Federal retirement expert, Chris Kowalik, shares how a FERS employee — who may be considering retiring under MRA+10 retirement rules — will be affected by swift penalties.
Key takeaways:
- What age and service requirements a FERS employee must meet in order to be eligible to retire
- Two penalties that have a profound financial impact on those who retire under the MRA+10 rules
- The way a federal employee can avoid one of the penalties (and who this might be most beneficial for)
- How MRA+10 affects the FERS Special Retirement Supplement
- How MRA+10 affects coverage of health insurance (FEHB) and life insurance (FEGLI)
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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.
In today’s episode, we’re going to focus on a very common question we get from FERS employees who wish to retire under the Minimum Retirement Age Plus 10 rules. Chris, it’s always great to have you.
I do want to make one minor point of clarification, just because there seems to be some confusion with another program. If we have someone itching to leave federal service before their minimum retirement age, so that’s somewhere between 55 and 57, this is not the podcast for them to listen to.
Scott: Okay.
Chris: Let’s say we have somebody who’s 45. They have 10, or 20, or 30 years of service, and they’re ready to leave. That’s called a deferred retirement. We’ll cover that in a later podcast, because those rules are very different for that group. Just wanted to provide that minor clarification, just so we know we have the right audience today.
Scott: Okay, yeah, that’s good to know. I imagine there are some hefty consequences imposed if someone chooses to do this type of retirement, but before we get into that, can you give our listeners a little background on this topic?
Chris: Yes, so let’s start with someone being fully eligible to retire under FERS. This is them meeting all of the normal requirements. They’ll need to meet one of three age and service year combinations, and it doesn’t matter which one they meet. As long as they’ve met one of them, then they’re good to go. They’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 their minimum retirement age with at least 30 years of service.
That minimum retirement age that we mentioned at the very beginning 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 our listeners, we have a link to the MRA chart, provided by OPM, directly below the Play button of the podcast. Down by where you give feedback on the podcast, you’re able to click right there, if you’re not familiar with what your MRA is.
Scott: Okay, great. These ages and years you just mentioned get someone to be fully eligible to retire. How does the Minimum Retirement Age Plus 10 come into play?
Chris: Yes, so MRA Plus 10, as we so lovingly call it, that comes into play when someone has met their minimum retirement age, but they have not met the 30 year requirement to be fully eligible. In this case, all they need is 10 years of service to be able to retire under the MRA Plus 10 rules. We’ve got the minimum retirement age and at least 10 years of service, but not the 30 required to be fully eligible.
Scott: Okay, this is probably music to so many employees’ ears, given that they’ll be able to retire with fewer years of service, but I’m sensing there’s probably a catch to this?
Chris: Yeah. Like most government programs, there’s normally a catch. In fact, there’s actually a couple of catches that have a profound financial impact on someone who chooses to retire under these MRA Plus 10 rules, namely the pension will be penalized by 5% for every year an employee is under age 62, and this penalty is forever.
To illustrate these consequences, let’s take a look at a scenario. Let’s say we have somebody who is 57 years old. They’re obviously under FERS, and they have 10 years of service. Let’s say by the time that they hit that 10 year mark, and they’re ready to walk out the door, that they have a high three average salary of $50,000, just to give us some numbers to work with.
Scott: Okay.
Chris: If we were to calculate their pension, their earned pension, at that moment in time, we would take their $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. On top of that, we have the penalty, which again, is 5% for every year they’re under 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, that’s going to leave us with a pension of $3,750 per year.
Scott: Wow, that’s quite a punch.
Chris: It is.
Scott: I suspect most employees who think this is a good idea might come to their senses after seeing this penalty. Right?
Chris: Probably.
Scott: Other than working long enough to be fully eligible, is there a way someone can avoid this penalty?
Chris: In fact, 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 their pension before the penalties was $5,000 a year. If they want to avoid being whacked with that 25% penalty that we calculated, there is a way to do it. They could voluntarily postpone receipt of their pension until age 62.
This is different than a deferred pension, so if anybody’s 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, if they’re trying to avoid the penalty, would receive no pension between age 57 and age 62, but once they draw the pension at 62, they get the full $5,000, not the penalized amount of the $3,750 that we calculated before.
Scott: Okay, I know that seems like it should be good news, but that seems like a long time to go without a pension.
Chris: You’re right. Scenarios where we see this typically work, is when someone is not truly retiring. They simply want to leave federal service to go take another job. Maybe they got an offer with a contractor or a private company, and in that scenario where they’re going to receive another paycheck, they might not actually need the income between 57 and 62, because they’ll have the paycheck from their new employer.
Scott: Okay, so this might be a good fit for some employees in certain circumstances.
Chris: Yes, but there’s more.
Scott: Okay.
Chris: During the time that an employee is not drawing the pension, so in this example, from age 57 to 62, they will not be covered under the Federal Employees Health Benefits Program, and they will not be covered under the Federal Employees Group Life Insurance Program, either. These are huge considerations for someone who is reliant, especially on FEHB, and certainly on the life insurance side, on FEGLI, to make sure that they have life insurance coverage if something happens to them.
I do have some good news, though. Once that employee begins drawing the pension, like in this example we used age 62, their FEHB and their FEGLI coverage will be restored.
Scott: Okay, that’s good news to know that they’ll regain those two programs eventually, because those are two pretty important programs for most federal employees.
Chris: You’re right, they really are pretty important. There is another benefit that we’re not quite so lucky with, 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 Plus 10 rules that we talked about before, they will forfeit any payment from the Special Retirement Supplement, and that may never be restored. It’s another piece that they have to give up.
Scott: Okay, I imagine that’s a pretty big shot to those who originally thought this might be a good idea.
Chris: Oftentimes, I’m the bearer of bad news when it comes to stuff like this. I am a big believer that I’d rather crush someone’s dreams today, their ideas of what they’re going to do, before they make a huge mistake, than to have help them to do some serious damage control after that decision’s already been made.
Scott: Right. For someone under FERS who has considered retiring under the MRA Plus 10 rules, do you have any parting guidance for them?
Chris: I do. This might not be what these folks want to hear, but they may very well have to keep working to reach their full eligibility rules.
Scott: Right.
Chris: Again, that might not be a popular answer, but the numbers are a real reality check in this whole decision.
Scott: Are there any scenarios where this might play out a little bit differently, or where the penalty is not quite so steep?
Chris: There are some scenarios like this. 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 minimum retirement age. 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’s more years of service, we know the pension will naturally be higher. We would take that $50,000 high three that we used before, times 1%, times 20 years, and that yields a $15,000 a year pension, of course, before penalties are assessed. This person is still five years under age 62, so they’re still going to get a 25% penalty, which now is $2,500. It’s a higher dollar amount that they’re being penalized, because the pension is higher.
Scott: Right.
Chris: 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, they’ll have 20 years of service at that moment in time, which makes them fully eligible to retire with no penalties.
Scott: Okay, that’s interesting. Could we expect all of the other consequences you mentioned to still remain here?
Chris: Yes, so 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 first Special Retirement Supplement will still be forfeited, so no money will come out of that program.
Scott: Okay, well Chris, I know this was a relatively short topic for us to talk about today, but I’m sure you’ve really helped employees who have considered using this retirement option to seriously consider the important consequences. You mentioned you like getting feedback from federal employees and want to encourage our listeners to interact with you. What kind of feedback are you looking for, and where can they go to give that to you?
Chris: Yes, so happy to give this short and sweet topic for our listeners today. For the feedback, if our listeners have ideas on topics or just want to share their reaction to today’s content, they can visit fedimpact.com/feedback, and share their thoughts. We also have a link to that feedback right at the bottom, underneath the Play button for this podcast, so make it nice and easy for everybody to tell us what they think.
Scott: Again, it’s been great to have Chris Kowalik of ProFeds with us today. Like to invite you to stay tuned to the FedImpact podcast to get straight answers and candid insights on your federal retirement.
