Federal retirement expert, Chris Kowalik, shares her candid insights on how federal employees who are Law Enforcement, Firefighters, and Air Traffic Controller are affected by different rules in several of their benefits.
Key takeaways:
- Basic differences between Special Provision and regular employees
- Retirement eligibility rules for Special Provision employees
- How the pension is calculated and changes over time
- Transferring from “covered” to “non-covered” positions
- Different rules under the FERS Special Retirement Supplement
- How withdrawals out of the Thrift Savings Plan may be treated differently
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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 Chis Kowalik of ProFeds, how of the federal retirement impact workshop.
Today’s episode will focus on how federal employees, who are law enforcement officers, firefighters, and air traffic controllers, are affected by different rules and several of their benefits. Chris, it’s great to have you with us today.
Now, I will warn everybody, this topic is a little bit of a tricky one to cover, because it’s gonna cover a wide variety of benefits for which we haven’t necessarily established a knowledge base for our listeners yet. But we’ll touch on some of the major differences for this group, and I’ll do my very best to give some context for each one of these topics.
Scott: Okay, yeah, there is definitely a lot on this topic for sure. Now, based on the podcast feedback we’ve received so far, we seem to get a lot of questions from special provision employees who know that they’re different, but they’re not sure exactly how they’re different. So, what do you have for us today on this?
Chris: Yeah, during this episode, of course, we can’t possibly cover every facet of the law enforcement officers, firefighters, and air traffic controller communities, because frankly, they’re all unique, even in their own ways. But we will cover a few key areas in which these types of employees are different than the regular employees that we would see in a normal agency.
So some of those differences are some eligibility rules that are going to be different for special provision employees, how the pension is going to be calculated, and how it changes over time. Any employee considering transferring from what we call a covered position, where they’re a special provision employee, out to a non-covered position, a regular position out into an agency, and how that might affect things.
We’ll also cover some different rules under the first special retirement supplement, and how their withdrawals out of the thrift savings plan may be treated differently as well.
So, of course, like all of our episodes, we’re always looking for feedback on this material, so we’ll let our listeners know how to do that near the end of today’s episode.
Scott: Okay, great. Well it sounds like we’ve got a lot on our plate today, so where should we get started?
Chris: Yeah, so let’s get started with identifying some of the basic differences for special provisions. So in a broad sense, special provision employees are treated just like regular employees in most respects. Of course, they get a pension, they have their thrift savings plan, access to all of the insurance programs, just like every other employee that’s out there. But when we get into the details, that’s where we see the bigger differences with respect to this particular community.
So let’s start with some of those basic differences, and we’ll dig into some of these a little bit in more detail in a few minutes. So the first way that they’re different is that they follow different eligibility requirements that allow them to retire at a younger age, and with fewer years of service. They’ll contribute more to the retirement system, so it’s actually an extra half a percentage point into their respective retirement system.
So for any special provision employee that we have out there, if they’re CSRS, which there are very few of those left, they would be contributing 7.5% of their pay into CSRS, and our FERS employees, who are special provision, will contribute 1.3%. So that’s a half a percentage point higher than a quote-unquote “regular” employee.
Scott: Okay.
Chris: Once we start to calculate their pension, they get a richer pension formula, as opposed to their regular counterparts. So while they have to contribute more, they actually get more out of the system as well. And then, the last way, at least on a basic level that they’re different, is that these special provision employees are subject to mandatory retirement. For our law enforcement officers and firefighters, they must retire by age 57, and air traffic controllers must retire by age 56. And they all must have at least 20 years of special provision service.
This is why the typical age limit to be hired into one of these positions is 36 and 37, respectively. So like most things in government, there are always exceptions to these mandatory limits, but this is at least the start of the list of the basic differences that these employees have.
Scott: Okay, well if these are the basic differences, then I think we are in store for a lot of material today.
Chris: Yeah, there is a lot to cover in this. And like I mentioned, we’re covering a broad base of topics for which we’ve not really established some of those basic rules for our listeners today.
Scott: Okay.
Chris: But let’s dive in and talk first about eligibility. So if you’re listening to this podcast on the myfederalretirement.com website, just below the play button, you’ll be able to access an easy one-page PDF that shows the information that I’m about ready to share with you. So if you need a visual to this, you can go out there and grab that PDF.
So, talking about eligibility, I’m only going to cover the FERS eligibility for special provision at this point, simply because rarely do we meet folks that are still under the older system, that are not already at mandatory retirement age and have retired, right? Because 56, 57 is the mandatory.
So, if we’re just looking at FERS eligibility for special provisions, they would need to meet both an age and a service year requirement to be eligible to retire. So, two different levels they could retire at. They can either retire at least age 50 years old, with at least 20 years of service, or at any age with at least 25 years of service. So, whichever one they meet first, that grants them the permission to walk out the door and retire.
Now, I do want to make a special point regarding the 20 years of actual FERS special provision service. If we have a special provision employee, say, a law enforcement officer, that had 19 years as law enforcement, but also maybe had some other time with their agency prior to coming on as a special provision or military service, anything like that … I want everyone listening today to realize that those extra years don’t help get them to 20. They have to have 20 special provision years with the federal government, and then any other service that the have can be counted on top of that. But to be able to get this greater pension formula that we’re about ready to talk about, they must meet that 20 year requirement for law enforcement, firefighter, or air traffic controller time.
Scott: Okay.
Chris: And what we mentioned before, was the mandatory retirement. There are exceptions to all of these items. So for instance, if we have anybody listening who’s a customs and border protection officer. If you were hired prior to July of 2008, you’re not subject to mandatory retirement, because prior to that age, you weren’t considered law enforcement. So you may have been hired much beyond 36 or 37, because of the type of job that you would have been hired into.
So, all of these things change, of course, with the stroke of the congressional pen. So, today, we’ll talk about how most of these folks are going to be treated.
Scott: Okay. Well, I’m sure our listeners are especially concerned about how their retirement pay may be different, since they are special provision employees. Can you cover that?
Chris: Absolutely. So, once an employee is deemed quote-unquote “eligible” to retire, calculating their pension is actually quite simple. So in this podcast, again, I’m only gonna cover the FERS rules as far as the pension formula, just to keep things simple. But if we do have any CSRS special provision in that same PDF download, you’ll see your numbers as well. So, same concept, just some different formulas.
So, before covering the actual formula, let’s talk about one of the components called The High Three. So, most employees know that The High Three is an employee’s highest three years of consecutive earnings. So they all have to be together, and most of the time, they’re at the very end of an employee’s career. That’s a very natural career progression, where you’re earning more the longer you stay.
And of course, these groups of people, whether they are law enforcement, firefighters, air traffic controllers, they all have their own special types of pay, given the kind of work and schedules that they have. So for instance, law enforcement officers, which is the largest community of the ones we’re talking about, most of them receive law enforcement availability pay, which is the 25% kicker to their salary. So that leap will be included in The High Three.
So, let’s take a look at the calculation of how the pension works, so everybody can see how this really comes out. So for reference, remember, this is in the PDF just below the play button on myfederalretirement.com on this page.
Scott: Right.
Chris: So for a FERS special provision employee, when we got to calculate the pension, we would take … There’s two parts of the formula. We’re gonna take The High Three times 1.7%, times 20 for the first 20 years of service that they’ve had.
Scott: Okay.
Chris: And then, the second part of the formula is we’re gonna take that same High Three times 1% for every year above the 20 that that employee had. So, if we think back to the eligibility that we talked about where I stressed, you must have at least 20 years as law enforcement, firefighter, or air traffic controller. That kind of corresponds with this formula, that they’re saying 20 years must be that special provision time.
But, there’s often some confusion for the law enforcement officers that we train in our workshops, that they think that all of their law enforcement, or firefighter, or air traffic controller time, will count at that higher level.
Scott: Right.
Chris: And that’s not the case. There’s a rare exception that I’ll share here in a few minutes, but those 20 years are … We say 20 years, no more, no less. If you have less than 20 years, you don’t get this higher formula. If you have more than 20 years, only 20 years is counted at that 1.7% level. Everything above that, even if it’s actual law enforcement, firefighter, or air traffic controller time, is only counted at the 1% part of the formula, okay?
So if we were to have, just by way of an example, a FERS employee, a special provision employee that was 50 years old, and they have 30 years of service, and a $50,000 High Three.
Scott: Okay.
Chris: We would essentially plug all of that into the formula, so we’d take 50,000 times 1.7% times 20, and we would add that number to the next part of the formula, the 50,000 High Three times 1% times 10, for every year above the 20 that we just calculated. And we would come up with a starting pension of $22,000 per year.
Scott: Okay.
Chris: Now, what everybody wants to know is, well how is that different than a regular employee? A regular employee, had they had the same $50,000 High Three, and the same 30 years of service, their pension would have started at $15,000 per year. So a pretty big difference than an average, regular employee under the normal formula, okay?
Scott: Right.
Chris: So, I’ll give a couple of examples of groups that may be exceptions to this formula that I just shared. For instance, customs and border protection officers that I mentioned before, they were only considered law enforcement from July of 2008 on. So they’ll have a different calculation. Part of their years are actually going to be calculated as law enforcement, and then other parts of their years are going to be calculated as regular employees, okay?
Another example of an exception would be some air traffic controllers who are able to work until age 56, and who have 30 years of service, they receive the 1.7% calculation for all of their years. Now, this isn’t all air traffic controllers, but there are certain groups of them that do get that 1.7% for all 30 of their years.
So, again, these are exceptions to the general rule, and certainly more detail will need to be sorted out for those individuals.
Scott: Okay. Well, I can see how some of this can get fairly complicated. Are there any unique ways that special provision employee pensions are treated in retirement?
Chris: Yes. So most employees are aware that there are adjustments to their pensions and retirement called cost of living adjustments. And that number is based on a number that’s released by the US Treasury each year called the Consumer Price Index for Wage Earners, or CPIW for short. So to give everybody an idea, over the last ten years, SERS retirees have averaged a 1.99% cost of living adjustment. And FERS have averaged 1.6%, okay?
Now, for most FERS employees who retire under the age of 62, they will not receive any change to their pension, so no COLAS are applied, until they get to age 62. So you can imagine, someone who retires at 55, their pension flat lines until 62 when they pick up that cost of living adjustment. Now that’s where things are a little bit different for special provision employees. So regardless of their retirement age, they will begin receiving COLAS right away.
Scott: Okay.
Chris: Yeah, so we could essentially have a 45-year-old that just retired from federal service, and they’re going to get cost of living adjustments from that moment forward for the duration of their lifetime.
Scott: Okay, wow. So, other than the pension itself, in what ways are these employees treated differently than a regular employee?
Chris: Yeah, there are a few ways. So, first, let me address something that I think seems like a really big difference for regular employees when they’re hearing about all these special rules. Law enforcement, firefighters and air traffic controllers, when they are forced out at age 56 or 57, so remember that mandatory retirement age.
Scott: Yes.
Chris: On the surface, this sounds really great, that you’re able to retire so much younger than the average employee. But the reality is, is this can put a big financial burden on employees who are simply not ready to retire yet.
Scott: Yeah.
Chris: In some instances, these employees can move into a different what we call non-covered position in their agency, and keep working, or they could move to another job altogether, like update their USAJobs account and switch agencies. But they simply don’t have the luxury of staying in the job for the last 20-plus years, like an average regular employee could do.
So this can really place a financial burden on these folks, at a time where they’re kind of in their last stretch, but if they had their choice, they would rather just keep working, doing what they’re doing, for maybe another four or five, six years to the normal age that other employees are retiring, but they simply don’t have that luxury.
Scott: Okay.
Chris: Okay? Now, another way that they’re different is through a program called the FERS Special Retirement Supplement. And this supplement is paid to FERS employees who are eligible to retire, and choose to do so prior to the age of 62. But there’s a catch. For a regular employee, if they make too much money, more than about $15,700 dollars, they’ll start to give some, or all, of this benefit back. And it’s called the earnings test. And it’s always a big surprise in our retirement workshops, like “What? I thought this was something I got? And now you’re gonna take it all away from me,” right?
But for special provision employees, there’s a little bit of grace here. So for any special provision employee who retires prior to their minimum retirement age, not their mandatory, but their minimum retirement age, which is somewhere between 55 and 57, depending on the year that they were born. The earnings test won’t apply to them until they reach their minimum retirement age.
So let me give an example. Let’s say we have a special provision employee who retires at 50. And when we determine what their birthday is, we determine that they’re minimum retirement age is 57. So between 50 and 57, they can go out and make as much money as they want. They are still going to draw the special retirement supplement. Which could be a significant portion or percentage of the social security benefit that they’re waiting for at 62, so this could be big, a pretty big payment.
So, they do have a little bit of grace in there, but once they hit that minimum retirement age, again, 55 to 57, from that point up through 62, they’re gonna be treated like everybody else.
Scott: Okay.
Chris: Okay? And the last way that they are different, with respect to … Aside from the pension itself. The third way that they’re different is, special provision employees who retire at age 50 or later, they may withdraw money from the thrift savings plan without penalty between age 50 and 59 and a half. Now, remember, during all that time, they still have to pay tax on the money that they’re taking out, but they don’t have any penalties on top.
So, had they tried taking that same kind of money out of a private IRA, then they would be subject to a 10% early withdrawal penalty by the IRS.
Scott: Sure.
Chris: So this was a huge win for law enforcement officers, firefighters, and air traffic controllers, that just went into effect this year. Regular employees can draw from TSP if they retire 55 or later, but this special group can pull at age 50 with no penalty. Huge, huge win for this group.
Scott: Yeah, sure is. Well Chris, you’re always so great in giving this information, and I appreciate you providing all the information for our special provision employees that are listening today. Now, you mentioned that you enjoy getting feedback from employees, and you’d like to encourage them to interact with you. What kind of feedback are you looking for, and where should employees visit to give you that feedback?
Chris: Absolutely. Well first, thank you for having me. I’m so grateful to be able to provide this type of information for our special provision employees that are listening. As for feedback, for any of our listeners who have ideas on topics, or just want to share their reaction to today’s content, they can certainly visit fedimpact.com/feedback and share their thoughts.
Scott: Well great. Well, it’s been great as always to have Chris Kowalik of ProFeds with us today. We invite you to stay tuned to the next FedImpact podcast episode, to get straight answers and candid insights on your federal retirement.
