This is the second of two MFR columns discussing the Retirement Annuity Supplement (RAS). The RAS is paid to eligible FERS employees who retire immediately from federal service before their 62nd birthday.
The first column on the RAS discussed the eligibility rules for the RAS and how the RAS is calculated. This column discusses the “earnings test” associated with the RAS.
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A FERS annuitant who is employed after retiring from federal service may lose a portion, or all, of their RAS if the annuitant’s “earned income” exceeds the maximum permissible (the exempt amount). This is called an “earnings test.”
Earned income includes salary, wages, or self-employment net income. Earned income does not include the following: (1) Investment income (interest, dividends, capital gains); (2) Rental income; and (3) Retirement income (CSRS or FERS annuity, military pensions, Thrift Savings Plan or qualified retirement plans, IRAs, and Social Security).
Note the following with respect to the earnings test reduction:
• The reduction applies only to the RAS and not to the FERS annuity, and
• The reduction for excess earnings (salary, wages or self-employment net income) does not apply to Special Provision Employees) until they reach their minimum retirement age (MRA). Special Provision Employees include federal law enforcement officers, firefighters, air traffic controllers and customs and border patrol officers.
Wages/Salary/Self Employment Net Income Earnings: Exempt Amount
The exempt amount of the earnings that the FERS annuitant is the same as the amount established by the Social Security Administration (SSA) for the purpose of calculating the earnings reduction for Social Security retirement benefits. The Social Security retirement benefits earnings reduction applies to Social Security recipients who are younger than their full retirement age (FRA) and who have earned income.
During 2023, the exempt amount was $21,240 per year, or $1,770 per month. During 2024, the exempt amount is $22,320 per year or $1,860 per month.
Amount of Reduction
If a FERS annuitant’s earnings exceed the exempt amount, then a FERS annuitant’s RAS will be reduced $1 for every $2 earned above the exempt amount. Earnings for the purpose of calculating the RAS 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 reduction during a year may not exceed the amount of the RAS; and
• For the year immediately following the first year during which an annuitant becomes eligible to receive the RAS, the annual earnings reduction amount cannot exceed the total RAS amount to which the FERS annuitant was entitled during the first year of retirement, or the preceding year. The following example illustrates:
Example 1. Emily retired on September 30, 2022, and her RAS was $1,000 a month. Since Emily’s RAS payments during 2022 (October, November and December 2022) totaled $3,000, any reduction in Emily’s RAS during 2023 for post-retirement excess earnings during 2022 cannot exceed $3,000, no matter how much Emiliy earned during the months of October through December 2022.
When RAS Reduction is Assessed
A reduction in the RAS due to excess earnings 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 a FERS annuitant became entitled to the RAS (or reached their MRA if already receiving the RAS before the annuitant’s MRA; the MRA depends on the annuitant’s year of birth and is presented in Table 1).
Table 1. MRA According to Birth Year
The following examples illustrate:
Example 2. Michael retired on December 31,2021 at age 58 with 30 years of service. He is eligible for the RAS. Micheal’s earnings between January 1,2022 and December 31,2022 were subject to the “earnings test”. If his post-retirement earnings exceeded the 2022 exempt amount of $19,560, then for every $2 that Micheal earned above $19,560 between January 1 and December 31, 2022, OPM will reduce Micheal’s monthly RAS by $1 during 2023.
Example 3. Betsy retired at age 53 as a FERS employee under a discontinued service retirement. Betsy reached her MRA in September 2023 and began receiving her RAS. Her first RAS monthly check was received in October 2023. Betsy’s salary earnings starting in September 2023 became subject to the earnings test. If Betsy’s post-retirement earnings exceed the 2023 exempt amount of $21,240, then for every $2 that Betsy earned above $21,240 between October 1 and December 31,2023, OPM will reduce Betsy’s monthly RAS by $1.
Example 4. Kent retired in May 2018 at age 51 as a federal firefighter with 22 years of federal service. He received his RAS immediately after retiring. Kent’s RAS will not be subject to the “earnings test” until he reaches his MRA of 56 years and 6 months in November 2023.
FERS Annuitant’s Reporting of Earnings to OPM’s Retirement Office
OPM asks any FERS annuitant receiving the RAS and who has reached his or her MRA to provided statement of earnings for the previous year. Earnings must be reported by FERS annuitants using OPM Form RI 92-22 (Annuitant Supplement Earnings Report) – RAS Receipt: Effect on Future Social Security Monthly Retirement Benefits
A FERS annuitant’s receipt of the RAS has no effect on the annuitant’s future Social Security monthly retirement benefits. Once the annuitant reaches age 62, the RAS ceases. The annuitant is then eligible to apply for his or her monthly Social Security retirement benefit. However, by applying at age 62, the annuitant’s monthly Social Security monthly retirement benefit will be permanently reduced by as much as 30 percent. The annuitant is therefore encouraged to delay the start of their monthly Social Security retirement benefit until at least their full retirement age (FRA) thereby avoiding the reduction. An annuitant’s FRA depends on their year of birth as shown in Table 2.
Table 2. Social Security FRA According to Birth Year
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019