Congress created the Federal Employees Retirement System (FERS) in 1986, and it became effective on January 1, 1987. Since that time, new Federal civilian employees who have retirement coverage are covered by FERS.

Not long ago, I wrote an article about the effect Baby Boomers are having on the workplace landscape as they reach retirement age. Huntsville Alabama has a large community of engineers employed by the federal government that are reaching the years of service and minimum age requirements to qualify for early retirement.

Most of these federal retirees, between the ages of 56 and 61 are very attractive hires for the many contracting companies in Huntsville, and in fact, have multiple offers for employment just waiting for them to pull the trigger on early retirement!

Background

FERS is a retirement plan that provides benefits from three different sources: a Basic Benefit Plan, Social Security and the Thrift Savings Plan (TSP). Two of the three parts of FERS (Social Security and the TSP) can go with you to your next job if you leave the Federal Government before retirement. The Basic Benefit and Social Security parts of FERS require you to pay your share each pay period. Your agency withholds the cost of the Basic Benefit and Social Security from your pay as payroll deductions. Your agency pays its part too. Then, after you retire, you receive annuity payments each month for the rest of your life.

The TSP part of FERS is an account that your agency automatically sets up for you. Each pay period your agency deposits into your account an amount equal to 1% of the basic pay you earn for the pay period. You can also make your own contributions to your TSP account and your agency will also make a matching contribution. These contributions are tax-deferred. The Thrift Savings Plan is administered by the Federal Retirement Thrift Investment Board.

So, the issue for these highly-specialized engineers becomes, the Special Retirement Supplement (SRS) which is an offset for Social Security until the early retiree reaches age 62.

Early Retirement and Re-Employment

Because the engineer is going to work for a contractor, his or her SRS is reduced by $1 for every $2 they earn at the new job, in excess of about $15,000. All of these engineers will be earning far more than that and most assuredly enough to zero out the SRS. There is no form to file to stop it. The SRS will be reduced to zero commencing in July of the year following the year that you earn these new wages.

The earnings test procedure is always one year behind, i.e., 2016 earnings will be reported to OPM by SSA in May 2017 for possible adjustment July 2017.

So for example, you retire June 30, 2016, immediately go to work for a contractor and receive a W-2 for $95,000 for the last six months of 2016. You will draw the SRS as part of your retirement until the Social Security Administration reports that contractor W-2 to OPM in May 2017. OPM will then halt the SRS effective July 2017, assuming your continued employment at that level.

You can either repay the SRS or have them deduct it each month until it is repaid. Prior to age 62, should you cease earning more than the threshold amount or cease employment altogether, you can notify them and your SRS payments will resume.