Federal retirement expert, Chris Kowalik, helps federal employees to understand how each type of leave is paid out, some special considerations for each, and how to maximize both types of leave upon retiring from federal service.
Key takeaways:
- main differences in sick leave and annual leave
- how sick leave and annual leave are paid out at the time of retirement
- when you can expect to receive leave payments
- the tax implications of both sick leave and annual leave payouts
- which type of leave should federal employees take at the end of their career?
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Scott: Hello and welcome to this episode of FedImpact, candid insights on your federal retirement. I’m Scott Thompson with MyFederalRetirement.com and I’m here today with Chris Kowalik of ProFeds, home of the Federal Retirement Impact Workshop. Chris is here with us today to give us some clarification between two leave programs, annual leave and sick leave. Hi Chris.
Chris: Hi Scott, and welcome everybody, glad to be here today.
Chris: Yeah, you’re right, Scott. I’m going to mostly focus today on the retirement aspects of these two types of leave, and so we’re going to talk about the main differences between sick leave and annual leave, how those two different types of leave are paid out at the time of retirement, so employees know what to expect, when you can expect to receive the leave payments, and the tax implications of each one of those. Like all of our episodes, we want to hear from our listeners, so I know what they thought of today’s material and what topics they want to see in the future. We’ll be sure to give all those details to provide feedback at the end of the broadcast, and the feedback so far has been so incredible and listeners are giving us many great topics to consider for the future.
Scott: Okay, great. Well, should we get started with annual leave now?
Chris: Sure, that seems like a pretty logical place to start. Let’s put the idea of retirement aside for just a moment, and just talk about some of the rules surrounding annual leave while an employee is still working. The first thing we’ll talk about is how much leave you can earn each pay period. Most employees can earn eight hours of annual leave each and every pay period. Every biweekly, you get hours in the bank. Now, employees also know that the most number of hours that again, most employees can carry over from year to the next, is 240 hours. Everything about that, when the end of the year rolls around, anything above 240 turns into use or lose, and if you don’t use it by the end of the year, it just vanishes.
Of course, there are exceptions for employees who have deployed and those who are the senior executive, and postal workers and all of that. They can carry over more than 240, but the vast majority of feds that we see today are looking at that 240 limit. Now, when we think of the different types of leave that are included, we’ve got normal annual leave, we’ve got comped time and restored leave, so a lot of different factors in this. At the end of an employee’s career, the government will essentially buy back the extra hours that the employee accumulated and didn’t end up using. The retiree then receives a check a few weeks after they retire to compensate them for the annual leave that they didn’t end up using. Really, a great opportunity to get a pretty nice check at the end of retirement.
Scott: Okay, so how does it work when someone retires?
Chris: The calculation is relatively simple. We take the number of hours of annual leave that an employee has, and we multiply it by the hourly rate at the time the employee leaves federal service. Let’s review some important details so everyone’s on the same sheet here. The hourly rate that we’re going to use in this calculation is the employee’s final salary. It is not the high-3. When an employee gets a pay raise in January, like everybody else does in most years, of course if they were to retire at the end of January, they’re going to be paid out at the higher hourly rate because they just got a pay raise. That’s something to consider.
For most employees, the maximum number of hours of annual leave that can be cashed out is 448. A lot of employees think it’s the 240, but here’s the scenario. If we have somebody retiring at the end of a given year, they have 240 hours they could have carried over from the previous year, plus the 208 hours that they earned in the current year. That brings us to the 448. Let’s say that we have an employee who retires in December, like I mentioned, we’ve got the 240 from last year plus the 208, assuming they get through all 26 pay periods. Now, I have to say in this scenario, it seems pretty unreasonable to think that an employee doesn’t use any of their annual leave for over two years, but this truly would be the max.
Again, the calculation, we take the hourly version of the salary that includes locality pay and all that, we multiply it times the number of hours of annual leave and that equals the cash payout. That all seems pretty simple, right?
Scott: Yeah.
Chris: Not so fast. Things get pretty complicated when we try to game the system. You see, sometimes employees think they’re going to pull a fast one on Uncle Sam when they go to retire, and they’re going to do what I’ve mentioned a few minutes ago, which is waiting until January of a given year after they expect to receive a pay raise, so that they can get this much higher payout.
Scott: Sure.
Chris: Yeah, makes sense, and by all means, if we can time things the right way and get paid more, that sounds beautiful. However, the thinking is that if they can hang on to get that pay raise, and they get the higher payout, that it’s going to make this drastically different check that they’re going to receive. While this all sounds great, this only works if an employee has less than 240 hours of annual leave at the end of the year. If by stepping into the new year, an employee has to give up hours of annual leave to get there, the calculations simply aren’t going to work. It tends to provide a much lower payout if you have to give up hours. Those hours are so valuable.
Sometimes this yields several hundred or even several thousands less of a payout. It’s substantial, and of course, the more money you make, the higher the number is. It often makes sense simply for employees to retire at the end of a given year, so say the end of December, and then be paid out at their current salary.
Scott: Yeah. Well, I’m sure that extra money comes in handy when someone retires.
Chris: Of course.
Scott: Yeah. Are there some other things that employees should consider when receiving the money?
Chris: Yes. In fact, in our retirement workshops, it seems to be about once a workshop, I get this question, and somebody will say, “Well shouldn’t I just burn my annual leave?” Meaning, just go on leave and run it out, and then retire. “Isn’t that more valuable to me than taking the payout?” Well, I’ll start by saying it will be difficult to get an agency to give you an extended period of annual leave, especially when they know you’re retiring. Presumably, if we’re looking at the 448, we’re talking about almost two months. About 56 days of leave. That’s difficult for an agency to swallow because they have a job for someone to be doing, but you’re not there to do the job, and they can’t hire your replacement until you’ve actually retired.
That makes it difficult even to get approval to get annual leave for that long of a period of time. Now, either way, regardless of which way you go, whether you go ahead and retire and then take the lump sum payout of your leave balance, or you burn your leave and ride it out until the end, if you can get an agency to agree with that, you’re still getting the same amount of pay as far as the normal paycheck that you will receive. But, the difference is if you can’t convince an agency to let you run out your leave, and just burn it all, then you’ve added about 56 days to the pension calculation. Is there some benefit? Yes, but I don’t think it’s quite as overwhelming as some might think.
Another question I get asked a lot is, “Can I donate leave?” Maybe they have somebody in their agency or a coworker at a different agency that is sick, that has run out of leave, and they want to donate it. Of course, you can always donate leave. The rules for donating leave are in the notes below this episode, so if you’re listening to this on the MyFederalRetirement.com website, right at the bottom, underneath where you push the play button, you’ll see some special links there and we’ve got a link in there for donating leave and the rules associated with that.
Another question I get a lot of is, “Can I take my pay out from annual leave and roll it into TSP as my final payment?” While there’s been plenty of legislation and request to do that, none of it’s passed. That is not acceptable within the TSP and the IRS rules at this given moment. I’ll say most employees are really going to need a little bit of a stash of cash anyway, right when they retire, and so unless that tax advantage is super important to you, and that it makes a significant difference, I suspect having the cash in hand will simply serve a different purpose, and be pretty timely when you walk into retirement.
Another question I get asked a lot of is how the money is taxed, as far as the annual leave payout. When that check comes to an employee or in this case, a retiree, it happens just a few weeks after they retire, and there are taxes due on this payment. There are federal taxes, there are state taxes that are still due. We’ve got Medicare Part A which everyone contributes to, so that’s 1.45% of pay for that year, or for that pay period, and any FICA taxes, so social security or any of that for our FERS and our CSRS offset employees. With all of that still withheld, there are some things that aren’t going to be withheld from that payment, and that would be any insurance premiums, like FEHB or FEGLI. Then, any TSP contributions, so those aren’t going to come out of that final check.
Of course, whenever you receive that check from the IRS, that is when it’s deemed paid to you, and so that’s the tax year in which you’re going to have to satisfy your tax obligation. For employees that retire at the end of a given year, they’re not going to receive their annual leave payout until the following year, the following tax year. They’re able to not take a big extra payment in their current year of earnings, but be able to pass that into retirement, hopefully being able to save taxes at least to some degree. Now, all of this money helps as far as having the cash when you ultimately retire, but make sure that for all the employees listening out there, that you have some other form of cash as well. We don’t want your annual leave to be your only source of emergency funds once you step into retirement.
Scott: Right. Well, I suspect a lot of this is news to many of our listeners today. Thanks so much for providing this clarification on annual leave. Now, how about sick leave? What can an employee expect regarding sick leave?
Chris: Yeah, sick leave and annual leave are paid out in such different ways, so like we did with annual leave, let’s start with some of the basics of how it looks while someone is still working. Most employees earn four hours of sick leave each biweekly pay period, so not the eight of annual leave, but four hours of sick leave. There is no cap as to how much sick leave an employee can accrue, so it doesn’t follow the same rules of annual leave where you have a cap at 240 or some other number. This can simply roll over from one year to the next and it’s very common for me to see CSRS employees that have been banking sick leave for all these years to have 3 and 4000 hours of sick leave.
Scott: Wow.
Chris: That gives you an idea. Now, to give a bit of perspective as far as what that equates to, 2087 hours of sick leave equals one year of work. When it comes time to retire, we have to figure out how much this is really going to be worth to an employee. A huge legislative change that happened in 2010 with the National Defense Authorization Act. Prior to the NDA of 2010 being signed, CSRS and FERS employees were treated quite differently when it came to sick leave. It was a very unfair point of contention between the two groups and rightly so, because FERS employees were under a use it or lose it program. When they got to a point at the end of their career, had they not used their sick leave, it just evaporates.
Once they get to that point of retirement, when that sick leave balance disappears, they have nothing to show for it. In an effort for FERS employees to feel like they weren’t losing any money by way of sick leave, they unfortunately ended up getting really sick at the end of their career, right?
Scott: Yes.
Chris: They end up having the FERS flu we call it, and that’s where all of them got sick at the end just so they could burn all their leave that they earned but weren’t allowed to take. Now, FERS employees and CSRS employees are treated exactly the same when it comes to sick leave. Here’s how it works. At the end of someone’s career, the hours of sick leave are converted to years, months, and days. It’s added to the pension calculation. If we have an employee, let’s say that has 30 years of service, and they are eligible to retire, so they’ve reached the right age and all of that, and they have 2087 hours of sick leave, because they want to give me some easy math to do on this call, it would mean that they would essentially be paid as if they had worked 31 years.
We’re going to be adding another year onto the calculation for the pension, so this is pretty impressive, and it can mean a pretty good deal of money on top of what the normal pension is going to be. A couple of important notes I want to bring to everyone’s attention about sick leave. Sick leave does not help an employee to retire sooner. You must already be eligible to retire, so the correct age and the correct number of years of service before applying the sick leave to the pension calculation. Let’s take a look at an example of that 2087 that I just mentioned. If we have an employee that has 29 years of service and they need 30 to be eligible, having a year of sick leave doesn’t get them there. But if they already have 30, then the year of sick leave is kind of the icing on the cake with the cherry on top, right?
Scott: Right.
Chris: They get the extra year included. Now, this extra pension or the extra calculation in the pension will be paid out every single year for the rest of an employee’s life. It’s not the big payout like annual leave is where it comes out all at one time, but it can be a substantial amount of money over a 40 year retirement. It can be pretty substantial, and it will be taxed, just like the majority of the federal pension will be taxed. The sick leave component, that portion attributed to this extra sick leave calculation will be taxed as well.
Scott: Okay. Now, at the start of this episode, you mentioned that employees often ask, “Which kind of sick leave” … Excuse me, “Leave, general leave, should I take? Sick leave or annual leave?” Do you have some guidance for them?
Chris: Yeah. Most of my guidance would be as we’re approaching that timeline of retirement, what we should do, because that’s really where the consequence is happening. When we have employees that are nearing the end of their career, they should opt to take sick leave over annual leave. Of course, we’re not looking to abuse the leave program and you have to still meet the qualifications to be able to take sick leave, either you’re sick yourself, you’re taking care of a sick family member or something of that nature, but assuming that you qualify for that, we would prefer you take sick leave over annual leave because of the method by which it’s credited back to the employee.
While those hours of sick leave would be credited to the pension calculation, and paid for the duration of an employee’s lifetime, or a retiree’s lifetime, it’s far more financially advantageous if you get paid out the extra money from the annual leave bucket. In most instances, it would take between 25 and 100 years, …
Scott: Wow.
Chris: … Just depends on how the numbers work, between 25 and 100 years in retirement to make up the difference in the payout.
Scott: Wow, okay.
Chris: Yeah. If an employee has a choice in the last two years before retiring, burn that sick leave before annual leave.
Scott: Okay. Well Chris, this has been very insightful for those who weren’t really sure how sick leave and annual leave play out once they retire, and I bet after talking about all this leave, they probably want to submit their leave requests, even before …
Chris: Probably.
Scott: … We wrap up this episode, right?
Chris: Probably.
Scott: You seem to really bring in a lot of useful information on every topic we cover, but in the vast sea of federal benefits, what else can we look forward to hearing about in future episodes?
Chris: Yeah. You know, my mission is to give very candid insights and I like to say “no BS advice” on federal benefits. We are going to continue to cover such a wide variety of different benefits, ranging from the CSRS and FERS pensions, to the insurance programs like FEGLI and FEHB and the long term care program, and then from social security to taxes, and everything in between. I doubt we’ll run out of topics to cover, so I hope our listeners will stay tuned for more insights.
Scott: Right. Well, Chris, you mentioned that you love getting feedback from employees and want to encourage our listeners to interact with you. What kind of feedback are you looking for and where should the listeners visit to give you that feedback?
Chris: Yeah. You know, looking back over the feedback that we’ve received from our previous episodes, I’m so glad to hear that our listeners really resonate with the topics that we’re talking about in this forum. Of course, in our live retirement workshops I can see their bright, shining faces, eager to put this material into action. Over the radio waves, it’s a bit different, so I don’t always get that immediate feedback. We want to make sure that we’re providing relevant information that our listeners really want to hear, so if they have ideas on topics that they want to hear in the future, or just want to share their reaction to today’s content, then they can visit our website at FedImpact.com/feedback.
Again, if you’re listening on the MyFederalRetirement.com website, you can simply scroll down below where you push the play button to listen to this episode and you’ll see a link there to be able to leave that feedback and share your thoughts, so for all of our listeners, I can’t wait to hear what you have to say.
Scott: Well, again, it’s been a pleasure to have Chris Kowalik of ProFeds with us today, and we’d like to ask you to stay tuned for another upcoming episode of the FedImpact podcast, to get straight answers and candid insights on your federal retirement.
