Jason’s final salary (based on the 2023 leave year GS pay schedule) was a GS-14, Step 10 salary rate of $129,878. Jason’s hourly wage rate is computed as:
$129,878 (annual salary)/2087 hours (hours per leave year) = $62.23/hour (2023 hourly wage rate)
January 14, 2024 is the official start of leave year 2024. At that time, federal employees will receive a pay increase averaging 5.2 percent. Employees living and working in a high-cost area of the country (such as Washington, D.C., New York, San Francisco, and Chicago) will receive a higher local pay adjustment compared to employees who work in lower cost areas of the U.S.
Those employees who retire on January 13, 2024 (the last day of leave year 2023) will benefit from the pay increase taking effect on the first day of leave year 2024. That is because the lump-sum annual leave payout will equal the pay the retiring employee would have received had the employee remained employed until the expiration of the period covered by the annual leave.
The following example illustrates:
Example 2. Sheila will retire from federal service on January 13, 2024. At the time she retires, Sheila’s final salary will be a GS-15 Step 5 equal to $133,186 (based on the 2023 leave year GS pay schedule). Sheila’s hourly wage rate is:
$133,186 (annual salary)/2087 hours (hours per leave year) = $63.82/hour (2023 hourly wage rate)
Sheila will have 456 hours of unused annual leave hours at the time she retires. Sheila lives in an area in which the 2024 total pay increase (5.2 percent plus locality pay adjustment) equals 6.0 percent.
With the pay adjustment of 6.0 percent. Sheila’s 2024 hourly wage rate is equal to:
$63.82/hour x 1.06 = $67.65/hour (2024 hourly wage rate)
How Much of a Lump-Sum Payment for Unused Annual Leave Hours Will Jason and Sheila Receive?
The following chart summarizes the amount of lump-sum payment for unused annual leave retiring employees Jason (who retired from federal service on December 30,2023 with 448 hours of unused annual leave hours) and Sheila (who will retire from federal service on January 13,2024 with 456 hours of unused annual leave hours) will receive:
Both Jason’s and Sheila’s agencies calculate the lump-sum payment. In calculating the lump-sum payment, Jason’s agency and Sheila’s agency projects forward that Jason’s and Sheila’s annual leave hours for all the workdays they would have worked had Jason or Sheila had remained in federal service. By law, federal holidays (such as January 1, 2024) are counted as regular workdays in projecting the lump-sum annual leave period.
Other aspects of the lump-sum payment for unused annual leave that federal employees should note:
1. The lump-sum payment for unused annual leave hours is subject to federal and state income taxes, and Social Security (FICA) and Medicare Part A (Hospital Insurance Tax) payroll taxes.
There are no deductions for retirement contributions (TSP contributions and deductions made bi-weekly to the CSRS or the FERS Retirement and Disability Trust Fund. There are also no deductions for the federal insurances (FEHB, FEGLI, FEDVIP or the FLTCIP) premiums.
2. A retiring employee’s agency payroll provider will direct deposit the lump-sum payment into the same bank account that the retiring employee uses for direct deposit of bi-weekly payroll checks.
The direct deposit may occur as soon as the pay period following the final paycheck, or it can take months. The direct deposit of the retiring employee’s final paycheck and lump-sum payment for unused annual leave should occur within 30 to 45 days after the employee retires.
Lump-Sum Payment for Unused Annual Leave and Re-Employment into Federal Service
If a retired federal employee is re-employed in federal service prior to the expiration of the period of the lump-sum period of unused annual leave hours, then the reemployed annuitant must refund the portion of the lump-sum payment that represents the period between the date of reemployment and the expiration of the lump-sum period. An agency recredits to the employee’s leave account the amount of annual leave hours equal to the days or hours of work remaining between the date of reemployment and the expiration of the lump-sum leave period.