What Is A Phased Retiree?

Understanding a “Phased Retiree” and How It Differs from a Reemployed Annuitant

Edward A. Zurndorfer–

“Phased retirement” is a human resource tool for federal agencies to retain federal employees who are eligible to retire but who are willing to continue in federal service on a part-time schedule. The main purpose of these employees working a part-time schedule is to mentor younger and lee experienced employees. This column discusses the various aspects of phased retirement and how it benefits both a partially retired employee and the federal government.

Employees participating in phased retirement will be paid for the part-time service they continue to provide the federal government and will receive additional credit for that service towards their full retirement. A “phased-retired” employee is in fact receiving a partial CSRS or FERS annuity based on the portion (percentage) of a workweek that they are not scheduled to work. For the portion (percentage) of the workweek that a “phased-retired” employee works at a federal agency, he or she receives a part-time salary.

Phased retirement is designed to assist agencies with knowledge management and continuity of operations in the short term. In addition, phased retirement is being used to prepare the next generation of experts for success. In essence, phased retirement is designed to enhance the mentoring and training of the employees who will be filling the positions or taking on the duties of more experienced retiring employees.

However, phased retirement is not an employee entitlement. Agencies may choose to utilize phased retirement when appropriate. A retiring employee’s entry into phased retirement is strictly voluntary and it requires a mutual agreement between the employee and his or her agency.

How Employee Benefits are Affected by Phased Retirement

An employee in phased retirement is considered an employee for the purpose of federal employee benefits, including the Federal Employees Group Life Insurance (FEGLI), the Federal Long Term Care Insurance Program (FLTCIP), the Federal Flexible Spending Accounts Program (FSAFEDS), the Federal Employees Dental and Vision Insurance Program (FEDVIP), the Federal Employees Health Benefits (FEHB) Program and premium conversion. Employees in phased retirement status continue to be eligible to participate in all of the mentioned employee benefits programs like other full-time and part-time permanent employees. Note that an election of phased retirement is not a qualifying life event that would allow employee benefit changes outside of an “open season” with respect to the FEHB, FEDVIP, FSAFEDS and the FEGLI benefits programs.

For FEHB and FEGLI purposes, an employee in phased retirement status is treated as if he or she was working full-time. This means that an employee in phased retirement status will pay the employee portion of the FEHB premium as if he or she were a full-time employee (on average 25 to 28 percent of the FEHB premium), not as a part-time employee and therefore not paying proportionally more. If an employee in phased retirement status dies in service, the FEGLI Basic insurance amount (BIA) would be their full-time salary (SF 50 salary slightly adjusted upward) and, if elected, the additional Optional Life Insurance (FEGLI Option B) would be a multiple (1,2,3,4, or 5 times) of his or her full-time salary (SF 50 salary adjusted upward to next $1,000) rate.

An employee in phased retirement status will earn annual and sick leave in the same manner as a regular part-time employee does. All employees in phased retirement status must have at least 20 years of service and therefore will be earning leave at the rate of one hour of annual leave for each 10 hours in pay status, and one hour of sick leave for every 20 hours in pay status. An employee in phased retirement status with a 50 percent working percentage (meaning they are 40 hours per pay period) will earn four hours of annual leave and two hours of sick leave per pay period.

An employee in phased retirement status will also be able to continue to contribute to the Thrift Savings Plan (TSP) as an employee. Usual withdrawals from the TSP are not allowed for “phase-retired” employees during phased retirement because these employees have not officially separated from federal service.

Eligibility Rules for Phased Retirement

Participation in phased retirement is voluntary and requires the consent of the employee and the agency.

in order to participate in phased retirement, an individual must have been employed on a full-time basis for no less than the three-year period preceding the effective date of his or her entry into phased retirement status. The employee must also be eligible for immediate retirement under special provisions of CSRS or FERS.

• Under CSRS, the employee must be at least age 55 and must have performed at least 30 years of service or must be at least age 60 and must have performed at least 20 years of service.

• Under FERS, the employee must be at least minimum retirement age (MRA – age 55 to 57, depending on the employee’s year of birth) and must have performed at least 30 years of service, or must be at least age 60 and must have performed at least 20 years of service.

Note all employees who meet these requirements are eligible to participate in phased retirement. Employees who qualify for retirement under the retirement provisions for law enforcement officers (LEOs), firefighters, nuclear materials couriers, air traffic controllers, and border protection officers are excluded from participation in phased retirement.

How Phased Retirement Works

An employee electing phased retirement status continues to work as an employee of the federal government but under a part-time work schedule. At the same time, the employee receives an annuity benefit equal to a fraction of the annuity that would have been paid had the employee fully retired. The annuity, however, is computed without credit for unused sick leave and without a reduction for a survivor annuity. Also, phased-retired FERS employees should note that the FERS annuity supplement is not payable during phased retirement annuity status.

The number of hours an employee in phased retirement works is based on the working percentage. With a 50 percent working percentage, an employee in phased retirement will be receiving half of his or her pay and half of his or her annuity that would have been received had that employee fully retired rather than electing a phased retirement.

The annuity is based on the total creditable service the employee had performed up until the effective and high-three average salary computed on the date of the phased retirement election. A FERS employee with prior post-1956 military service who elects to make a deposit for such service must do so before the phased retirement election becomes effective. Any deposits owed for civilian (temporary) service must also be paid before OPM completes the processing of the employee’s phased retirement application.

Phased Retiree Versus Reemployed Annuitant

Employees in phased retirement status are permanent employees on a part-time work schedule who are also paid a partial annuity (CSRS or FERS). They do not separate from federal employment in order to participate in phased retirement. They are career federal employees with the same rights as other federal employees.

Reemployed annuitants are individuals who have separated from federal employment for retirement who subsequently return to federal service. They continue to receive their full (CSRS or FERS) annuity benefit during their reemployment, but their salary is offset by the amount of annuity received during the period of reemployment. Reemployed annuitants service at the will of the agency and can be separated from employment at any time.

Employee’s Salary During Phased Retirement Status

Employees who elect phased retirement continue to work at the agreed-to working percentage of a full-time work schedule (for example, 40 percent or 50 percent) and their gross pay prepay period is reduced accordingly. For example, if any employee works 40 percent, the employee will receive 40 percent of the bi-weekly gross salary.

Cross pay from the agency continues to be subject to the usual employee’s withholdings including federal and state income taxes, Medicare hospital insurance tax, FICA tax (CSRS-Offset and FERS employees), CSRS retirement deductions (CSRS and CSRS-Offset employees), FERS retirement deductions (FERS employees), FEHB, FEGLI, FEDVIP and FLTCIP insurance premiums, and TSP contributions. FEHB and FEGLI premiums are the same amount that is withheld from an employee working a full-time work schedule.

Phased Retirement Annuity Computation

Basic computation before any reductions:

(1) CSRS:

• 1.5 percent x high-three average pay¹ x five years of total creditable service² plus
•  1.7 percent x high-three average pay¹ x five years of total creditable service², plus
•  2.00 percent x high-three average pay¹ x remaining years/months of total creditable service²

(2) FERS:

• 1.0 percent x high-three average pay¹ x years/ months of total creditable service² or
• 1.1 percent x high-three average pay¹ x years/ months of total creditable service²
• (for employees who are age 62 or older when they enter phased retirement status and who have performed at least 20 years of creditable service³.)

¹ High-three average pay: Under CSRS or FERS, the high-three phased retirement annuity is the amount of the employee’s creditable service as of the day before the effective date of the phased retirement election.

² Total creditable service. Total creditable service used in the phased retirement annuity is the amount of the employee’s creditable service as of the day before the effective date of the phased retirement election. Unused sick leave is not credited in the phased retirement calculation because the unused sick leave continues to be available for use during the employment with the agency.

³ At least 20 years of FERS service as of the date of the phased retirement election.

Reductions

Both CSRS and FERS annuities – Phased retirement percentage reduction, the difference between 100 percent and the working percentage.

CSRS annuities only: (1) reduction for unpaid deposit for pre-October 1982 non-deduction (temporary) service. This reduction equals 10 percent of the unpaid deposit balance as of the effective date of phased retirement status. This reduction is made before the phased retirement percentage reduction.

(2) reduction for unpaid redeposit for refunded service that ended before March 1, 1991. This reduction is based on the redeposit balance as of the effective date of phased retirement status and the present value factor corresponding to the age of the employee as of that effective date. The reduction equals the result of the redeposit, balance divided by the present value factor, rounded to the higher dollar. This reduction is applied after the phased retirement percentage reduction.

Example – FERS Phased Retirement Computation

Total creditable service: 6/1/1996 – 8/31/2021 = 25 years and 3 months

High-three average salary: $80,000

Working percentage: 50 percent

Annuitant is age 60 when phased retirement is effective

Note:

• (1) No FERS annuity supplement is payable in phased retirement to FERS employees between MRA and 62.
• (2) In addition to the monthly phased retirement annuity, the phased retirement salary will be 50 percent of the gross salary as of the start date of the phased retirement. If the full-time salary is $82,000, then the phased-retired employee will receive $41,000 per year (about $3,400 per month).

Computing the Composite Annuity When the Employee Transitions in Full Retirement Status

When an employee in phased retirement status decides to fully retire and submits an application for a full retirement annuity, the full retirement annuity (the “composite retirement annuity”) will be equal the sum of:

• The phased retirement annuity updated by any cost-of-living adjustments (COLAs) that were applied to the phased retirement annuity, plus
• The amount of the final phased portion of the full retirement annuity.

The final phased portion of the full retirement annuity equals a percentage of the full annuity the employee would have received had the employee not elected phased retirement and instead continued working full-time until separation for full retirement. The final phased portion includes all unused sick leave (both pre- and post- phased retirement periods).

The composite annuity is subject to a reduction for a survivor annuity election, if applicable. In the case of a CSRS composite annuity, it will also be subject to the actuarial reduction for unpaid redeposit for CSRS refunded service that ended before March 1, 1991, if applicable.

The commencing date of the composite annuity is the day after the employee in phased retirement separates from federal service. Regardless of when the composite annuity is effective, it will be subject to the full COLA whenever the next COLA becomes effective. For example, if an employee in phased retirement – either a CSRS employee or a FERS employee over age 62 – separates on October 31, 2021, they will be eligible for future COLAs. If there is a 2022 COLA (for annuitants and survivor annuitants on the retirement rolls as of December 1, 2021), then the 2022 COLA will show up in annuity and survivor annuity checks dated January 1, 2022. OPM recently announced that CSRS annuitants will be receiving a 2022 COLA of 5.9 percent while FERS annuitants over age 62 will be receiving a 2022 COLA of 4.9 percent. These COLAs will show up in annuitant’s checks starting with annuity checks dated January 1, 2022.

    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 dependable, 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.

What is a Phased Retiree?