FERS Special Retirement Provisions for LEOs, ATCs, & Firefighters (Part II)

For feds affected by a mandatory retirement age, or other special provisions. For Law Enforcement Officers, Air Traffic Controllers, and Firefighters.

< PART I

Edward A. Zurndorfer

This is the second of two FEDZONE columns discussing the special retirement provisions that apply to certain groups of employees covered by the Federal Employees Retirement System (FERS). These employees are law enforcement offices (LEOs), firefighter (FFs), and air traffic controllers (ATCs). This column presents information about the basic annuity benefit and the retiree annuity supplement that a LEO, FF and an ATC are eligible to receive upon retiring from federal service. Also presented are the special Thrift Saving Plan (TSP) withdrawal rules that apply to LEOs, FFs and ATCs once they retire from federal service.

Computation of the FERS “Basic” Annuity

An ATC’s, FF’s, or a LEO’s FERS “basic” annuity is based primarily on: (1) the amount of the employee’s creditable service; and (2) the employee’s high-three average salary.

Added to the employee’s creditable federal service time will be unused sick leave hours on the day of the employee’s retirement. The formula for computing an ATC’s, FF’s or LEO’s starting basic FERS annuity is:

· For the first 20 years of service, multiply the high-three average salary by 1.7 percent; and

· For any years of service beyond 20 years including any unused sick leave, multiply the high-three average salary by 1.0 percent.

The following example illustrates:

Example 1. Carl, age 50, has been a LEO since he entered federal service at 25. Carl intends to retire on Dec. 31, 2021. At the time of his retirement, Carl will have 25 years of service and six months of unused sick leave and a high-three average salary of $100,000. Carl’s starting FERS annuity is computed as follows:

1.7 percent/year times 20 years times $100,000 equals      $34,000

+ 1.0 percent/year times 5.5 years times $100,000 equals   $5,500

                                           Carl’s starting FERS annuity equals                                          $39,500

Note the following:

· Election of (or a court-ordered) survivor annuity for a current spouse or former spouse will reduce the ATC’s, FF’s or LEO’s FERS annuity. The maximum spousal survivor annuity is 50 percent of the decease annuitant’s gross annuity at the time of his or her death. The “less than maximum” spousal survivor annuity is 25 percent of the deceased annuitant’s gross annuity at the time of his or her death.

· The special retirement benefits for ATCs, FFs, and LEOs apply only to employees who separate with entitlement to an immediate FERS annuity under the special provisions. Consequently, “MRA+10”, “MRA+20” and deferred retirement provisions only apply to special group employees who separate before meeting the age and service requirements for benefits for retiring under the special provisions.

· In addition to the “basic” FERS annuity, a retired ATC, FF or LEO is entitled to the FERS retiree annuity supplement, discussed below.

· Unlike other FERS employees who after they retire from federal service are not eligible for their first cost-of-living adjustment (COLA) until they become age 62, special provision employees receive their first FERS COLA the January after they retire. The COLA is applied towards the FERS annuity received in the previous year resulting in a larger monthly annuity in the new year.

Retiree Annuity Supplement

A retired ATC, FF, or LEO who retires with entitlement to an immediate FERS annuity is also eligible to start receiving the retire annuity supplement. The retiree annuity supplement is payable through the earlier of the following dates: (1) the last day of the month in which the retiree becomes age 62; or (2) the last day of the month for which the retiree would, upon proper application, be entitled to Social Security benefits.

Note the following: (1) for retirement and Social Security purposes an individual attains or becomes age 62 or the day before his or her 62^nd birthday is on September 1, then he or she becomes age 62 on August 31; and (2) an individual is entitled to Social Security retirement benefits beginning on the first day of the month throughout which he or she is age 62.

The following examples illustrate:

Example 2.  Marlene’s 62^nd birthday is September 1. Her annuity supplement stops on August 31, whether or not she is entitled to Social Security benefits because she attained age 62 in August.

Example 3. Steve’s 62^nd birthday is September 2. He is eligible for Social Security benefits beginning on September 1 because September is the first month throughout which he is age 62. Therefore, Steve’s retirement annuity supplement stops on August 31. However, if Steve were not entitled to Social Security benefits (because he has not earned at least 40 credits of Social Security) the retiree annuity supplement would continue until September 30 because that is the last day of the month in which Steve became age 62.

The following steps are used to calculate a FERS annuitant’s retiree annuity supplement:

Step 1. Obtain the annuitant’s current (at the time he or she retires) estimated Social Security benefit at age 62.

Step 2. Calculate total civilian service under FERS rounded to the nearest full year.

Step 3. Divide the years of FERS service by 40.

Step 4. Multiply the amount in Step 1 by the amount determined in Step 3.

The following example illustrates:

Example 4. Frank retired as a LEO at age 52 with 24 years and 8 months of LEO service. His estimated Social Security benefit at age 62 on the day he retires is $16,000 per year. Frank’s retiree annuity supplement is calculated as follows:

Upon retiring from federal service Frank will receive his “basic” FERS annuity and the retiree annuity supplement of $10,000.

Note the following with respect to the annual “earning” test: A FERS annuitant who receives the retiree annuity supplement and who is employed after having retired from federal servcie may lose all or part of the retiree annuity supplement if the amount he or she earns the “exempt amount”. The reduction applies only to the retiree annuity supplement and not to the “basic” FERS annuity. The “exempt amount” is the same as the amount established by the Social Security for the purpose of calculating the earnings reduction for Social Security retirement benefit recipients between the age of 62 and full retirement age and who are working. During 2021, this exempt amount is $18,960.

If a FERS annuitant’s earnings exceed the “exempt amount”, then OPM will reduce the retiree annuity supplement $1 for every $2 that is earned above that amount. Earnings for purposes of calculating the earning reduction consist of the sum of salary/wages for service performed during the year plus all net earnings from self-employment for the year, minus any net loss from self-employment for the year.

For ATCs, FFs, and LEOs who in most cases retire before they reach their minimum retirement age (MRA- age 55 to age 57, depending in which year they were born), the “earnings” test for the retiree annuity supplement does not take effect until the year and month the ATC, FF or LEO becomes MRA. This means that a retired ATC, FF or LEO who retires several years before they reach his or her MRA date will receive the full “basic” FERS annuity, full retiree annuity supplement and get a job earning as much as they want and not lose any of the retiree annuity supplement. It is only when they reach the month that they reach their MRA that the “earnings” test takes effect.

Federal Employee Insurance Benefits

Like other federal employees, special provision employees are eligible to carry their insurance benefits into and throughout their retirement. These insurance benefits include federal health, life, dental, vision and long-term care insurances.

With respect to federal health and life insurance benefits, an ATC, FF and LEO must have been a participant in the Federal Employees Health Benefits (FEHB) program for at least all of the last five years of their federal service ending on the day they retire in order to keep their FEHB program insurance for themselves and for family members for retirement. The same is also true with respect to Federal Employee Group Life Insurance (FEGLI) group life insurance program.

Thrift Savings Plan (TSP)

To make penalty-free (no 10 percent IRS early withdrawal penalty) withdrawals from the traditional TSP, a TSP participant would have to be age 55 or older in the year he or she retires from federal service. But there are exceptions, including special provision employees when they retire from federal service.

As a result of the passage of the Defending Public Safety Employees’ Retirement Act that was signed into law on June 29, 2015, ATCs, FFs and LEOs who retire from federal service during or after the year they become age 50 can make penalty-free withdrawals from their traditional TSP accounts. This means that a retired (at age 50 or older) ATC, FF or LEO who makes a traditional TSP withdrawal will have to pay federal (and state, if applicable) income taxes on the amount withdrawn but is not subject to a 10 percent early withdrawal penalty. But if they retire from federal service as a special provision employee before the year they become age 50 (with 25 or more years of service), then they will have to wait until age 59.5 to make penalty-free withdrawals from their traditional TSP accounts.

Note that the discussion here is strictly with respect to the traditional TSP. If an ATC, FF or LEO owns a Roth TSP account and retires from federal service, then the retired ATC, FF or LEO has to wait at least he or she reaches age 59.5 to make penalty-free (and income-tax free withdrawals) from his or her Roth TSP accounts.

    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. The examples are case studies for illustrative purposes only. Individual cases will vary. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

FERS Special Retirement