Monthly Archives

July 2021

Retiring Under the FERS MRA+10 Provision

By | Benefits, Federal Pay, Retirement | No Comments

What happens when a FERS employee wishes to retire prior to meeting all of the full eligibility requirements?

In this article, I’ll share how a FERS employee — who may be considering retiring under Minimum Retirement Age (MRA)+10 retirement rules — may be affected by swift penalties.

Full eligibility to retire

Let’s start with federal employees being fully eligible to retire under FERS by meeting all of the normal requirements. You’ll need to meet one of three age and service year combinations, and it doesn’t matter which one you meet. As long as you’ve met one of them, then you’re good to go. You’ll need to be at least age 62 with at least five years of service, at least age 60 with at least 20 years of service, or at least your minimum retirement age with at least 30 years of service.

That Minimum Retirement Age (MRA) is a sliding scale somewhere between the age of 55 and 57, and it depends on the year in which an employee was born. To make this easy for you, here’s a link to the MRA chart provided by OPM, if you’re not familiar with what your MRA is.

How does MRA+10 work?

The concept of “MRA+10” comes into play when someone has met their MRA, but has not met the 30-year requirement to be fully eligible to retire. In this case, the employee simply 10 years of service to be able to retire under the MRA+10 rules. Again, in this scenario, we’ve got the MRA and at least 10 years of service, but not the 30 required to be fully eligible.

It probably sounds great that you’ll be able to retire with fewer years of service, but like most government programs, there’s a catch. In fact, there are actually a couple of catches that have a profound financial impact on someone who chooses to retire under these MRA+10 rules. Most importantly, the pension will be penalized by 5% for every year an employee is under age 62, and this penalty is forever.

An example of the penalty

To illustrate these consequences, let’s take a look at a scenario. Let’s say we have a FERS employee who is 57 years old and has 10 years of service. Let’s also assume that this employee has a high-3 average salary of $50,000, just to give us some numbers to work with.

If we were to calculate the earned pension, at that moment in time, we would take the $50,000, times 1%, times 10 years of service. That is the normal formula for a FERS employee. That would yield $5,000 a year. But then we have to calculate the penalty, which again, is 5% for every year the employee is under age 62, which for this person is five years. The penalty is 25% of the pension. If we take the original $5,000 a year that we calculated, we subtract out 25% of it to get a pension of $3,750 per year.

How to avoid the penalty

Other than working long enough to be fully eligible, there is a way to avoid the penalty, but it might feel like a penalty, too. In the scenario that we just outlined, we have an employee who’s 57 with 10 years of service. We know the pension before the penalty was $5,000 a year. If we want to avoid being hit with that 25% penalty that we calculated, there is a way to do it. The employee could voluntarily postpone receipt of their pension until age 62.

This is different than a deferred pension, so if you’re looking up rules, don’t look up deferred pensions. This is a voluntary postponement of the receipt of that pension. In this scenario, this person by trying to avoid the penalty by voluntarily receiving no pension between age 57 and age 62, but once the employee draws the pension at 62, they would get the full $5,000/year, not the penalized amount of the $3,750 that we calculated earlier. This seems like it should be good news, but it’s also a long time to go without a pension. In fact, if they go without the pension for 5 years, they would have forgone $18,750 in pension money and it will take them 15 years to regain what they lost in this voluntary postponement.

Scenarios where we see this typically work well for a federal employee, is when someone is not truly retiring. The employee simply wants to leave federal service to go take another job. Maybe the employee got an offer with a contractor or a private company, and in that scenario where the employee is going to receive another paycheck, he/she might not actually need the income between 57 and 62, because he/she will have the paycheck from the new employer. So, retiring under MRA+10 might be a good fit for some employees in certain circumstances.

Still, there are catches.

The other consequences

During the time that an employee is not drawing the pension (so in this example from age 57 to 62), the employee will not be covered under the Federal Employees Health Benefits Program (FEHB), and will not be covered under the Federal Employees Group Life Insurance Program (FEGLI) either. These are huge considerations for employees who are reliant on FEHB and FEGLI programs to make certain they are covered if something should happen to them. The good news is once the employee begins drawing the pension, like in this example we used age 62, the FEHB and FEGLI coverage will be restored at that time.

There’s another benefit, however, that cannot be restored and that’s the FERS Special Retirement Supplement. This is the program that looks like Social Security, but it’s paid between the time an employee retires and the time they turn 62. Anyone retiring under the MRA+10 rules will forfeit any payment from the Special Retirement Supplement, and that may never be restored. It’s another piece that the employee will have to give up and take under consideration when deciding if MRA+10 is the way to go.

A slight change to the example

There are some scenarios where this might play out a little bit differently, or where the penalty is not quite so steep. Let’s take a look at another example. We’ll circle back to the original scenario and change just one thing. Remember, this person is 57 years old, so they’ve met their MRA. But let’s say, instead of this person having 10 years of service, that now they have 20. They’re still not fully eligible to retire, but let’s see how things look.

Of course, since there are more years of service, we know the pension will naturally be higher. We would take that $50,000 high-3 that we used before, times 1%, times 20 years, and that yields a $10,000 a year pension, before penalties are assessed. This person is still five years under age 62, so they will still get a 25% penalty, which now is $2,500. It’s a higher dollar amount that the employee is being penalized, because the pension is higher.

If this person wanted to voluntarily postpone receiving this pension to avoid the penalty, they would only need to wait until age 60 to begin to draw it. The reason is that at 60, this employee will have 20 years of service at that moment in time, which makes them fully eligible to retire with no penalties.

All of the other consequences I mentioned earlier still remain. This employee would still lose FEHB and FEGLI while they’re not drawing the pension, but again, would be restored once the pension starts at 60. And of course, the Special Retirement Supplement will still be forfeited, so no money will come out of that program in either scenario.

Don’t confuse MRA+10 with deferred pensions

I do want to make one minor point of clarification, just because there seems to be some confusion with MRA+10 rules and what’s called a “deferred retirement.” Let’s say you’re a federal employee who is age 45. You have 10, or 20, or more years of service, and you’re ready to leave before your MRA. That’s called a deferred retirement, and I’ll cover that in a later article, because those rules are very different for that group.

Final thoughts

For someone under FERS who has considered retiring under the MRA+10 rules, my parting guidance for you would be to consider all the implications and penalties before coming to any final decision. This might not be what you want to hear, but you may very well have to keep working to reach your full eligibility rules in order to have the best retirement for your situation. Again, that might not be a popular answer, but the numbers are a real reality check in this whole decision. Math doesn’t lie.

Oftentimes, I’m the bearer of bad news when it comes to big decisions like this. I am a big believer that I’d rather temper those dreams today, before you make a huge mistake, than to see you struggle to do some serious damage control after that decision has already been made.

While retiring with fewer years of service may sound like a good idea, there are some hefty consequences imposed. I hope this article will help you consider those important consequences and decide if retiring under the FERS MRA+10 provision is the right choice for you.  So, now with all this being said, if you would like us to run a Full retirement analysis please visit our Contact Us Page to schedule your review today.

 

Ins and Outs of Leaving Government Now and Retiring Later

By | Benefits, Retirement | No Comments

In her swearing-in ceremony, newly confirmed OPM Director Kiran Ahuja, had this to say about the major issues federal employees are facing: “From shaping how and where we work in the future to ensuring everyone is safe while working during this pandemic, and discussions regarding how we rebuild our federal workforce, there’s no shortage of conversations to be had and issues to tackle.”

Based on the increased number of emails I’ve been receiving requesting information about deferred or postponed retirement benefits, it appears that some employees may not be returning to their offices to help with this reshaping. Some are contemplating early retirement or transitioning outside of federal service to finish their careers.

Here’s one typical scenario:

I would like to get some information concerning deferred retirement. I have 20 years of federal service under FERS but I am only 49 years old. I am thinking of retiring now and defer my retirement pay until 57. Will there be a reduction in pay because I am retiring at 49 instead of waiting until 57? What forms do I need to complete to retire now?

Here’s another:

I’m writing because I am starting to talk with private sector employers and there’s a good chance I may pursue early retirement when I reach my minimum retirement age (56 years and 2 months). I currently have around 25 years of federal service. I would pursue the deferred/postponed retirement benefit and reinstate health insurance when I apply at age 60. I plan to use the insurance from whatever firm I join until 60 years old. My question is what do I want to do to make sure this happens before I leave the federal government, including what forms do I want to make sure I get copies of and retain? 

If you are under the Federal Employees Retirement System and considering a move outside of federal service before being eligible to retire with immediate retirement benefits or postponing your retirement, here are some things to know:

  • In order to qualify for a deferred retirement, you will need to complete a minimum of five years of creditable civilian service. Your benefit will begin the first day of the month after you reach age 62.
  • If you complete at least 10 years of creditable service, including five years of civilian service, then you are eligible for a deferred annuity beginning the first day of the month after you reach your minimum retirement age.
  • Your deferred annuity is based on the length of service and high-three average salary in effect when you separate from federal service. You will be entitled to a benefit computed at 1% of your high-three average salary for each year of service.
  • You will begin to receive cost of living adjustments on your deferred retirement benefits once you are over 62.
  • Former employees who receive a deferred or postponed annuity are not eligible for a retiree annuity supplement.
  • If you have already reached your MRA and you have at least 10 years of service, you can separate but postpone receiving your retirement benefit to avoid an age reduction.
  • Most of your insurance benefits such as health, dental and vision, and life insurance will end when you separate without applying for immediate retirement benefits.
  • There will be no forms to file until you are ready to apply for your deferred annuity. Your separation will be treated as a resignation, but form SF 50, Notification of Personnel Action, will note that you are entitled to a deferred or postponed retirement in the remarks section of the form.

Form RI 92-19 is used to apply for a deferred or postponed FERS retirement benefit. There are instructions for this form available in companion pamphlet RI 92-19a. You should file the application directly with the Office of Personnel Management 60 days before you want your monthly annuity benefit to begin.

It’s a good idea to request a retirement estimate for a deferred or postponed retirement from your agency’s human resources office before leaving federal service. This will give you an idea of the value of this benefit at the time you are entitled to receive it.

If you are married when your annuity begins, it will be computed with a reduction to provide a maximum survivor annuity (50 percent of your unreduced annuity) for your spouse upon your death. You can choose to provide a partial survivor annuity (25 percent of your unreduced annuity) or no survivor annuity; however, you must get your spouse’s consent.

If you separate from federal service, but die before receiving your deferred or postponed retirement, there would be a survivor annuity payable to your spouse if they were married to you at the time of your separation and you had 10 or more years of creditable service (and did not apply for a refund of your retirement contributions). Your surviving spouse may elect to receive a lump-sum payment of your retirement contributions in lieu of a survivor annuity.

You should keep personal copies of certain documents filed in your electronic Official Personnel Folder, because you will lose immediate access to this folder after your separation. These include:

  • FERS Designation of Beneficiary Form (SF 3102)
  • SF-50 forms showing appointments into federal service, prior separations from federal service, changes in your work schedule, changes in your retirement coverage, and pay changes over the last (or highest) three years of service, because they will be used to compute your high-three average salary for your future retirement benefit.
  • FEGLI forms if you are retiring with an immediate retirement, including SF 2817 (Life Insurance Election) and SF 2823 (Designation of Beneficiary).
  • SF 2809 FEHBP election forms.

If you are considering employment related to your government work or possibly returning to federal service later on, you may want to maintain information regarding training, duty stations, security clearances, pay, and positions that were held during your career.

The pandemic has upended our lives and made us think about our priorities. There is a big difference between retiring with an immediate, unreduced, retirement based on a full career of federal service versus a reduced or postponed deferred retirement. So be sure to think it through before you make the leap out of government.

Inflation and the Great COLA Countdown of 2021

By | Benefits, Federal Pay, Retirement | No Comments

For the first time in recent memory, the annual cost-of-living adjustment for federal retirement benefits could increase significantly.

The Bureau of Labor Statistics announced this week that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased 6.1 percent over the last 12 months. This figure is significant to federal retirees and those soon to retire, because it’s the basis for the annual retiree cost of living adjustment.

Annual COLAs are determined by comparing the average monthly CPI-W during the third quarter (July to September) of the current calendar year and the third quarter of the base year, which is the last previous year in which a COLA was applied. The effective date for COLAs is December, but the adjustment first appears in the benefits issued during the following January. This means that the 2021 COLA for federal retirees won’t be determined until the CPI-W announcement for the end of September, which will occur by mid-October.

The CPI-W will be influenced by the additional increase (or decrease) in prices for July, August and September. Based on the second quarter announcement, it’s shaping up to be a significant increase. The recent history of COLA increases includes 1.3 percent (2020), 1.6 percent (2019), 2.8 percent (2018), 2.0 percent (2017), 0.3 percent (2016), 0.0 percent (2015), 1.7 percent (2014), 1.5 percent (2013), 1.7 percent (2012), 3.6 percent (2011), 0.0 percent (2009 and 2010) and 5.8 percent (2008).

It’s important for those who are planning to retire from the federal government to understand how the annual COLA is applied to your retirement benefits. Let’s start with Civil Service Retirement System and Federal Employees Retirement System benefits. Eligible annuitants must be retired for at least one year to receive the full annual COLA, but the maximum increase is computed a little differently for FERS annuitants. One year starts with the December 2020 retirement benefit and ends November 2021. For example, if you retire on July 31, 2021 and your retirement starts on Aug. 1, you will be retired for four months during the 2021 rating period. You would receive 4/12 of the 2021 increase in your January retirement payment (which covers the month of December).

The difference for FERS retirees occurs when the increase is higher than 2%. When the increase is 3% or higher, the maximum boost for FERS retirees is 1% less than the full COLA increase. So, for example, if the 2021 COLA turns out to be 6%, FERS annuitants will receive 5%. In years when the rate of the COLA is between 2% and 3%, FERS retirees are granted a 2% COLA. The only time such a reduced (or “diet”) COLA doesn’t apply to FERS is when the COLA increase is 2% or less.

FERS COLAs apply only to the retiree’s basic annuity (not the FERS retirement supplement). For survivor annuitants, the COLA applies to both the basic survivor annuity and supplementary annuity. CSRS COLAs apply to all annuities, regardless of the age of the annuitant. FERS COLAs generally do not apply to annuitants who are under age 62 as of Dec. 1, 2021, with some exceptions.

For FERS employees who are planning to retire at the minimum retirement age of between 55 and 57 years old, this can be a significant issue if a trend of higher inflation continues. A 5% increase to a benefit of $1,000 per month would add $50 to the retirement benefit. Over time the lack of such a COLA would result in a significantly reduced buying power of the benefit.

For Social Security recipients, the COLA is also based on the full CPI-W third quarter adjustment. The increase in Social Security benefits is a little more complicated to calculate since it is based on the benefit payable at your full retirement age.

If you would like to have a free retirement review to know where your pension numbers look like, please feel free to Contact Us today and schedule your one-on-one call today.

Former Temporary Workers Could Make Catch-Up Pension Contributions Under New Bill

By | Benefits, Federal Pay, Retirement | No Comments

A bipartisan group of lawmakers has introduced legislation to allow most federal employees who were initially hired as temporary workers to make catch-up contributions to defined benefit pensions so they can retire on time.

Reps. Derek Kilmer, D-Wash., and Tom Cole, R-Okla., on Wednesday introduced the Federal Retirement Fairness Act (H.R. 4268), which would allow employees enrolled in the Federal Employees Retirement System who initially entered government as a temporary worker the ability to make catch-up retirement contributions to cover for the years when they were temps and unable to contribute to their retirement accounts.

Former temporary workers once had access to a similar provision to make “buy back” contributions to account for their time as temps under the Civil Service Retirement System, but the practice was phased out in 1989, after the implementation of FERS. As a result, federal workers who began as temporary employees must choose between accepting a lower defined benefit pension annuity or working additional years to receive their full retirement allowance.

“Many federal employees begin their careers in temporary positions before transitioning to permanent status—so we need to have their backs,” Kilmer said in a statement. “This bill will ensure that all federal workers . . . have the opportunity to retire on time, regardless of how they started their careers.”

“Whether first hired under temporary status or not, civil service should be recognized, and these workers should have the option to pay toward retirement credit for the entirety of their employment,” Cole said. “I am proud to join in re-introducing the Federal Retirement Fairness Act that allows this buy-in benefit to give these civil employees earned time credit toward retirement.”

The bill already has the support of an array of federal employee groups, including the American Federation of Government Employees, the Federal Managers Association, and the National Active and Retired Federal Employees Association.

“When a temporary employee converts to a permanent employee, the temporary service time is not considered when calculating the FERS retirement benefit,” NARFE National President Ken Thomas said. “This bill would allow the once temporary, now permanent employee to make a deposit of employee contributions to make their temporary service creditable towards retirement.”

“Seasonal and temporary employees who answer the call of duty deserve the same level of deference as the permanent employees they work with,” said Randy Erwin, national president of the National Federation of Federal Employees. “It is unconscionable to ignore temporary or seasonal labor upon becoming permanent employees given many of these employees risk their lives and health for these jobs, as thousands of wildland firefighters do each year . . . If they put the time in, they deserve to have it counted toward retirement.”

If you need assistance or want to get a Free Retirement review, please Contact Us today to schedule your retirement review.

Leaving Government Now and Retiring Later

By | Benefits, Retirement | No Comments

The ins and outs of deferred or postponed retirement.

In her swearing-in ceremony, newly confirmed OPM Director Kiran Ahuja, had this to say about the major issues federal employees are facing: “From shaping how and where we work in the future to ensuring everyone is safe while working during this pandemic, and discussions regarding how we rebuild our federal workforce, there’s no shortage of conversations to be had and issues to tackle.”

Based on the increased number of emails I’ve been receiving requesting information about deferred or postponed retirement benefits, it appears that some employees may not be returning to their offices to help with this reshaping. Some are contemplating early retirement or transitioning outside of federal service to finish their careers.

Here’s one typical scenario:

I would like to get some information concerning deferred retirement. I have 20 years of federal service under FERS but I am only 49 years old. I am thinking of retiring now and defer my retirement pay until 57. Will there be a reduction in pay because I am retiring at 49 instead of waiting until 57? What forms do I need to complete to retire now?

Here’s another:

I’m writing because I am starting to talk with private sector employers and there’s a good chance I may pursue early retirement when I reach my minimum retirement age (56 years and 2 months). I currently have around 25 years of federal service. I would pursue the deferred/postponed retirement benefit and reinstate health insurance when I apply at age 60. I plan to use the insurance from whatever firm I join until 60 years old. My question is what do I want to do to make sure this happens before I leave the federal government, including what forms do I want to make sure I get copies of and retain? 

If you are under the Federal Employees Retirement System and considering a move outside of federal service before being eligible to retire with immediate retirement benefits or postponing your retirement, here are some things to know:

  • In order to qualify for a deferred retirement, you will need to complete a minimum of five years of creditable civilian service. Your benefit will begin the first day of the month after you reach age 62.
  • If you complete at least 10 years of creditable service, including five years of civilian service, then you are eligible for a deferred annuity beginning the first day of the month after you reach your minimum retirement age.
  • Your deferred annuity is based on the length of service and high-three average salary in effect when you separate from federal service. You will be entitled to a benefit computed at 1% of your high-three average salary for each year of service.
  • You will begin to receive cost of living adjustments on your deferred retirement benefits once you are over 62.
  • Former employees who receive a deferred or postponed annuity are not eligible for a retiree annuity supplement.
  • If you have already reached your MRA and you have at least 10 years of service, you can separate but postpone receiving your retirement benefit to avoid an age reduction.
  • Most of your insurance benefits such as health, dental and vision, and life insurance will end when you separate without applying for immediate retirement benefits.

There will be no forms to file until you are ready to apply for your deferred annuity. Your separation will be treated as a resignation, but form SF 50, Notification of Personnel Action, will note that you are entitled to a deferred or postponed retirement in the remarks section of the form.

Form RI 92-19 is used to apply for a deferred or postponed FERS retirement benefit. There are instructions for this form available in companion pamphlet RI 92-19a. You should file the application directly with the Office of Personnel Management 60 days before you want your monthly annuity benefit to begin.

It’s a good idea to request a retirement estimate for a deferred or postponed retirement from your agency’s human resources office before leaving federal service. This will give you an idea of the value of this benefit at the time you are entitled to receive it.

If you are married when your annuity begins, it will be computed with a reduction to provide a maximum survivor annuity (50 percent of your unreduced annuity) for your spouse upon your death. You can choose to provide a partial survivor annuity (25 percent of your unreduced annuity) or no survivor annuity; however, you must get your spouse’s consent.

If you separate from federal service, but die before receiving your deferred or postponed retirement, there would be a survivor annuity payable to your spouse if they were married to you at the time of your separation and you had 10 or more years of creditable service (and did not apply for a refund of your retirement contributions). Your surviving spouse may elect to receive a lump-sum payment of your retirement contributions in lieu of a survivor annuity.

You should keep personal copies of certain documents filed in your electronic Official Personnel Folder, because you will lose immediate access to this folder after your separation. These include:

  • FERS Designation of Beneficiary Form (SF 3102)
  • SF-50 forms showing appointments into federal service, prior separations from federal service, changes in your work schedule, changes in your retirement coverage, and pay changes over the last (or highest) three years of service, because they will be used to compute your high-three average salary for your future retirement benefit.
  • FEGLI forms if you are retiring with an immediate retirement, including SF 2817 (Life Insurance Election) and SF 2823 (Designation of Beneficiary).
  • SF 2809 FEHBP election forms.

If you are considering employment related to your government work or possibly returning to federal service later on, you may want to maintain information regarding training, duty stations, security clearances, pay, and positions that were held during your career.

The pandemic has upended our lives and made us think about our priorities. There is a big difference between retiring with an immediate, unreduced, retirement based on a full career of federal service versus a reduced or postponed deferred retirement. So be sure to think it through before you make the leap out of government.

We can also run a free benefits analysis for you as well, just visit out simple contact us page to request yours today.