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Checklist for Federal Employees Retiring in Late December or Early January

December 22, 2020 - By Edward A. Zurndorfer, Certified Financial Planner

One of the most popular retirement dates for FERS-covered employees is December 31 and this year Dec. 31, 2020 is no exception. For CSRS/CSRS Offset-covered employees, January 2 and January 3 are popular retirement dates. January 2, 2021 – the end of pay period 26 for leave year 2020 – will likely be a popular retirement date for retiring CSRS/CSRS Offset employees. More explanatory information on why December 31 and January 2 and January 3 are popular retirement dates can be found here.

This column presents a checklist of some actions that FERS-covered employees retiring in late December 2020 or CSRS/CSRS Offset-covered employees retiring in early January 2021 should consider performing to make sure their transition into retirement is as financially beneficial and smooth as possible.

Final opportunity to contribute to the TSP

Those employees retiring on Dec. 31, 2020 and Jan. 2, 2021 are retiring close to or at the end of pay period 26 of leave year 2020. These retiring employees may have previously made their maximum contribution to the TSP for calendar year 2020 ($19,500 of “regular” TSP contributions and $6,500 of “catch-up” TSP contributions for employees over age 49).

However, their paychecks for pay period 26 will be deposited into their bank accounts sometime in early to mid- January 2021. As such, these retiring employees are allowed to contribute a portion of their final paychecks to the TSP. This is because the TSP “contribution meter” has restarted with the start of calendar year 2021.

Retiring FERS employees who contribute a portion of their final paychecks for pay period 26 to the TSP will also receive an automatic 1 percent of gross contribution and a maximum 4 percent of matching contribution from their agency. The maximum 4 percent match assumes a FERS employee contributes to the TSP at least five percent of their salary for that last pay period, pay period 26.

Lump-sum payment for unused annual leave hours

The lump sum payment for unused annual leave hours is fully taxable in which federal and state income taxes and Social Security (FICA) and Medicare Part A (Hospital Insurance tax) payroll taxes are withheld. The net payment (made by the retiring employee’s payroll processing office) will be directly deposited into the retiring employee’s same bank account as the employee’s paychecks are deposited. The direct deposit will occur sometime in January 2021. Retiring employees cannot elect to have part of the lump-sum payment for unused annual leave contributed to their TSP accounts.

However, retiring employees can elect to use up to $7,000 of the lump-sum payment into order to make a 2021 contribution to a traditional IRA in which the contribution may be deductible depending on:

(1) the retiring employee’s 2021 adjusted gross income and

(2) whether the retired employee will be participating in another qualified retirement plan during 2021 and/or if the retired employee is married, whether the spouse participates in a qualified retirement plan during 2021.

Retired employees who qualify to make a fully deductible traditional IRA contribution can directly transfer the fully before-taxed IRA account to the retired employee’s traditional TSP account during 2021 or later using Form TSP-60 (Request for a Transfer Into the TSP), downloadable here.

For retiring employees over age 65, eligible to keep their Federal Employees Health benefits (FEHB) insurance into retirement and enrolled in Medicare Part A – enroll in Medicare Part B

Federal employees enrolled in a FEHB health insurance plan are not required to enroll in Medicare once they become age 65. Most employees enroll in Medicare Part A (Hospital Insurance) when they become age 65 because there is no premium cost for Part A. On the other hand, Medicare Part B (Medical Insurance) is not free. There is a monthly premium, the amount of which depends on the Part B enrollee’s modified adjusted gross income. But the rule is that any employee over age 65 who continues to work for an employer who offers group health insurance coverage (like the Federal government) is not required to enroll in Part B until the employee retires from that employer.

Upon retiring from that employer, the retired employee has 8 months – starting from the day the employee retires – to enroll in Part B and not be subject to a late enrollment penalty. Therefore, an employee age 65 or older retiring from federal service on Dec. 31, 2020 and enrolled in a FEHB health insurance plan has until Aug. 31, 2021 to contact the Social Security Administration to enroll in Medicare Part B. The retiring employee should download Form CMS L564 (Request for Employment Information) here and give the form to the Human Resources or Personnel Office to complete.

For retiring employees who are between age 62 and their full retirement age (FRA) (age 65-67) and who will be receiving their first Social Security monthly retirement benefits in January 2021 should fill out Form SSA-131 (Employer Report of Special Wage Payments))

(Download the form here) should be completed by the retiring employee’s Personnel or Human Resources Office. Since these retired employees are now receiving their Social Security retirement monthly benefits and are younger than their FRA, any earned income (salary, wages, self-employment income) that these federal annuitants earn and receive starting in January will be subject to the Social Security “earnings test”.

In particular, during 2021 any federal annuitant born between 1956 and 1959 can earn up to $18,960 without losing any of their Social Security benefits. For every $2 the annuitant earns about $18,960, the Social Security Administration (SSA) will take back $1 of their monthly Social Security benefit. For retiring employee born in 1955 and receiving Social Security retirement benefits during 2021, these individuals can earn up to $50,520 until the month they become age 66 years and 2 months without losing any of their benefits. For every $3 these individuals earn above $50, 520, the SSA will take back $1 of an individual’s benefits.

The purpose of filing Form SSA-131 is to report special wages payments. Special wage payments include lump-sum payments for unused vacation time (unused annual leave), bonuses, voluntary separation income incentive payments and final paychecks. All of payments will be received in January 2021 and are considered as “earned income”.

As such, these payments could affect an annuitant’s Social Security “earnings test” for the year 2021 if the annuitant is receiving a monthly Social Security retirement benefit. But since these payments were earned before the employee actually retired but received after the employee retired, these payments should not be included as part of the “earnings test” and will not be – if reported on Form SSA-131.

Retiring employees should make sure all beneficiary forms have been filled out and current. The following are a list of beneficiary forms to be filled and current:

– TSP-3: Designation of Beneficiary – TSP

– SF 2823: Designation of Beneficiary – FEGLI life insurance

– SF 2808: Designation of Beneficiary – CSRS contributions

– SF 3102: Designation of Beneficiary -FERS contributions

– W-4P: Federal income tax withholding for CSRS or FERS annuity and TSP

– State income tax withholding forms, dependent on which state an annuitant is a legal resident, and whether that state has a state income tax and taxes CSRS and FERS annuities

About Edward A. Zurndorfer

Edward A. Zurndorfer is a Certified Financial Planner (CFP®), 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

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