What does “phased retirement” really mean?
The option of a phased retirement -- being partly retired while working part-time -- is closer to becoming a reality in the federal government. This week, the Office of Personnel Management issued proposed rules for allowing employees to work a part-time schedule while beginning to draw federal retirement benefits. The comment period on the proposed rules ends Aug. 5. Afterwards, OPM will publish final rules and then issue new forms for agencies to use in implementing the program.
In the meantime, the proposed rules are likely to generate a lot of questions -- and some confusion -- among employees. Here’s a look at what’s clear in the regulations, and what’s still up in the air.
To take advantage of phased retirement, employees must meet certain criteria:
- They must have been employed full-time for the preceding three years before the phased retirement begins.
- Civil Service Retirement System employees must be eligible for immediate retirement with at least 30 years of service at age 55 or with 20 years of service at age 60.
- Federal Employees Retirement System employees must be at their minimum retirement age (MRA) with at least 30 years of service or 20 years of service at age 60.
- Employees subject to mandatory retirement (such as law enforcement officers, firefighters and air traffic controllers) are not eligible.
- Employees entering a period of phased retirement will be required to spend 20 percent of their working hours on mentoring activities (with the exception of employees of the U.S. Postal Service).
Note: The proposed rules do not specifically address employees who are 62 with at least five years of service but less than 20 years, who would otherwise be eligible for immediate retirement. The regulations also do not specifically address FERS employees eligible for MRA + 10 retirement (under which employees with at least 10 years of service, but less than 30 -- or age 60 or 62 with more than 10 years, but less than 20 years -- are eligible to receive an immediate, but reduced, retirement benefit.) But the following statement in the rules indicates they may not be eligible: “Employees who do not meet these requirements will be excluded from electing phased retirement.”
During phased retirement, coverage under the Federal Employee Health Benefits Program and Federal Employees' Group Life Insurance will continue to be provided by the employing agency. The FEHBP employer contribution will be the same as for full-time employees. FEGLI coverage amounts will be based on the full-time salary for the position.
The proposed rules do not mention the government’s flexible spending account program, dental and vision insurance coverage or the Federal Long Term Care Insurance Program.
The rules state: “Phased retirement annuities and pay are subject to the same rules for processing garnishment orders for child support and/or alimony as regular annuities and other federal pay.”
Initially, employees will only be permitted to work 50 percent of their full-time work schedule and receive 50 percent of their full retirement benefit under the phased retirement arrangement. The law allows different percentages at OPM’s discretion in the future.
Phased retirement will be a voluntary agreement between the employee and the agency. The authorizing agency official will provide written approval for this arrangement. The agency will be allowed to establish a time limit on the phased retirement as a condition for approving the request.
FERS Annuity Supplement
FERS phased retirees will not receive an annuity supplement.
When employees complete the period of phased retirement and transition to full retirement, their CSRS or FERS retirement will be computed as a composite of their original retirement benefit and the new retirement that they are eligible for based on the additional service performed during the period of phased retirement. The phased retirement period is treated as full-time employment. The retiree will receive 50 percent of the original retirement and 50 percent of the benefit adjusted by the additional service.
Survivor benefit elections would be based on the combined benefit. If the employee dies during the period of time that they are in phased retirement, the death would be treated as a death in service. There are no survivor elections made at the time that the employee enters phased retirement. These selections are made at the time of full retirement.
For employees who owe a deposit or a redeposit for prior civilian service or for military service performed before the phased retirement period, these deposits would need to be paid before entering phased retirement. Deposits and redeposits will not be possible at the point where a phased retiree decides to enter full retirement status. Military service deposits may be paid if military service is performed during the phased retirement period.
Cost of living adjustments would be added to the phased retirement annuity during the period of phased retirement.
Thrift Savings Plan
According to the TSP Board, phased retirees are considered employees for TSP purposes. Therefore, the following provisions apply:
- They will not be subject to minimum distributions at age 70 1/2.
- They are not entitled to treat phased retirement as a separation for TSP withdrawal purposes.
- They can continue to make contributions to the TSP and are eligible to make age-based or financial hardship withdrawals that they would otherwise be entitled to make as an employee.
- They will be eligible to receive a TSP loan and to repay the loan through payroll deduction. Employees who have TSP loans when they enter phased retirement status will not be required to prepay the loans, nor will the loans be declared as a taxable distribution.
Return to Full-Time Employment
Under a phased retirement, the idea is for the employee to go through a three-stage process: full-time employment, half-time employment while receiving half of a retirement benefit, then full retirement. It is possible, however, for the employee to end a phased retirement and return to full-time employment with the authorizing agency official’s approval. In this situation, the phased retirement would be treated as a period of part-time employment. The phased retirement annuity would immediately terminate.