Understanding the Calculation of the FERS Basic Gross Annuity: 1.0 Percent Versus 1.1 Percent Versus 1.7 Percent Accrual Factor
Edward A. Zurndorfer
The Federal Employees Retirement System (FERS) consists of three retirement income components for FERS employees when they retire from federal service, namely:
- (1) A guaranteed pension in the form of a FERS basic annuity;
- (2) Thrift Savings Plan (TSP) distributions; and
- (3) Social Security monthly retirement benefit. A federal employee who meets the requirements to retire under FERS will receive during their retirement all three of these retirement income components.
This column discusses the calculation of a retiring FERS employee’s starting basic FERS gross annuity. The three factors used in the calculation of the starting FERS gross annuity will be explained. These three factors are:
- (1) Length of service;
- (2) High-three average salary; and
- (3) Accrual factors (1 percent, 1.1 percent, or 1.7 percent) that are multiplied against (1) and (2) resulting in the starting gross FERS annuity.
Length of Service Used in the FERS Basic Gross Annuity Calculation
Creditable service used to determine length of service in the FERS annuity computation purposes include:
• Service for which full FERS deductions were made via payroll deduction and not refunded:
- FERS employees hired before Jan. 1,2013 have 0.8 percent of their paycheck deducted each pay period and contributed to the FERS Retirement and Disability Fund
- FERS employees hired during 2013 have 3.1 percent of their paycheck deducted each pay period and contributed to the FERS Retirement and Disability Fund
- FERS employees hired after Dec. 31,2013 have 4.4 percent of their paycheck deducted each pay period and contributed to the FERS Retirement and Disability Fund
• Nondeduction (temporary or intermittent) service performed prior to January 1,1989 for which a full deposit for such service is made prior to retirement
• Creditable periods of military service performed after December 31,1956 for which a full deposit is made prior to retirement
• Service for which Social Security (FICA) taxes and full or reduced CSRS deductions were deducted and not refunded, and
• Unused sick leave hours on the day of retirement converted to months and days of service using the OPM 2087 Sick Leave Conversion chart.
Note: Special provision employees (these employees include federal law enforcement officers, firefighters, and air traffic controllers) have a higher percentage of their paychecks (1.3 percent, 3.6 percent or 4.9 percent, depending on when they were hired into federal service) deducted from their bi-weekly gross salary and contributed to the FERS Retirement and Disability Fund.
Service not used in the computation of the FERS annuity includes: (1) Any refunded service with no redeposit made; (2) Nondeduction (temporary or intermittent) service for which a full deposit is not made; and (3) military service for which a full deposit is not made.
High-Three Average Salary
The “high-three average” salary is the largest annual rate resulting from averaging an employee’s rates of basic pay in effect over any period of three consecutive years of creditable service, with each salary rate weighted by the length of time it was in effect.
Note the following with respect to the calculation of the high-three average salary:
- The three-year period in which the average pay is computed starts and ends on the dates that produce the highest average pay. The period need not start on January 1, or the first of any month, or the date of a pay change.
- The salary that is used in the calculation of the high-three average salary is the salary that appears on an employee’s SF-50 (Notice of Personnel Action) which changes from one leave year to another – a result of government-wide pay increases and locality-pay adjustments, job promotions, within-grade step increases, etc.
- Since most employees earn their highest salaries during the last three years of employment ending on the day the employee retires, the beginning date of the three-year period for most employees is obtained by subtracting 3 years, 0 months, and 0 days from the employee’s retirement date (year, month, day). Note that this assumes that an employee retires on the last day of any month. If the employee retires on any day of the month other than the last day of the month, add 1 to the day of the month the employee is retiring in determining the start day of the 3 consecutive year period. The following two examples illustrate:
Example 1. Margaret intends to retire from federal service under FERS with 30 years of federal service on June 30,2022. Her three-year period for calculating the start date of her high-three average salary is calculated as follows:
|Date of retirement||2022||6||30|
|Minus: 3 years, 0 months, 0 days||3||0||0|
|Beginning date of high- three average salary calculation||2019||6||30|
Example 2. Phillip intends to retire from federal service under FERS with 30 years of federal service on July 30, 2022. His start date for calculating his high-three average salary is calculated as follows:
|Date of retirement||2022||7||30+1|
|Mins 3 years, 0 months, 0 days||3||0||0|
|Beginning date of high- three average salary calculation||2019||7||31|
• The 3 years of service used in the high-three average salary calculation need not be continuous, but they must be consecutive periods of service. This means that two or more separate periods of employment may be joined, provided there is no intervening service. The following example illustrates:
Example 3. Florence was hired into federal service on 3/2/2010 at the age of 50 and retired from federal service on 2/5/2022 at age 62. Her service time and SF 50 salary history are presented below:
In computing Florence’s high-three average pay, the periods to be used are 1/3/2018 to 7/5/2019 and 8/7/2020 through 2/5/2022.
Computation of Basic FERS Gross Annuity Using the Appropriate Accrual Factor
Three different computations of the Basic FERS gross annuity are presented. These different computations depend on: (1) At what age a FERS employee retires (before or after age 62) and with any number of creditable years of FERS service; (2) A FERS retires on or after the employee’s 62nd birthday with a minimum 20 years of FERS service, or combined CSRS and FERS service if the employee is a “Trans FERS”. A “Trans-FERS” employee is a FERS employee who transferred to FERS after working under CSRS for a minimum five years and eligible for a CSRS annuity; and (3) a Special Provision Employee – law enforcement officer, firefighter, or an air traffic controller. An example of each computation is presented.
FERS Employees Who Retire Before Age 62 (With Any Number of Years of Creditable Service)
The FERS basic gross annuity computation formula for a FERS employee who retires before age 62, including “immediate”, “early”, “MRA+10” and “MRA+20” optional retirement is:
1 percent times high-three average salary times the total years and months of creditable service (including unused sick leave)
The following example illustrates:
Example 4. Jason retired from federal service on Feb. 26,2022 at age 60 with 21 years of service, 6 months of unused sick leave, and a high-three average salary of $130,000.
Jason’s starting FERS gross annuity is: 1 percent times $130,000 times 21.5 equals $27,950
Note that employees who retire under age 62 under the regular immediate retirement rules resulting in an unreduced starting gross annuity (not “MRA+10” and “MRA+20” immediate retirement in which there is an age-related reduction to the starting basic FERS gross annuity) should be eligible for the FERS Retiree Annuity Supplement. Employees who retire at age 62 or older are not eligible for the FERS Retiree Annuity Supplement.
FERS Employees Who Retire at Age 62 or Older with 20 or More Years of Service
The FERS basic annuity computation formula for a FERS employee who retires at age 62 or late, with a minimum 20 years of creditable service is:
1.1 percent times high-three average salary times the total years and months of creditable service (including unused sick leave)
The following example illustrates:
Example 5. Joy, age 63, retires from federal service with 22 years of creditable FERS and 6 months of unused sick leave. Her high-three average salary is $150,000.
Joy’s starting FERS gross annuity is: 1.1 percent times $150,000 times 22.5 equals $37,125
Note the following with respect to the 1.1 percent accrual factor:
- A retiring FERS employee must fulfill two requirements in order for the 1.1 percent accrual factor (rather than the 1.0 accrual factor) be used in the calculation of his or her starting basic FERS gross annuity, namely: (1) Be age 62 or older on the day he or she retires; and (2) Have a minimum 20 years of creditable FERS service.
- With the 20-year minimum creditable service requirement, OPM has ruled that unused sick leave hours when converted to months and days of service can be added to a retiring FERS employee’s creditable service time for the purpose of meeting the minimum 20-year service requirement. The following example illustrates:
Example 6. Carlos, age 63, has 19 years and 6 months of creditable FERS service. Since Carlos is at least age 62 and has at least 5 years of FERS service, he is eligible to retire. Carlos also has 6 months of unused sick leave to be used in the computation of his starting basic FERS gross annuity. Without the 6 months of unused sick leave Carlos will have less than 20 years of FERS creditable service for FERS annuity computation purposes. But with the added 6 months of unused sick leave, Carlos will have a total of 20 years for FERS annuity computation purposes. Therefore, given that Carlos is retiring after his 62nd birthday and with 20 years of service used for annuity computation purposes, the 1.1. accrual factor will be used in the computation of Carlos starting gross FERS annuity.
• Those FERS employees who are “TransFERS” – that is, a FERS employee who transferred to FERS in either 1987/1988 or during the last months of 1998 (during one of the two FERS “open seasons”) and who was previously covered by CSRS (with a minimum 5 years of CSRS service) and is therefore entitled to both a CSRS annuity and a FERS annuity, can count the years of CSRS service for eligibility purposes towards the minimum 20 years requirement for application of 1.1 percent accrual factor. The following example illustrates:
Example 7. Elizabeth entered federal service initially in 1983 as a CSRS employee at the age of 32. She worked 15 years until 1998 and then transferred to FERS. When she retired in 2013 at the age of 62, she had 15 years of CSRS service used in the computation of her CSRS annuity and 15 years of FERS service used in the computation of her FERS annuity. Without the 15 years of CSRS service, Elizabeth’s FERS annuity will be computed using the 1.0 percent accrual factor. With the 15 years of CSRS service added to the 15 years of FERS service for a total of 30 years of service, the 1.1 percent accrual factor will be used in the computation of the FERS annuity (1.1. percent times 15 years times high-three average salary).
FERS Employees Who are Special Provision Employees – Law Enforcement Officers, Firefighters, or Air Traffic Controllers
Those FERS employees who retire as Special Provision Employees have a different formula used in the computation of their starting FERS gross annuity. The formula is:
- For the 20 years of service, a special provision employee ‘s basic FERS gross annuity is calculated as 1.7 percent of their high-three average salary per year of service. Added to that:
- For each additional year of service (including converted unused sick leave hours), a special provision employee’s is calculated as 1.0 percent of their high-three average salary.
The following example illustrates:
Example 8. Dean, age 50, retires as a law enforcement officer with 26 years of law enforcement officer service. At the time of his retirement, Dean had 6 months of unused sick leave and a high-three average salary of $160,000. Dean’s starting FERS gross annuity is computed as follows:
1.7 percent/year times 20 years times $160,000 plus 1.0 percent/year times 6.5 years times $160,000 equals $54,400 plus $10,400 which equals $64,800
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.