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Understanding the FERS Retiree Annuity Supplement and How It Is Calculated - Part II

In the second of two columns explaining the FERS retiree annuity supplement, this week’s column explains the computation of the retiree annuity supplement and the possible reduction of the retiree annuity supplement because of an annuitant’s excess “earned” income. Also presented is what an annuitant has to do each year in reporting his or her “earned” income. Please confirm receipt.

In the second of two columns discussing the FERS retiree annuity supplement, this week’s column discusses how the annuity supplement is calculated and its possible reduction . The FERS annuity supplement is payable to FERS employees who retire under the early retirement or regular retirement rules. Monthly payments start at an early retiree’s minimum retirement age (MRA) and between MRA and age 62  for employees who retire under the regular retirement rules.  Payments continue until the annuitant becomes age 62.

Computation of the Retiree Annuity Supplement

Once a retiring employee’s FERS “benefit” years are identified , the retiree annuity supplement is  computed using a methodology derived from Social Security law. The FERS “benefit” years are defined as the calendar years in which an employee contributed to the FERS Retirement and Disability fund via payroll deduction or made a deposit for temporary service. This methodology is now explained:

Step 1. Compute the Average Indexed Monthly Earnings for the retiree annuity supplement.
a. Total the indexed earnings for each of the “benefits” years using the same index factors as the Social Security Administration uses for the “benefit” years.

b. Determine the number of months in the benefit computation years (“benefit” years times 12)

c. Divide the total indexed earnings derived in Step 1a by the number of months derived in Step 1b. Drop any fractions of a dollar that is left over. The result is the Average Indexed Monthly Earnings (AIME) for the purpose of computing the retiree annuity supplement.

Step 2. The Primary Insurance Amount (PIA) is computed. The formula used to compute the PIA changes each year. This is because the formula used to compute the PIA contains “bend” points that are set by the Social Security Administration. For a FERS employee retiring in 2017 and who is eligible for the retiree annuity supplement, the PIA is computed as:

• 90 percent times first $885, plus
• 32 percent times next $4,451, plus
• 15 percent times AIME over $5,336
equals the PIA

Step 3.  The PIA in Step 2 is multiplied by the appropriate reduction factor found in the following table: 

Step 4. The reduced PIA obtained in Step 3 is multiplied by the following fraction:

Total Civilian Service Creditable Under FERS (rounded to the nearest full year)/40

Note 1. There is no COLA applied to the retiree annuity supplement.
Note 2. The FERS is fully federally taxable. 

Reduction in Retiree Annuity Supplement Due to Excess Earnings

A FERS annuitant who is employed after retiring from federal service may lose a portion or all of the retiree annuity supplement if the amount that then annuitant earns exceeds the “exempt” amount. The reduction applies only to the retiree annuity supplement and not to the FERS annuity. The reduction for excess earnings does not apply to employees who retire under the special provisions for law enforcement officers, firefighters, air traffic controllers and military reserve technicians until they reach their MRA.

Exempt Amount

The exempt amount is the same as the amount established by the SSA for the purpose of establishing the earnings reduction for Social Security benefits. That amount changes from year to year and for 2017 the earnings limit is $16,790.

Amount of Reduction

If a FERS annuitant’s “earned” income - that is, wages/salary or self-employment net income -exceeds the exempt amount, then the retiree annuity supplement will be reduced $1 for every $2 that is above the exempt amount. For example, Cathy retired on April 29, 2017 and started a job on May 1st. If she earns more than $16,790 between May 1st and Dec. 31, 2017, then for every $2 she earns above $16,790 OPM will reduce her retiree annuity supplement of $1,218.22 by $1. If Cathy were to earn more than $50,370, she will lose her entire retiree annuity supplement.

Reporting Earnings to OPM

OPM asks each FERS annuitant receiving the FERS retiree annuitant supplement and are MRA and older and are working to complete and submit Form RI 92-22 (Annuity Supplement Earnings Report).

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