Explaining the Rules Regarding Eligibility For and Computation of the FERS Retiree Annuity Supplement
Edward A. Zurndorfer
The retiree annuity supplement is a retirement benefit paid to those employees covered by the Federal Employees Retirement System (FERS) who retire before age 62 and who are entitled to an immediate FERS annuity. The retiree annuity supplement approximates the value of FERS service in a Social Security benefit. The purpose of the supplement is to provide a portion of retirement income before a FERS annuitant becomes age 62, similar to what the annuitant would have received in a Social Security benefit had the retiree attained age 62 and immediately applied for Social Security retirement benefits.
This column discusses the FERS Retiree Annuity Supplement. Among the topics to be discussed are: (1) Eligibility for the retiree annuity supplement; (2) Computation of the retiree annuity supplement; (3) The possible reduction that is applied to the retiree annuity supplement due to excess earnings over the annual “exempt” amount; (4) The requirement that retirees repost their earnings to OPM annually; and (5) Advice for retiring FERS-covered employees eligible to receive the retiree annuity supplement.
Eligibility for the Retiree Annuity Supplement
A retiring FERS-covered employee is eligible for the retiree annuity supplement at the time of retirement if the employee: (1) Has at least one calendar year of FERS service; and (2) Retires with entitlement to an immediate retirement: (a) At or after reaching MRA with at least 30 years of service; (b) At age 60 with at least 20 years of service; (c) Under one of special provisions for law enforcement officers, firefighters and air traffic controllers; or (d) At or after the MRA under discontinued service (involuntary) retirement provisions; or (e) at or after the MRA under early retirement provisions; for example, a RIF, reorganization, or transfer of function.
The retiree annuity supplement is payable through the earlier of the following dates: (1) The last day of the month in which the FERS annuitant becomes age 62; or (2) The last day of the month before the first month for which the FERS annuitant would, upon proper application, be entitled to Social Security benefits.
Note the following:
- For retirement and Social Security purposes an individual attains age 62 on “first month” of the day before is or her 62nd birthday. Therefore, if a retiree’s birthday is on October 1st, then he or she becomes age 62 on September 30 (see example 1 below).
- An individual is entitled to Social Security retirement benefits upon proper application and upon the first of the month throughout which he or she is age 62 (see example 2 below).
Example 1. Jason’s 62nd birthday is October 1. His retiree annuity supplement stops on September 30, whether or not he is entitled to Social Security benefits because he attained age 62 on September 30.
Example 2. Wendy’s 62nd birthday is October 2. Wendy is eligible for Social Security benefits beginning on October 1 because October is the first month as a 62nd year old. Therefore, Wendy’s FERS retiree annuity supplement stops on September 30. However, if Wendy were not entitled to Social Security benefits the retiree annuity supplement would continue until October 31, because October 31 is the last day of the month in which Wendy becomes age 62.
Computation of the FERS Retiree Annuity Supplement
When a FERS employee retires as an immediate and unreduced retirement (but not an “MRA+10” or an “MRA+20” immediate and reduced retirement) OPM’s Retirement Office will calculate the retiree annuity supplement. The retiring employee can get an estimate of his or her retirement annuity supplement by performing the following steps:
- Step 1. Estimate the retiring employee’s Social Security benefit as if the retiring employee is age 62. Note that the employee can go to his or her Social Security account at www.ssa.gov/myaccount and check the amount of his or her monthly retirement benefit at age 62.
- Step 2. Determine the total number of years of FERS creditable (full and part-time) permanent service and temporary time in which a full deposit has been made.
- Step 3. Divide the number obtained in Step 2 by the number 40.
- Step 4. Multiply the amount obtained in Step 1 by the number obtained in Step 3.
The purpose of this four-step procedure is to determine the amount of the FERS employee’s Social Security benefit was earned while working in federal service as a FERS employee. The following example illustrates:
Example 3. Felice recently retired from federal service at her MRA after 32 years of service (30 full-time years and two years of temporary service for which she made a full deposit). Her calculated Social Security benefit at age 62 is $2,000 per month. Felice estimates her FESR Retiree Annuity Supplement as follows:
- Step 1. Felice’s estimated Social Security benefit at age 62 $2,000
- Step 2. Felice’s total number of creditable years of FERS service 32
- Step 3. Step 2 divided by 40 0.80
- Step 4. Multiply Step 1 by Step 3 $1,600
Felice’s retiree annuity supplement is $1,600 per month. Felice will receive $1,600 per month, in addition to her FERS annuity, starting the month after the month she retired and until the month she becomes age 62.
Note the following with respect to the calculation of the FERS retiree annuity supplement:
- Years in which a FERS employee worked part-time – that is, less than 80 hours per pay period – are counted as full years for the purpose of calculating the retiree annuity supplement
- Active-duty military service time for which a full deposit is made and credited for FERS annuity computation purposes is not included in the years of creditable service for the purpose of calculating the retiree annuity supplement
- A FERS employee’s unused sick leave hours at the time of retirement and converted to creditable service time is not included in the years of creditable service for the purpose of calculating the retiree annuity supplement, and
- The retiree annuity supplement is not subject to a cost-of-living adjustment (COLA).
Reduction in Retiree Annuity Supplement Due to Excess Earnings
A FERS annuitant who is employed after retiring from federal service; that is, the annuitant is receiving a salary or is self-employed and has a net profit from self-employment income – may lose part or all of the retiree annuity supplement if the amount he or she earns exceeds the maximum permissible “exempt” amount of earned income (salary and/or net self-employment income).
Note the following with to the reduction:
- The reduction applies only to the retiree annuity supplement and not to the basic FERS annuity
- The reduction for excess earnings does not apply to employees who retire under the Special Provision for law enforcement officers, firefighters and air traffic controllers until they reach their MRA
The “exempt” amount is the same as the amount established by the Social Security Administration for the purpose of calculating the earnings reduction for Social Security retirement benefits.
In 2022, the exempt amount is $19,560. That means a FERS annuitant receiving the retiree annuity supplement during 2022 and earning a salary can earn up to $19,560 without losing any part of the retiree annuity supplement. The exempt amount increases annually with the annual increase in average wage levels in the national workforce.
Amount of Reduction Due to Excess Earnings
If a FERS annuitant’s earned income during the year exceeds the exempt amount, the retiree annuity supplement will be reduced $1 for every $2 that is earned above the exempt amount. Earnings, for purposes of calculating excess earnings includes the sum of wages for services performed in the year, plus all net earnings from self-employment for the year, minus any net loss from self-employment for that year.
Note the following: (1) Any earnings reduction during a year may not exceed the amount of the annuity supplement payable during that year; and (2) For the year immediately following the first year during a FERS annuitant becomes eligible to receive the retiree annuity supplement, the annual earnings reduction amount cannot exceed the total annuity supplement to which the individual was entitled in the first year, or preceding year. The following example illustrates:
Example 4. Leslie retired on Sept. 30. 2021, and is eligible for a retiree annuity supplement of $600 a month.
Since her retiree annuity supplement payments during 2021 totaled $1,800, any reduction of her retiree annuity supplement during 2022 for post-retirement excess earnings during 2021 cannot exceed $1,800, no matter the amount of her excess earnings during the months of October through December 2021.
When the Reduction Due to Excess Earnings is Assessed
A reduction in the retiree annuity supplement 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 retiree becomes entitled to the retiree annuity supplement or reached the MRA (if an annuitant was receiving the retiree annuity supplement prior to reaching their MRA). For example, a retired federal law enforcement officer who retired at age 50. The following three examples illustrate:
Example 5. Molly retired on June 30,2021 at age 57 with 30 years of service. She is eligible for a retiree annuity supplement. Her earnings between July 1 and Dec. 31,2021 are subject to the earnings test. If her post-retirement earnings exceed the 2021 exempt amount of $18,960, her retiree annuity supplement will be reduced (during 2022)
Example 6. Frank retired at age 52 under a discontinued service retirement (DSR). Frank reached his MRA in June 2021 and began receiving the FERS annuity supplement. His earnings starting in June 2021 became subject to the earnings test. If his postretirement earnings exceed the 2021 exempt amount of $18,560, his retiree annuity supplement in 2022 will be reduced.
Example 7. Brett retired in May 2018 at age 52 as a federal firefighter. He started receiving his retiree annuity immediately after retiring. His retiree annuity supplement will not be subject to the earnings test until he reaches his MRA in August 2022.
Reporting Earnings to OPM
OPM asks each FERS annuitant who has reached MRA and receiving the retiree annuity supplement for a statement of earnings each year. Earnings must be reported by annuitants using Form RI 92-22 (Annuity Supplement Earnings Report).Once completed, the report must be mailed to OPM at the address shown on the form.
Reminders for FERS-Covered Employees Eligible to Receive the Retiree Annuity Supplement
Retiring FERS-covered employees who are eligible to receive the FERS retiree annuity supplement are reminded of three important items with respect to the FERS retiree annuity supplement:
- •The retiree annuity supplement terminates around the time the annuitant becomes age 62, whether or not the FERS retiree is entitled to or applies for Social Security benefits at that time (see above under “Eligibility for the Retiree Annuity Supplement” for specific termination dates)
- •A FERS annuitant may not receive part or all of the retiree annuity supplement if his or her earnings exceed a certain amount ($19,560 during 2022). After reaching the MRA, FERS annuitants who are receiving the retiree annuity supplement are required to report earnings annually to OPM
- via Form RI 92-22.
- •The retiree annuity supplement is not increased by cost-of-living adjustments (COLAs).
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.