As federal employees approach the end of their careers and start the retirement planning process, many wonder what will happen to their leave. Will they receive a lump sum payment or credit toward their FERS annuity? There can be a lot of confusion around the treatment of sick leave, especially since prior to the 2010 National Defense Authorization Act, FERS employees didn’t receive any credit upon retirement. Fortunately, that is no longer the case, and FERS employees now receive compensation for both their annual and sick leave when they retire. However, the compensation is different depending on the type of leave you have on the books when you retire. So, in this article, we’ll look at how both types of leave are treated when you clock out for the last time.
Annual Leave Payment
First, let’s review the treatment of your annual leave at retirement. When you retire, you’ll receive a lump-sum payment for your leave. The payment will be equal to the amount you received if you worked the period covered by the annual leave. So, the calculation is pretty straightforward and is your hourly pay rate multiplied by your annual leave balance.
Most federal employees are aware of this lump sum payment, which is largely why many federal employees decide to retire at the end of the year, say December 31st. Of course, the rationale behind this is to receive a lump-sum payment for the leave carried over from the prior year and the amount earned in the current year.
Planning Tip: The lump sum payment for your annual leave is taxable income, so keep an eye on your income for the year as the lump sum payment could push you into a higher tax bracket.
Credit for Unused Sick Leave
As mentioned earlier, FERS federal employees now receive credit for their unused sick leave upon retirement and have been able to do so since January of 2014. So, what does this mean? It means that your unused sick leave balance will be credited as additional service in the computation of your FERS pension when you retire (under an immediate annuity). However, your sick leave cannot be used to meet retirement eligibility or increase your High-3.
Note: Although your sick leave cannot be used to meet retirement eligibility, it can be used to help you meet the 20-year requirement for the purposes of increasing your pension multiplier (aka the 10% bonus).
How Is Your Sick Leave Credited?
When OPM calculates your credit for unused sick leave, they credit one day for every 5.8 hours of sick leave (rounded). This daily credit was computed by dividing the number of work hours per year (2,087) by 360 (12 months x 30-day months).
Since OPM only counts years and full months of service when calculating your credit, using OPM’s sick leave conversion table for converting unused sick leave hours to months and days of service time can be helpful. You can download it below.
Converting sick leave can be confusing, so let’s look at an example of how you determine the total time your leave would add to your pension.
Bob has 1,000 hours of sick leave. Since every 174 hours of leave equals 1 month of service credit (5.8 x 30), Bob has 5 months and 22 days of leave that can be added to his actual service time to calculate his pension.
Now let’s say Bob is retiring at age 60 with 20 years and 7 months of service and has a High-3 of $120,000. After adding sick leave credit to his 20 years and 7 months of service, Bob’s pension increases by about $500 a year, and his remaining 22 days are forfeited. Although an increase of $500 a year doesn’t seem like much, over a 30-year retirement, it can add up to a significant number.
Understanding how you are compensated for annual and sick leave clarifies several decisions, from which leave to use for time off, to what your taxable income will be in the year of retirement, and most importantly, can you retire when you want. As is the case with most things in financial planning, there is no one right answer for everyone. But by taking the time to plan early and educate yourself, you are far more likely to have the retirement you want. As always, consult with a qualified financial planner if you’re not confident in creating your retirement plan or want a professional opinion.
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2023 Legislative Change Notice
The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.