Federal retirement expert, Chris Kowalik, breaks down how part-time service may affect a federal employee’s eligibility to retire and the calculation of their pension.
Key takeaways:
- How the part-time service you had in your career — even perhaps many years ago — can affect the retirement that you are expecting
- An understanding of the sometimes complex rules for part-time service
- How part-time service meets retirement eligibility requirements
- How part-time service helps increase the amount of the retiree’s pension (and the math behind the part-time proration factor)
- Does your part-time salary affect your high-three salary calculation?
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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. I’m here today with Chris Kowalik of ProFeds, home of the federal retirement impact workshop. In today’s episode, we will be discussing how part time service can impact a federal employee who plans to retire from federal service. Chris, as always, it’s a pleasure to get together with you again today.
Chris: Thanks so much, Scott. I really enjoy bringing some clarity to topics that sometimes get overlooked and part time service is definitely one of those topics. Employees are often perplexed at how their part time service that they had maybe many years ago might impact their ability to retire with the pension they expect and all that good stuff. So very good to be here today.
Chris: Sure. So in its simplest form, part time service is a period of service that an employee was not working a 40-hour a week schedule. That’s the bare bones part time. Where it gets a little bit complicated is that this part time work might happen when an employee is in a temporary position. So when someone’s hired in a temporary position, they’re not contributing to the CSRS or FERS retirement system so that period of service might not really count for them in the long run. Now, on the flip side, it might also happen, this part time service might happen when an employee is in a permanent position and by definition of course during that time they’re contributing to the CSRS or the FERS retirement system.
Scott: Okay, for something that seems to be so straightforward, I can kind of tell there’s going to be some complexity here, Chris.
Chris: Yeah, a little bit. Now, the rules we’ll talk about will apply to most people who have had part time service but there are exceptions to this. This topic can get a little bit hairy, like I mentioned before with the different types of service out there so a little bit complex at times but we’ll break some things down pretty simply in some examples we have today. Now, to make things a little bit easier, I’d like to stay focused on those employees who had part time service while they’re in a permanent position.
Scott: Okay.
Chris: This is by far the most common scenario so we want to make sure to cover that.
Scott: Okay, great. Well, that will probably help us to narrow our focus to get the real meat of this topic and eliminate those distractions.
Chris: Yeah, exactly. So when it comes down to part time service or really any of this type of service, there are two things that an employee should try to accomplish. The first is we want the period of service that we’re referring to to count to help to meet eligibility requirements to retire.
Scott: Okay.
Chris: The second thing is we want this piece of service to count to help increase the amount of the retiree’s pension. So let’s get a scenario laid out so everyone can be thinking about how this plays out in real life. So most often, an employee, if they have part time service, it was for a relatively short period of time in their career. Maybe they had a couple of years where they worked 20 or 30 hours a week but the majority of their career was full time. So in just a few minutes, we’re going to look at an example to really put all this into perspective.
Scott: Okay.
Chris: For now, what I would ask our listeners to do is set aside part time service for a moment. Forget that we had any part time service and just assume that we’re regular full time employees. When we think about employees becoming eligible to retire, we know that they must meet certain age and service year requirements to be allowed to retire and start drawing a pension. So full eligibility for a CSRS employee is we need them to be at least age 62 with at least five years, at least 60 with at least 20 years and at least age 55 with at least 30 years. That’s the basic eligibility requirements.
Scott: Right.
Chris: It’s almost identical for FERS employees. At age 62 with five, at age 60 with at least 20 years or at their MRA which is somewhere between 55 and 57 with at least 30 years of service. So that’s the basic eligibility. Now, once an employee meets one of those gates and meets both the age and the service year requirement. They are eligible to retire and if they choose to do so, those years of service will be put into the formula that yields the pension that they will receive at that time. Okay, now, we’re not going to be able to go into those calculations on this podcast because they’re a little bit more complicated but we’re going to acknowledge that there is a formula out there that yields that pension and those years of service are put into the calculation.
Scott: Okay, I suppose the big question is is how does part time service affect these aspects of someone retiring.
Chris: Yeah, so you’re exactly right. I mean, that really is the big question. That’s what we have to figure out to really determine the impact of an employee or on an employee and what they’re going to feel in retirement because of the part time service that they might have had many, many years ago. Now, to really illustrate some important points, I’d like to take an extreme example. This is an easy one for employees to listen to in this podcast without seeing a bunch of calculations as well. So a little easier to listen to than getting really in the details and seeing all these numbers but knowing that our listeners are listening instead of viewing today. So let’s say we have an employee who has worked 20 hours a week for 30 years. So they’ve been half time their whole career. It’s unusual but bear with me so I can make a couple of really important points here, okay.
Scott: Okay, from an eligibility standpoint, how would this employee be affected?
Chris: Yeah, so when it comes time to calculate how many years of service they have completed for eligibility purposes, the part time years of service will count as full time. So in our extreme example, someone that had 30 years of half time service but for eligibility purposes, they have 30 years. They don’t have 15. They have 30. So once they’ve met the correct age, somewhere between 55 and 57, as long as they have at least those 30 years of service, then they are fully eligible to retire.
Scott: I’m sure that comes as a bit of a surprise to some of our listeners today. The average person might think that the person in this example only had 15 years of service. If there’s no adjustment to the years of credit they get, does the adjustment happen when the pension is calculated?
Chris: Well, kind of. So let me explain. Going back to our extreme example, a person that worked for 30 years at half time, when it comes time for their pension to be calculated, it will initially be calculated as if they worked full time for all of those 30 years and then the adjustment happens.
Scott: Okay.
Chris: So remember in our example, let’s assume that the employee has had a full time pension. If we assume they were a full time employee their whole career, they had $20,000 a year coming to them in the pension, a full time pension. Since our example employee only worked half time for their entire career, they will only get half of the $20,000 per year.
Scott: Okay.
Chris: Okay, so this adjustment is called the part time proration factor. In this extreme example that we’re using, the part time proration factor is 50% meaning they will only get 50% of the pension that they would have received had they been a full time employee for their entire career.
Scott: Okay, well, that actually seems pretty fair when you explain it like that.
Chris: Yeah, it’s probably the fairest calculation that I’ve seen in federal benefits. I mean, there’s all sorts of weird exceptions and everything that happens out there with all these other benefits but I do think that this is pretty fair. Now, of course, I’ve shown in the extreme example. That’s easy for our audience to listen to since we don’t really have the benefits of seeing charts and numbers on our podcast today. But I will share, it’s obviously far more likely that someone had a few years of part time service and then they returned to full time status for the vast majority of their career. So the same type of calculation would happen though just on a smaller scale.
So let’s take a more realistic example. Let’s say we had an employee that has spent four, five years in a part time position working 32 hours a week. We might find that their part time proration factor is 95% which essentially means that they would receive 95% of the full time pension. So in the example we gave before, for $20,000 a year pension, this person would get 95% of that.
Scott: Okay, now, could you give us the math behind the part time proration factor?
Chris: Yeah, so it’s relatively simple. If employee knows when their part time service occurred, like how long it was and what their hours were, we take the total number of hours that an employee worked for their entire career so that would include their part time service and their full time service and we divide that number by the number of hours that the employee should have worked had they been full time for their whole career and that math gives us a percentage and that is the part time proration factor.
Scott: Okay, well, I bet you’ve clarified this topic for many of our listeners today. Is there anything else that you’d like to share about this topic?
Chris: I do have one final thing to share, Scott. Every once in a while, we will have an employee at the end of their career who is in a part time position. They have a very valid concern which is are you going to use my part time salary to determine all of this or is there something else?
Scott: Right.
Chris: So the concern that they’re really coming to us with is that their salary is less of course since they’re a part time employee and they worry that their pension is going to be calculated using that lower salary to determine their high-3.
Scott: Right.
Chris: I have some good news for these folks. A person’s high-3 and that is one of the components of the pension formula, that high-3 average salary always takes into account their full time salary. It’s never what they’re actually receiving as a part time employee. They extrapolate that as if the employee had been full time. So if we have somebody who has a full time salary of let’s say $50,000 a year and they’re working half time, really making $25,000 a year, their high-3 is still going to be based off of that $50,000 number. Now of course we’re going to average three years and all of that but once the part time proration factor is calculated, with that percentage that we talked about before, that is how the part time service will be accounted for for those folks.
Scott: Okay. Well, this is great help, Chris. To those who have had part time service and had been wondering how this may affect their ultimate pension and their ability to retire when they want to. Again, so happy to have Chris Kowalik with us today from ProFeds. Like to invite you to stay tuned to the Fed Impact Podcast to get straight answers and candid insights on your federal retirement.
