November 6, 2009Last week, President Obama signed the fiscal 2010 Defense Authorization Act. In addition to ending the National Security Personnel System, the bill contained several provisions that could affect employees near retirement. This week, I'd like to look at two of them:
Now, of course, many people will be wondering whether they should take advantage of the new provisions. It might take weeks or months for the Office of Personnel Management to provide full information that will help employees decide. In the meantime, let's look at some of the basic issues. Part Time Computations The change in how part-time work is computed when it comes to retirement benefits primarily will benefit CSRS employees who want or need to work -- or already are working part time at the end of their careers.
Here's an overview of the changes. But be forewarned, this is going to get a little tricky.
First, some background. Years ago, federal employees who worked part time (less than a 40-hour per week schedule) received full-time credit toward retirement eligibility and computation of their retirement benefit. The only thing affected by working part time was an employee's high-three average salary. It doesn't take a genius to figure out that one could work 27 years part time and switch to full time their last three years and their retirement would be identical to someone who had the same career, but worked 40 hours a week the entire time.
Congress took up the issue in a law that took effect April 7, 1986. Under the new rules, service performed before that date still would be computed under the old rules, but work from then on would be calculated with full-time credit of all part-time service for retirement eligibility, but pro-rating the service in the computation of retirement benefits. The high three would be figured using full-time pay rates instead of actual pay rates. Since a "deemed" high-three would be used, it was no longer necessary to switch to a full-time appointment during the last three years.
The only problem was CSRS employees had service both before and after April 7, 1986. The law still made it necessary for them to work full time their last three years so their pre-April 7, 1986, service would not be affected by a lower salary for the high-three calculation. (This is explained in more detail in Chapter 55 of the CSRS and FERS Handbook.)
Let's look at how this might play out in the real world:
Suppose Anne, a CSRS employee, was hired in 1976 and worked full time until 1996. Then she worked 32 hours a week -- 80 percent of a full-time schedule -- until retiring in 2006. Her final salary was $60,000 per year, but with her part-time schedule, her actual pay rate was $48,000. Anne's retirement is computed by separating her career into the service that she performed before and after April 7, 1986. Her 10 years of pre-1986 service would be computed using the CSRS formula and her actual high-three salary:
5 x 1.5% x $48,000 = $3,600
5 x 1.75% x $48,000 = $4,200
The 20 years of service that she worked after the magic 1986 date would be computed using the deemed high three with pro-rated service. Her pro-rated service is computed as 37,566 hours (the hours she actually worked since April 7, 1986) / 41,740 hours (the hours she would have worked if she had been full time since April 7, 1986) = 0.90 (the percentage of a full-time schedule she actually worked). So the retirement for the last 20 years of her career would be computed as:
20 x 2% x $60,000 x 0.90 = $21,600
As a result, Anne's full CSRS retirement would be:
$3,600 + $4,200 + $21,600 = $29,400 per year
The problem with this computation is the high-three salary used to compute her first 10 years of full-time service was based on a part-time salary rate. To avoid this problem, Anne would have had to return to a full-time schedule her last three years. That way, the first 10 years of her career would be computed using the $60,000 high three.
But under the law signed last week, Anne would not have to return to a full-time appointment because her high three for the pre-1986 and the post-1986 service both would be calculated using the full-time pay rate. Now her retirement would be computed as follows:
5 x 1.5% x $60,000 = $4,500
5 x 1.75% x $60,000 = $5,250
Credit for the 20 years she worked after April 6, 1986, would be computed using the deemed high three but with pro-rated service. The service would be computed as 37,566 (the hours she actually worked after April 6, 1986) / 41,740 (the hours she would have worked if she had been full time since that date), or 0.90. So the retirement for the last 20 years of her career would be computed as:
20 x 2% x $60,000 x .90 = $21,600
So Anne's full CSRS retirement would be:
$4,500 + $5,250 + $21,600 = $31,350 per year
Notice that the only thing element that changed in the second part of this example is the pre-1986 high three. The new law will allow Anne to continue working part time until she retires and her retirement will be $1,950 higher a year. That's $162.50 per month.
Of course, the only problem is Anne retired in 2006 and the new law didn't take effect until last week. But if you're a current CSRS employee, you won't have to worry that your pre-1986 service will be affected by working part time at the end of your career.
Here are a few other things to consider:
Retirees Who Return to Service
I outlined the current reemployed annuitant program in one of my earlier columns: Back to Work (March 23, 2007).
The change enacted last week will allow retirees to return to federal service without a salary offset so they will continue to receive their CSRS or FERS retirement benefits and the salary for the new position they take.
Some agencies already have programs allowing them to rehire retirees without a salary offset. The largest such program is at the Defense Department. I wrote about it in my column Back to Work, Again (March 30, 2007).
Of course, even without such programs, retirees have been going back to work on behalf of the government for years. It's called working for a contractor. The new program will allow retirees to work directly for an agency instead of a potentially more expensive contractor.
The rehired retirees would not accrue additional retirement benefits. They would have their health and life insurance benefits covered through their retirement, so agencies would not have to pay the government share of premiums, as they do with regular other employees. The appointments most likely will be limited to a specified amount of time to avoid restricting promotions and the hiring of new employees. The Defense program limits appointments to 2,087 hours (that adds up to one year full-time service or two years part time.)
The new program will benefit people who love what they are doing and are eligible to retire. One way to take advantage of this opportunity would be to start living on your retirement benefit and put your new federal salary in the bank for the future.
CORRECTION: The original version of this column had errors in the computation of benefits for the hypothetical employee "Anne." The column has been updated to correct the errors.
Tammy Flanagan is the senior benefits director for the National Institute of Transition Planning Inc., which conducts federal retirement planning workshops and seminars. She has spent 25 years helping federal employees take charge of their retirement by understanding their benefits.
For more retirement planning help, tune in to "For Your Benefit," presented by the National Institute of Transition Planning Inc. live on Monday mornings at 10 a.m. ET on federalnewsradio.com or on WFED AM 1500 in the Washington metro area.
November 6, 2009