Delivered on: Thursday, October 14, 2021
To watch on YouTube, CLICK HERE
FERS Special Retirement Supplement
A unique benefit for select FERS employees
- Understand who is eligible and when this benefit is payable
- Calculate the benefit amount (and what does NOT count in that figure!)
- Review how making too much money may leave this benefit lower than expected – or completely disappear
- Appreciate why this benefit is regularly on Congress’ chopping block
Download Handouts: CLICK HERE
Register for our next short webinar: FedImpact.com/webinar
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Prefer to read instead? Below is a transcript from the video:
Hello, and welcome everybody to today’s webinar on a topic that we get tons of questions about, which is the FERS Special Retirement supplement. You’re going to find today that this benefit is relatively straightforward, but a couple little hiccups can leave people a little bit concerned about whether they may get the supplement. And so, we want to dispel some of the misinformation that’s out there and make sure that you are crystal clear on how this benefit works.
I’m your ProFeds presenter, Chris Kowalik. I am the founder of ProFeds and the developer of our Retirement Workshop. We also do a podcast, we write articles, and a boatload of other things to be able to help federal employees and we’re really delighted to be able to do this session for you today.
Again, as a reminder, our support team is standing by for your questions, so I’m going to stay really focused on delivering today’s material, and the support team is going to be able to answer those individual questions that you may have.
FERS Special Retirement Supplement: A unique benefit for select FERS employees
Today’s topic is all about the FERS Special Retirement Supplement. Like I mentioned a moment ago, this is a unique benefit for select FERS employees. Not all FERS employees will get this, and so you have to fit within very specific parameters for this benefit to be payable to you.
Agenda
For our agenda today, we’re going to first have a clear understanding of who is eligible and when this benefit is payable. We’re going to calculate the benefit, we’ll show you an example and you can plug in your own numbers, but specifically, we want to make sure that we know what does not count in the calculation of this benefit, because this is an area where we see Feds mess up all the time when they’re just trying to manually calculate this benefit and so we want to get crystal clear on what is included.
Next up, we’ll review how making a little bit too much money in retirement, again, after you’ve left federal service, might make this benefit lower than you expected or perhaps completely disappear. So, we don’t like any surprises in retirement, that’s one of our mottoes.
We want to make certain that if there’s going to be an adjustment or an obliteration to one of your benefits, that you know way in advance before you make any of these decisions. And then I also want you to have an appreciation for why this particular benefit always seems to be on Congress’s chopping block. It’s easy for these federal benefits to be targeted by Congress, but I want you to have a better sense of why.
SRS Purpose
Let’s start with the purpose of the Special Retirement Supplement. The basic purpose is to provide a benefit similar to Social Security for all those FERS employees who retire prior to the age of 62. With some caveats that we’ll cover here in a second.
The Special Retirement Supplement benefit is payable between the time a FERS employee retires up to when they turn age 62. And at the age of 62, when someone is eligible for Social Security benefits, this benefit will stop. And this is true even if you decide not to draw your Social Security benefits right at 62. Maybe you want to wait until your full retirement age, probably closer to 67, for most of you, or maybe all the way until 70 to get the max benefit out of Social Security.
You’re welcome to do that, but this benefit that we’re talking about today stops at age 62. Period. So, we don’t want there to be any confusion about ways to skirt the system to keep trying this benefit and delay Social Security to let it get better. It doesn’t work that way.
But I do feel compelled to tell you that receiving the Special Retirement Supplement affects Social Security in absolutely no way. This thing kind of looks like Social Security and it acts like Social Security, but don’t refer to this as early Social Security, because it’s not. The reason I say that is because you still have all of the freedoms to draw Social Security in any way that you wish, and by virtue of you taking this benefit, it does not lower the amount of Social Security benefits that you are entitled to.
One could argue that if you retire much earlier in life, let’s say you’re 56 or 57, and you don’t work all the way until 62, that perhaps your Social Security benefit isn’t as high. And I think that’s a valid argument based on your earnings and how Social Security is calculated, but I want to be very clear that taking this benefit does not lower the amount of Social Security benefit that you are set to receive. You’re still going to have all of the freedoms to take Social Security in any way that you wish.
Important Notes
A couple of notes along the line on the purpose of the Special Retirement Supplement. I want you to know that this benefit is automatic, and it is free. “Free” is always an interesting word when it comes to benefits, because it’s never really free, but what we mean by this is that you don’t elect this benefit, it just automatically happens, and you don’t pay a premium to have this benefit in place.
The taxpayers are paying for this benefit, but you personally are not paying for this. A lot of the other benefits, most of the other benefits that you’re going to have, there is a price to having them in place, but this is simply not one of them. It’s also the reason why it’s so easy for this to be on Congress’s chopping block because it’s easy for them to take benefits away when you’re not paying for them.
And so, it’s a big point of contention is that there’s always rumors that this benefit is going to go away. Whether that will happen, I suppose all of these benefits can change with the stroke of the Congressional pen, but what I suspect would happen first is that they simply don’t make the benefit quite as rich and lower the calculation that they’re using to determine the benefit amount.
When it comes to you being paid this benefit … and we’re going to calculate and see eligibility here in a second … but when it comes time for you to begin receiving this benefit, know that it will simply be included in your FERS pension check. So, whatever your FERS pension is, your annuity is, this benefit will be added to it in one single check. It’ll just be a different line item on your check.
Having said that, it’s important to point out that it’s going to take OPM a while, sometimes several months to calculate your pension and finalize it. During that time that OPM has your file sitting in a file cabinet and it hasn’t been processed yet, you will not receive Special Retirement Supplement payments. The good news is that you will receive retroactive payments.
Once OPM tallies everything up and figures out how many missed payments they had of this particular benefit, you will get a big check, presuming that all of the other calculations they’ve done for your pension were correct to begin with and there weren’t any big issues that caused them to level out these payments.
For most people, OPM simply counts the number of months that they’ve missed, they give it to them in one big lump sum check, and then from that point forward, assuming that employee is still under the age of 62, regular payments would begin at that time.
Eligibility for the SRS
But I suppose first, we should figure out are you eligible for the special retirement supplement? Eligibility is a big thing, because it doesn’t matter how great a benefit is, if you’re not eligible to receive it, it doesn’t matter, right? With respect to eligibility for the Special Retirement Supplement, most people are going to meet this eligibility, this basic eligibility.
The first is that an employee must have performed at least one full calendar year under FERS, and they must retire on an immediate non disability pension. Of course, they also have to be under the age of 62, like we mentioned before.
This first bullet here, performing at least one full calendar year, this was created when FERS was first created because they were giving the CSRS employees an opportunity to switch over to FERS and they didn’t want them to be able to take this benefit, switch and then retire right away.
And so, there was at least a year of commitment under FERS to be able to get this benefit. So, this really is not even a factor today because anybody that’s been under FERS and is eligible to retire has vested at least five years, of course, and has spent at least one full calendar year under FERS.
But the second bullet here is that they must retire on an immediate, non-disability pension. And so sometimes we’ll have employees come to us and say, “Well, I’m thinking about going out on disability. Can I still get the Special Retirement Supplement?” And the answer is no. So, very important that we’re paying attention to those two requirements, an immediate, and a non-disability pension.
There are some other restrictions that apply based on the type of retirement that someone retires under. Specifically, the ones we see most often are FERS employees retiring under the MRA+10 rules or deferred retirement rules. Let me explain who those people are. MRA+10 rules are employees who have met their minimum retirement age of somewhere between 55 and 57 and they have at least 10 years of federal service, but not the 30 required to retire with that age.
They can still leave, they can still draw a pension right away, but it’s going to be penalized. The other scenario here are deferred retirements. Those are people who are vested, they have at least five years of federal service, but they are too young to be able to go. Let’s say they’re 45. They have five years of federal service. There is a pension waiting for them, but it’s not until they turn 62. And so, anyone that falls into one of these two categories are not eligible to receive the Special Retirement Supplement.
Eligibility for the Special Retirement Supplement
But it’s not enough just to know that you’re eligible, it’s also important to know when you can draw the benefit. We have two different categories of employees when it comes to the supplement. Those on the left-hand side will receive the supplement immediately when they retire. It doesn’t actually mean they’re going to receive the cash right away. Like I mentioned, OPM is going to take a while, but it’s payable during that time immediately when someone retires.
Everybody on the right-hand side will eventually receive the Special Retirement Supplement, but it won’t be until they reach their minimum retirement age. Let’s take a closer look at the left-hand side of the Special Retirement Supplement and those who are receiving it immediately.
The first two groups are regular FERS employees that are fully eligible to retire. That would be they’ve met their minimum retirement age, again, somewhere between 55 and 57, depending on the year that they were born, with at least 30 years of service, or they’re at least 60 with at least 20 years of service.
The other group that would receive the SRS right away would be our law enforcement officers, firefighters, and air traffic controllers, and it does not matter what age they are when they retire. They can retire much younger than the average federal employee, they also have to contribute a lot more to the retirement system while they’re working.
If you’re in the category on the left-hand side, you can bank on getting this benefit immediately when you retire, might be delayed in starting the payment, but eventually, it’ll all catch up to you.
Everybody on the right-hand side, these are the special groups of retirees that weren’t fully eligible but something else happened. If you were to go out on a discontinued service, meaning your job completely went away, or an early out, where your agency is simply downsizing, and they make you an offer to go ahead and leave, once you reach your minimum retirement age, you will begin receiving that SRS.
Let’s say you’re 55, you get the early out, but your MRA isn’t until 57, for those first two years of retirement, you won’t receive this benefit, and then beginning at 57, at your MRA, those benefits would begin all the way until 62.
A special group of people called Military Reserve technicians or dual-status employees are those who are federal employees but wear their military uniform to work, that is their federal job. If they reach the age of 50, with at least 25 years of service, and they lose their military status, if something happens where they’re no longer able to keep their military position and they go out on a discontinued service retirement, they would simply begin receiving the SRS at their minimum retirement age as well.
And of course, members of Congress have a little special rule in here if they retire at age 50 with 20 years or MRA with 25 years, they’re going to get this benefit. That probably comes as no surprise to most of you, that there’s a special little caveat there. But let’s stay focused on how this benefit works for you.
Calculating the Benefit
The next area that we’re going to cover is the actual calculation of the supplement. The calculation itself will only include years as a FERS employee. It will not count CSRS time, and it also will not count military time, even if your CSRS time and/or your military time counts for the pension.
Let’s say you’re a regular FERS employee, you didn’t have any CSRS years, but you had four years of military service that you made a deposit for or you “bought back,” those four years can help in your pension, but they don’t help you in this specific calculation. And you’re going to see an example here in just a second. We just have to describe the parts of the formula first.
The second bullet here is the calculation that you’re about ready to see which will only include the number of years of FERS service rounded to the nearest whole year of service. We don’t see the government do this very often. Typically, they would just chop off if something wasn’t a full year, but in this case, they’re going to say, “If whatever number of years you have, if you have that and less than six months of service,” then they round down to the years that you had.
If you have those same number of years, but on top of that, have more than six months of service, then you’ll round up. So, if you have 30 years of service and two months, you’re going to round down. If you have 30 years of service and seven months, you’re going to round up, to give you an example.
Example
Let’s take a look at the formula of how this works. We have the formula at the top and we have an example here at the bottom. In the formula, we’re going to take the Social Security benefit at the age of 62 that you are expecting. This will be right on your Social Security statement. I realize this is a projection and so do the people at OPM who make this calculation.
But it’s the best number that they can go off of. The Social Security benefit projected at age 62. We’re going to multiply that times the number of years of FERS service. Remember, we’re rounding either up or down depending on how many extra months of service that you have, and we’re going to divide that number by 40. That will give the benefit that you will receive from the supplement.
Let’s take a look at an example of an employee who retires at the age of 57. We’re going to show them having 30 total years of service, but four of those were military years. And we know those four years won’t count for this calculation. And when we look at their Social Security benefit statement at the age of 62, it says that that employee is expecting $1,200 per month.
We’re going to plug all of those numbers into the formula. We take the $1,200 Social Security benefit projection, we’re going to multiply that times 26 years, divided by 40, which is a constant number here, and that gives us $780 per month. That would be payable, in this case, from 57 all the way up until the time that employee or the retiree reaches the age of 62.
A lot of people ask, “Where did that 40 number come from?” And it’s not 40 credits, or 40 quarters that you might have heard of in Social Security. It actually is representing the 40 years of typical earnings years that you would have prior to the age of 62. This assumes you go to college, then from 22 to 62, that’s 40 years.
What this benefit is trying to mimic is to say, “Well, what percentage of the Social Security earnings that you’ve had over those 40 years, what percentage of those were due to your federal service?” And that’s why you’re getting that fraction of the number of years of FERS service divided by 40, that will give a percentage, and that’s the percentage of the Social Security benefit, roughly, that you will receive. It’s given that percentage over your working years that you are a federal worker versus out in the private sector.
Cost of Living Adjustments (COLA)
Next is how this benefit changes over time. Now, COLAs are the hubbub right now, everybody’s talking about these ridiculous COLAs that are happening to FERS and CSRS retirees as well as Social Security recipients. And here’s the deal.
I know we get excited about high increases to pensions and Social Security, but when we have a COLA that’s this big that we’re experiencing right now, the highest in the 40 years that we’ve ever had a COLA, that’s not good news. I know it sounds like good news, but it means that everything around you just got a whole lot more expensive and we’re now adjusting the benefit that you are receiving to keep better pace with that. You’re not getting ahead; I want to be very clear.
Here’s the deal with the Special Retirement Supplement. You don’t get any cost-of-living adjustments to this benefit. You might to Social Security, and you might to your pension, but you don’t get any COLAs apply to the special retirement supplement.
And this is true for any kind of employee. It does not matter whether you’re a regular FERS employee or a special category, like law enforcement officers, firefighters, or air traffic controllers; everybody is in the same boat when it comes to COLAs. This benefit will be calculated one time when you retire, and it will remain that same amount all the way until 62 when it stops.
The Earnings Test
You might think that that was enough to cover like, well, who’s eligible? How much am I going to get, and does it change over time? But you have to leave it to the government to make things a little bit more confusing for everybody. In comes the earnings test.
If you’ve been paying attention to Social Security over the years, you know that the earnings test applies over there, too. In fact, this program borrows the earnings test from the Social Security program, so you’re going to see a lot of similarities here. Let’s see how it works.
The earnings test is a fancy phrase for penalty. If you make too much, they’re going to take some of this benefit away, maybe all of it away. But the earnings test applies only if both of these things are true, that a person is drawing the special retirement supplement benefit and their wages from a job exceed the limit for that particular year.
For this year, 2021, we’re looking at $18,950. We go up next year, in 2022, if you’re curious, to $19,560. But I do want to make special note that these wages that we’re talking about do not include income that you’re going to get from your FERS pension, money you’re going to take from the Thrift Savings Plan, or other investments that you have.
Maybe you have IRAs or non-qualified accounts where you’re going to take money from to live in retirement, none of that counts. We’re only talking about wages from a job. I want to be crystal clear there of how that works.
Let’s see how the earnings test is calculated. The benefit that you’re going to be receiving will be reduced by $1 for every $2 of earnings, from a job, that you have over the allowable limit. Again, for this year it’s $18,950. If you make a whole lot more than the earnings limit of $18,950, you very well may give up all of this benefit.
It is worth noting that the penalty is always applied the following year. OPM sends out a letter to everybody who’s receiving this benefit and asks them to report their earnings each year, and that will determine the benefit that’s payable the following year.
Let’s take a look at an example here. Remember, in that calculation, when we showed you the formula, that person had a Special Retirement Supplement benefit of $780 per month. Yours might be way higher or maybe even lower than that benefit, but let’s use that as a starting point here, and you can take the time to plug in your numbers, maybe after today’s session, if you want to get a sense of what that will look like for you.
If we have somebody that has a benefit of $780 per month, once they make more than about $37,000 a year, they would lose all of the Special Retirement Supplement benefit the following year. Because remember, that penalty is always assessed the next year. So, here’s the deal. $780 a month feels great, right? That’s over $9,000 a year.
What I wouldn’t want to see happen is for someone to say, “Well, I’m going to be sure not to make more than $18,950 so that I can get my $780 a month.” Because if you can go out and make, in this case, 37, 40, 50, $100,000, whatever that number looks like for you after you’ve left federal service, maybe you have a nice paying hobby, maybe you have a business you open, you have contract work, whatever it might be, if you can make a lot more money out there, I would encourage you to do that.
Because overall, it’s going to benefit you by having more money saved, and fewer years that you’re relying on your retirement income. I don’t want you to be shortsighted and to limit yourself on the income that you’re going to have just to get that $9,000 a year.
Again, yours might be higher than that so you’ll have to figure out what your numbers are here, but it’s important to take advantage of the working years’ opportunities that you have because once you are deeper into retirement, you will not have, really, the capacity to be able to work at your fullest level at that time. If you have an opportunity to do that now, I would encourage you to do so.
There is a special rule here for the special provision employees, so remember, these are law enforcement officers, firefighters, and air traffic controllers, they are not subject to this earnings test that we’ve referred to until they reach their minimum retirement age. Let’s say that we had somebody retiring at 50 from a law enforcement position and they have an MRA of 57. From 50 to 57, they can go out and make as much money as they want.
The earnings test would apply from age 57 and beyond. So, they’re going to receive the full Special Retirement Supplement benefit all the way until they reach their minimum retirement age, which is kind of weird, because for them, they’re able to retire much earlier, so the phrase, minimum retirement age, seems to be a little bit misleading, but that 55 to 57 mark in the sand is when that earnings test applies. And that would, of course, apply from that point all the way until age 62.
Taxes on the Special Retirement Supplement
But we’re not out of here yet. We have to talk about taxes on this benefit, because it’s not enough just to receive the benefit, now we have to figure out how to tax you on it. Taxes on the special retirement supplement, at the federal and the state level, are going to be treated as ordinary income.
It’s not earned income, like you having a job, this is ordinary income that is just like your pension is going to be treated. You don’t pay Social Security, and Medicare, and all of that, like you do as an employee, this is a different type of income for IRS purposes.
At the federal level, I promise you that this benefit is going to be taxed. At the state level, I can’t promise the same thing, because some states don’t have income tax at all, and others have specifically excluded federal pensions from being taxed at the state level. Let’s take a quick peek. Remember, at the state level, the FERS pension, including the Special Retirement Supplement, is treated as ordinary income.
But like I mentioned, there are some retiree friendly states, so some states don’t tax any income for any of their residents, and so of course, this wouldn’t be taxed either, but some states specifically don’t tax CSRS and FERS pensions, and by default, the Special Retirement Supplement.
These nine states are states that have no income tax, and therefore, of course, the Special Retirement Supplement and the FERS pensions would not be included, they would not be taxed at all. If you don’t happen to live in one of these nine states, these next nine states are states that normally have income tax, but they specifically exclude the entire CSRS and FERS pension from being taxed at the state level.
You’re still going to have to pay federal income tax on your money, but at the state level, you get a pass. And so, these nine states, if you happen to live in one or will live in one in retirement, both your pension and the Special Retirement Supplement would not be taxable.
Of course, there are other states, we have some of them listed here at the bottom, that give certain exemptions to the federal pension being taxed at the state level. But a lot of it depends on how old you are or the dates of your government service, and so you’d want to dig into the rules of your particular state if they’re not one of these 18 listed between these two slides.
Quick Recap
Again, this is supposed to be a pretty straightforward program, but there’s enough little twists and turns in here that can get you tangled up. Let’s do a quick recap and then we have our special announcement.
A quick recap on the Special Retirement Supplement. Remember, this is payable to most Feds retiring under the age of 62. It is based on your service years and the Social Security benefit that you’re expecting at age 62. That amount will stay level until you reach the age of 62, so no cost-of-living adjustments, and of course, at that age of 62, this benefit will stop.
If you make too much money, you might not receive this benefit at all, or it may simply be penalized. Next, and very, very important, plan to pay taxes on the Special Retirement Supplement, just like your pension. Don’t think that this is special money that you get that you don’t have to pay tax on.
Again, we don’t like surprises. That’s what we try to help employees to avoid. So, if you make an assumption about taxes being due on this money and you don’t set aside enough, you are going to find yourself in some hot water, and that is no place to be in retirement.
Wrap Up & Next Steps
The Special Retirement Supplement, of course, is part of your story, but it’s not the whole story when it comes to retiring. We always encourage employees to understand how each of these benefits fit in the bigger picture. Your entire financial life needs to be addressed.
And so, we hold live workshops, we also hold virtual workshops for now, as we’re coming out of COVID. There is no cost to attend these sessions. I will share with you that they are all full day sessions, so they go 9:00 to four o’clock. You can see a list of all of the sessions available, again, both live and virtual, by going to fedimpact.local/attend.
That will give you a whole list and you can choose a workshop that works for you. We’ll cover the Special Retirement Supplement in that workshop, but also be able to cover the rest of the benefits and see how it all fits together.
So happy to have you join us today. Remember to find a workshop close by, you can go to fedimpact.local/attend. We do have live and virtual sessions still happening. The virtual sessions will be ending in 2021, we will not carry those over into 2022.
So, if you need to get on a virtual session, if maybe you’re nowhere close to where we hold our live workshops, then please get on those virtual sessions. If you’re close by one of our live sessions and you’re comfortable attending live, I would really encourage that. The experience in our live sessions is so different than the virtuals and we’d love to invite you to attend.
Again, for our next webinar, you can go to fedimpact.local/webinar. That one specifically, on October 28 is on the vaccine mandate, and we look forward to having you all there. Thank you so much and we hope you enjoyed today’s session.
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For an introduction to a financial professional in our network: FedImpact.com/request-to-meet
Register for our next short webinar: FedImpact.com/webinar
Find a comprehensive retirement workshop for your area: FedImpact.com/attend
