Many federal employees retire before age 65. When these individuals retired, they most likely felt they were ready both emotionally and financially to retire. However, there are employees who for one reason or another remain in federal service and continue to work past age 65.
These employees are not alone. According to the Bureau of Labor Statistics, the labor force participation rate for the 65- to -74 age cohort is projected to be over 30% by the year 2026. It was about 27% in 2016.
There are several reasons why employees continue to work past age 65. Two important reasons are wanting to continue to save more in their retirement accounts like the Thrift Savings Plan (TSP) and their IRAs (individuals can only contribute to their IRAs in the years they have earned income) and to maintain their employer-subsidized health insurance.
Note that unlike the federal government, most private companies do not offer (and are not required to offer) subsidized health insurances for their retirees even if they provide subsidized health insurance for their employees.
Whatever the reason a federal employee decides to continue working in federal service past 65, the employee should consider four employee benefits for their post-age 65 employment.
These benefits are:
(1) Their Social Security retirement benefits and when (what age) they should sign up to receive their Social Security retirement benefits;
(2) Their Federal Employee Health Benefits (FEHB) insurance and Medicare eligibility;
(3) Their eligibility to be enrolled in the health care flexibility spending accounts (HCFSA) or continue to be enrolled and contribute to their Health Savings Account (HSA); and
(4) When they reach their “required beginning date” (April 1 following the year they become age 70.5 if they born before July 1, 1949 or April 1 following the year they became age 72 if they were born after June 30, 1949) and having to start required minimum distributions (RMDs) from their TSP and other qualified retirement plans they may own and the RMD they must take from their traditional IRAs they may own. Each of these employee-related benefits is now discussed.
When to Start Receiving Social Security Retirement Benefits
Social Security represents an important part of every federal employee’s future retirement income, especially those employees who are covered by the Federal Employees Retirement System (FERS). But even for those employees covered by the Civil Service Retirement System (CSRS) (who do not pay into Social Security while working under CSRS) Social Security benefits can be an important part of their retirement.
Among the reasons a Social Security retirement check is important for a CSRS annuitant, even a minimum monthly Social Security retirement monthly benefit can be sufficient to pay most, if not all, of a CSRS annuitant’s monthly Medicare Part B premium.
Both CSRS and FERS employees have the advantage of receiving throughout their retirement a defined benefit pension plan in the form of a CSRS or a FERS annuity that provides a guaranteed monthly income stream, the equivalent of which is most likely not available to employees working in private industry. CSRS and FERS annuities are backed by the US government and are not affected by the stock market. There is no risk of outliving one’s CSRS or FERS annuity. This risk – longevity risk- is a risk associated with the Thrift Savings Plan (TSP) which is classified as a defined contribution plan.
Social Security also provides a guaranteed income stream that an individual also cannot outlive. Cost-of-living adjustments (COLAs) help CSRS and FERS annuity and Social Security benefits generally keep pace with inflation.
There are two important things to keep in mind about Social Security retirement benefits, namely:
(1) The longer an individual continues to pay into Social Security via Social Security-covered employment the larger will be their Social Security lifetime benefits; and
(2) The older they are when they initially claim their Social Security retirement benefit the larger will be their monthly retirement benefit. It is therefore that everyone eligible for Social Security benefits have a “claiming” strategy. But as is explained, for someone working past age 65, this “claiming strategy can be more of a challenge.
A Social Security claiming strategy is more challenging if one is still working past age 65, is married or divorced, or is a widow/widower. The right claiming strategy can add thousands of dollars to an individual’s Social Security monthly retirement benefits.
Married employees in particular should pay attention to the timing of each spouse’s claim to benefits and take advantage of spousal as well as their own benefits as a way to maximize lifetime Social Security benefits. CSRS and CSRS Offset employees who continue to work in federal service past age 65 should give particular attention to claiming their own Social Security benefit or spousal, ex-spousal, or widow/widower benefits because of the two Social Security offsets (the Windfall Elimination Provision and the Government Pension Offset) that affect CSRS annuitants but not CSRS and CSRS Offset employees.
Claimants may be eligible to begin taking their Social Security retirement benefits at the age of 62. But should they? As shown in the following table, there is a big difference between the benefits paid to someone who receives Social Security benefits starting at age 62 and benefits paid to someone who waits until full retirement age (FRA), and an even greater difference if that same person waits until age 70 to start collecting Social Security retirement benefits.
In general, the longer an individual works in Social Security-covered employment, the more he or she earns while paying into Social Security, and the older the individual claims his or her Social Security benefits (assuming the individual lives to at least full life expectancy), the more he or she will ultimately receive in Social Security retirement benefits. As will be explained and illustrated below, it therefore makes sense for many individuals to wait until at least their full retirement age (FRA) before starting to receive their Social Security retirement benefits. An individual’s FRA depends on the person’s birth year, as summarized in the following table:
As shown in the table above, there is a major difference between the benefits paid to someone who takes Social Security early (age 62) and benefits paid to those who wait until FRA or until age 70. In this example, an individual who starts receiving Social Security benefits at age 62 would forfeit $660 per month compared with the benefits he or she would have received had he or she started at the FRA of 66 years and 6 months. Had he or she started receiving benefits at the age of 70, receive an additional $1,332 per month. For each year an individual waits past his or her FRA until age 70 to start receiving his or her Social Security retirement benefit, the individual receives a guaranteed 8 percent more year in benefits (“delayed retirement credits”).
There is another important consideration, namely the “earnings” test, for those individuals younger than FRA in 2021 (those individuals born in 1956 through 1959) receiving Social Security benefits and who continue to work. The Social Security Administration (SSA) has a limit for individuals younger than their FRA, receiving their Social Security benefits, and working as to how much the individual can earn without losing any of their benefits.
During 2021, someone between age 62 and 65 years, receiving Social Security retirement benefits and working (receiving earned income) can earn a maximum $18,960 without losing any of his or her Social Security retirement benefits. For every $2 the individual earns above $18,960, the SSA will reduce the individual’s Social Security benefits by $1. That would mean if the individual earned more than $56,880 during 2021, he or she would lose all benefits for 2021.
There is a separate “earnings” test for individual in the year they become FRA. During 2021, those individuals born during 1955 reach age 66 years and 2 months which is their FRA. These individuals have an “earnings” test as follows: Until the month the individual reaches his or her FRA, the individual can earn no more than $. For every $3 the individual earns above $50,520, the SSA will withhold $1 in benefits.
Once an individual reaches the month of his or her FRA, the “earnings” test ceases. That means an individual can receive Social Security benefits, work and earn as much as he or she wants without losing any of his or her Social Security benefits.
The following are suggestions for federal employees who are age 65 and older during 2021 and who continue to work in federal service with respect to their Social Security benefits:
(1) Those employees who were born during 1955 and who continue to work in federal service should not elect to receive Social Security benefits during 2021 because of the “earnings” test.
(2) For those employees who are 66 or older during 2021 (born before Jan. 2, 1955) and therefore have reached their FRA, are encouraged to elect receiving their Social Security benefits only if they need the additional income. Otherwise, they are encouraged to delay their Social Security benefits until age 70 in order to receive delayed retirement credits of 8 percent per year until age 70. Employees born before January 2, 1954 may want to consider filing a “restricted” Social Security application for benefits if they are married or been divorced for at least two years from a former spouse they were married to for at least 10 years.
(3) There is one exception for a federal employee who has reached FRA during or before 2021 to delay the start of Social Security benefits. A CSRS or CSRS Offset employee who has reached FRA and continues working in federal service is encouraged to receive his or her Social Security monthly benefits. This is because while the employee continues in federal service, his or her Social Security benefits are not subject to the Windfall Elimination Provision (WEP). The WEP reduces benefits on average of 40 to 50 percent but applies only to a CSRS annuitant and not to a CSRS employee. Since the employee has reached FRA, there is no “earnings” test and therefore no taking back of the Social Security benefits by the SSA for excess earnings. And no WEP.
FEHB Health Insurance and Medicare Eligibility
Federal employees celebrating their 65th birthday in 2021 are also becoming eligible to enroll in Medicare. There are four parts to Medicare – Medicare Part A (hospital insurance); Medicare Part B (medical insurance); Medicare Part C (Medicare advantage plans); and Medicare Part D (prescription drug plans).
Federal retirees who are eligible and keep their Federal Employees Health Benefits (FEHB) program group health insurance for their retirement are highly encouraged to enroll in Medicare Parts A and B (the “original” Medicare) for the simple reason that they will minimize if not eliminate any out-of-pocket doctor, hospital, laboratory and medical equipment bills. Once enrolled in Medicare Parts A and B, a federal annuitant’s primary medical coverage will be Medicare and their secondary coverage will be their FEHB program health insurance.
Medicare Part A helps cover the insured’s inpatient care in hospitals and rehabilitation facilities. It also helps cover hospice services and home health care services. Federal employees do not have to pay a monthly premium for Part A once they enroll at age 65 because they prepaid the premiums through the Medicare hospital insurance payroll tax during their working years.
Medicare Part B helps cover medically necessary doctors’ services, outpatient care, home health services, durable medical equipment, mental health services, and other medical services that Part A does not cover. But unlike Part A, there is a monthly cost for Part B. That cost depends on the insured’s modified adjusted gross income (MAGI) and varies by year. The following table summarizes Medicare Part B monthly premium cost for 2021, broken down by one’s tax filing status.
There are rules regarding when to enroll in Medicare Parts A and B. An individual can enroll during the following periods:
- Three months before the month of or three months after their 65th birthday (“initial” enrollment period)
- Between January 1st and March 31st of each year (“general” enrollment period with Medicare coverage becoming effective the following July 1
- Within eight months of retiring from an employer offering group health insurance for its employees and its retirees (like the federal government through the FEHB program)
Federal employees who are enrolled in the FEHB program and who continue to work in federal service past age 65 are advised to do the following with respect to Medicare enrollment:
- Because there is no premium cost associated with Medicare Part A, there is no reason not to enroll in Medicare A (however, see below for employees who are enrolled in high deductible health plans associated with health savings accounts). Once enrolled, their FEHB insurance will be considered primary insurance in the event they go to the hospital while Medicare Part A will be considered secondary coverage. If an employee is past age 65 and has not enrolled, they can enroll during the “general” enrollment period with no late enrollment penalty. If they are married and their spouse is over age 65 and included on their FEHB insurance (as part of self plus one or self and family coverage), the spouse is encouraged to enroll in Medicare Part A at no premium cost.
- With respect to enrolling in Medicare Part B, the situation is different if the federal employee continues to work in federal service and is enrolled in a FEHB health insurance plan. The employee is not required to enroll in Part B while they continue in federal service. In so doing, they avoid paying the monthly Part B premium. To minimize any out-of-pocket medical expenses (deductibles, co-insurance, co-payments or medical expenses not covered by their FEHB insurance), they are eligible to continue enrollment in their health care flexible spending accounts (HCFSA) that allows the employee to pay these expenses on a before-tax basis. If their spouse is over age 65 and enrolled in the employee’s FEHB insurance (as part of self plus one or self plus family coverage), then the spouse need not enroll in Part B.
- Once a federal employee working past age 65 in federal service retires, the retired employee – now a federal annuitant (and spouse if over age 65) – is required to enroll in Medicare B within 8 months of the employee’s retirement date. In so doing, the retired employee and spouse will avoid the normal late enrollment penalty (10 percent per year penalty for every year delay) beyond age 65 for not enrolling in Medicare Part B when first eligible – age 65. This enrollment has to be done in person at a Social Security office.
Continuing Contributions to a Health Savings Account
Those federal employees who are enrolled in a FEHB program high-deductible health plan (HDHP) associated with a health savings account (HSA) may continue to contribute to their HSA provided they continue to be enrolled in an HDHP. The HSA offers a “trifecta” tax benefit in the following way:
(1) HSA contributions are tax deductible (an adjustment to one’s gross income) (they reduce the HSA owner’s AGI resulting in current year tax savings);
(2) earnings (interest and dividends) grow at least deferred and most likely tax-free) and
(3) all withdrawals (including HSA contributions and accrued earnings) made to pay out-of-pocket qualified medical, dental and vision expenses are tax-free. In addition, there is no limit for carrying over unused HSA funds from one year to the next; qualified HSA withdrawals (tax-free) can be made during an individual’s retirement. Note that this is unlike an HCFSA, in which an individual can only have and use while an employee and any unused HCFSA funds cannot be carried and used in retirement.
Federal employees who are enrolled in a FEHB HDHP with an HSA are not allowed to contribute to their HSA once they enroll in Medicare. This includes enrolling in any part of Medicare – including Medicare Part A. Earlier there was presented some recommendations for employees working past age 65 with regard to Medicare enrollment. It was stated that “there is no reason why an employee aged 65 should not enroll in Medicare Part A”.
The reason is that Medicare Part A enrollment is free – no monthly premium. However, having an HSA and wanting to continue contributions to the HSA is an exception. This is because once enrolled in Part A, no contributions to the HSA are permitted. An HSA owner can always make qualified withdrawals from his or her HSA. But two events will prevent an HSA owner from contributing to his or her HSA, namely: (1) enrolling in a non-HDHP health insurance plan; and (2) enrolling in any part of Medicare.
Postponing the Start of Required Minimum Distributions
Federal employees who own traditional IRAs (including SEP IRAs and SIMPLE IRAs), and/or have participated in qualified retirement plans such as 401(k), 403(b) and profit-sharing plans and who are TSP participants are required to take required minimum distributions (RMDs) when they reach their “required beginning date” (RBD).
The RBD depends on when an individual was born. If the individual was born before July 1, 1949, the RBD is April 1 following the year the individual became age 70.5. If the individual was born after June 30, 1949, then the RBD is April 1 following the year the individual becomes age 72. Note the following with respect to RMDs:
(1) There is a separate RMD for each of the accounts mentioned; that is, one RMD for the traditional IRA; one for any type of qualified retirement plan listed; and one RMD for the TSP.
(2) Starting with the RBD year, RMDs must be taken every year for the remainder IRA owner, qualified retirement plan participant’s, and TSP participant’s life.
(3) There is a 50 percent IRS “excess accumulation” penalty imposed on an individual who was required to take his or her RMD from any account during a particular year but did not.
However, there is one exception to the RMD rules that applies to TSP participants. If a federal employee continues to work in federal service past their RBD, then no RMD is required until the employee retires from federal service. In that case, the first TSP RMD would be required by April 1 following the year the employee retires from federal service.
As noted, there are separate RMDs for the three types of retirement accounts. If a federal employee owns (besides the TSP) traditional IRAs and/or one or more of the qualified retirement accounts, then if the employee continues in federal service past his or her RBD and is allowed to postpone the first TSP RMD until he or she retires from federal service, the same rule does not apply to the IRA RMD and qualified retirement plan RMD. Those first RMDs must be taken by the RBD for those accounts.
A way of avoiding taking RMDs from the traditional IRAs and/or the qualified retirement plans is for the TSP participant to directly transfer the traditional IRAs and/or qualified retirement plan accounts into their traditional TSP. In so doing, the transferred accounts become part of the federal employee’s TSP account, and therefore not subject to the RMD rules until the employee retires.
An employee may request a direct transfer of a traditional IRA and qualified retirement account to the employee’s traditional TSP by filling out and submitting Form TSP-60 (Request For A Transfer Into The TSP) (may be downloaded at https://www.tsp.gov/forms/tsp-60.pdf). There are no dollar limits for transfers to the TSP and no tax consequences for direct transfers. Transfers also do not affect the amount an employee can contribute each year to the TSP via payroll deduction.