Early Retirement

Chapter 3: Section 5

Both CSRS and FERS contain special provisions that allow employees who do not meet the normal age and service requirements to retire early. The purpose of this early retirement option is to assist an agency in carrying out personnel or workload changes with minimal disruption to the workforce. (Note: Early retirement commonly is offered along with “buyout” separation incentive payments as described in Chapter 9, Section 3, but there is no requirement for agencies to offer them together.)

This section covers the two general types of early retirement: (1) voluntary and (2) involuntary (commonly referred to as discontinued service retirement, or DSR).

Whether the early retirement is voluntary or involuntary, the following definitions apply:

Reduction in Force—A reduction-in-force (RIF) action means the release of a competing employee from his or her competitive level by furlough for more than 30 days, separation, demotion, or reassignment requiring displacement, which is required because of a lack of work, shortage of funds, insufficient personnel ceiling, reorganization, an individual’s exercise of re-employment or restoration rights, or reclassification due to erosion of duties when it occurs within 180 days of a formally announced RIF in a competitive area.

Furlough—Under RIF procedures, a furlough means the placement of an employee in a temporary non-duty/non-pay status for more than 30 consecutive calendar days or more than 22 workdays if done on a non-continuous basis, but not for more than one year when the action is based on one of the RIF reasons and is not in accordance with pre-established conditions of employment.

Reorganization—Reorganization means the planned elimination, addition, or redistribution of functions or duties in an organization.

Transfer of Function—Transfer of function means: (1) transfer of the performance of a continuing function from one competitive area and its addition to one or more other competitive areas, except where the function involved is virtually identical to functions already being performed in the other competitive area(s) affected, or (2) the movement of the competitive area in which the function is performed to another commuting area.

Function—Function means all or a clearly identifiable segment of an agency’s mission, including all integral parts of that mission, regardless of how it is performed.

Early Voluntary Retirement

An agency or segment of an agency that is undergoing a reduction in force, reorganization, restructuring, or major transfer of function may ask OPM to permit early voluntary retirement for its employees (see below for special rules applying to the Department of Defense). If it agrees, OPM designates the specific geographic area(s) or occupation(s) covered by the RIF retirement option and stipulates the time the option will remain in effect. The agency may, at its discretion, end the period earlier.

RIF/Reorganization/Transfer of Function—When OPM determines that an agency is undergoing a major RIF, a major reorganization, or a major transfer of function, an eligible employee may apply to retire on an immediate annuity if he or she satisfies the general age and service requirements and meets certain other conditions. This means an employee must be at least 50 years old with at least 20 years of creditable service; or be any age with at least 25 years of service.

The individual also must:

  • meet the minimum civilian service requirement, which is at least five years of creditable civilian service. (If a CSRS employee has the minimum five years of creditable service, creditable military service may be used to meet the balance of service necessary for an early voluntary retirement. FERS employees with post-1956 military service cannot use it to meet the service requirement unless they make a deposit for it before retirement.);
  • separate from a position subject to either CSRS or FERS coverage under other than a time-limited appointment;
  • if covered by CSRS, meet the “one-out-of-two” requirement—that is, be covered by CSRS for at least one year within the two-year period immediately preceding the separation on which the annuity is based. This one year does not have to be continuous (there is no “one-out-of-two” requirement for FERS employees);
  • have served in a position covered by OPM authorization for at least 31 calendar days before the agency’s initial request to OPM and must have remained continuously on the rolls without a break in service of more than four days since that time; and
  • separate by the end of the last day of the early-out period authorized by OPM or the last day permitted by the agency, if it ends the period earlier.

The employee must not be in receipt of a decision of involuntary separation for misconduct or unsatisfactory performance.

Workforce Restructuring—P.L. 107-296 of 2002 amended Chapters 35, 83 and 84 of Title 5, U.S. Code (see 5 CFR Parts 831 and 842) to authorize permanent voluntary early retirement across the Executive and Judicial Branches for the purposes of workforce restructuring. This granted agencies the authority to delayer, correct skill imbalances, or reduce operating costs without linking their use of early retirements to eliminating positions. Offers can be targeted on the basis of organizational unit, occupational series or level, geographic location, specific periods, skills, knowledge, or other job related factors, or a combination of these factors, but not performance.

An agency that uses early outs (and/or buyouts, which the law also authorized; see Chapter 9, Section 3) for workforce restructuring must submit to the OPM a detailed plan describing the planned use of the authority and how the agency’s workforce would be restructured. This must include a detailed summary of the agency’s personnel and/or budgetary situation that will result in an excess of personnel because of a substantial delayering, reorganization, RIF, transfer of function, or other workforce restructuring or reshaping, consistent with agency human capital goals.

An agency plan cannot be implemented without the approval of OPM, which can modify the plan before approving it. The plan also must specify the period during which the authority would be used, as well as the number of employees for which it would be used, although there is no cap on the number of employees to whom early retirement can be offered. Employee eligibility rules mirror those for early outs for RIF, reorganization or transfer of function purposes.

DoD Authority—Under Section 9902(i) of Title 5, U.S. Code, as enacted by P.L. 108-136, the Defense Department established a permanent downsizing and restructuring voluntary early retirement program (as well as a buyout program; see Chapter 9, Section 3) in addition to other early out authorities.

The law permanently authorizes DoD to offer voluntary retirement to its employees without first seeking approval from OPM. According to internal DoD policy, the reasons for approving an early retirement offer may include substantial delayering, reorganization, RIF, transfer of function or other workforce restructuring. Offers may be used to reduce the number of personnel or to restructure the workforce to meet mission objectives without reducing the overall number of personnel. Offers may be based on occupational series or grade, skills, knowledge or other factors related to a position, to organizational, geographic and non-personal and objective factors, or any combination.

Only employees continuously employed within the department for more than 30 days before the date on which the determination to conduct a workforce restructuring or reduction has been approved are eligible. Also ineligible are employees serving under time-limited appointments, re-employed annuitants, those with disabilities that would qualify them for disability retirement and those in receipt of involuntary separation notices for misconduct or unsatisfactory performance.

Each installation using early retirement determines and publicizes the maximum number of approved offers and the anticipated number of election opportunities required. Multiple windows may be used. The general announcement of a single opportunity must indicate the dates for opening and closing, the number of anticipated separations and the factors being considered. Usage may cover more than one organizational element and more than one geographic location.

When used for downsizing, the retiring employees must be off the rolls by the expiration or termination date (RIF effective date). Recipients may not be retained in a duty status after the effective date for any reason.

Withdrawal of Application to Retire—Since optional retirement is a form of voluntary separation, submitting a retirement application is equivalent to submitting a resignation. As a result, a retiring employee has the same rights as any other employee involved in a voluntary action. This means that you can establish the date on which your retirement will take place (as long as it is within the period set) or withdraw it if you change your mind before the separation is effective. However, an agency may decline an employee’s request to withdraw an application before the effective date of separation if it has a valid reason (for example, if the position has been eliminated or someone has been hired to fill it) and explains that reason in writing to the employee.

Discontinued Service Retirement

A discontinued service retirement (DSR) is an involuntary retirement that provides an immediate annuity to employees who are separated against their will. Employees who are separated for cause on charges of misconduct or delinquency are not eligible for a discontinued service annuity.

DSRs can lessen the impact of an involuntary separation of a long-service employee. The final responsibility for determining whether a separation is in fact involuntary for discontinued service annuity purposes rests with OPM. Whether a separation is voluntary depends on the facts on a particular case. It is the substance of the action that governs, not the methods followed or the terminology used.

Note: If it is later discovered that a separation does not meet the standard for a DSR, that separation may be canceled, or an annuity denied or terminated.

Eligible separations include, but are not limited to, separations for:

  • reduction in force (RIF);
  • abolishment of position;
  • lack of funds;
  • expiration of an incumbent’s term of office;
  • unacceptable performance (unless due to the employee’s misconduct);
  • transfer of function outside the commuting area;
  • reassignment outside the commuting area when there is no mobility agreement;
  • failure to continue to meet qualification requirements of the position (provided the separation is non-disciplinary and the action is initiated by the agency);
  • separation during probation because of failure to qualify due to performance (not misconduct);
  • separation of a National Guard technician because of loss of military membership or the rank required to hold the National Guard position; and
  • removal from the Senior Executive Service for less than fully successful performance.

Among the situations that do not constitute a basis for a DSR are reclassification to a lower grade as a result of prior misclassification or the application of a new standard (including the correction of title, series and/or grade) and resignation because of ill health. In the latter case, it is qualifying if the employee is removed by adverse action or equivalent procedures (or retires after a decision to remove has been issued), because of illness resulting in one or more of the following:

  • continued absence;
  • inability to perform his or her duties; or
  • endangering his or her health or that of other employees.
  • To qualify for discontinued service retirement, an employee must receive a specific written notice of a proposed involuntary separation. The notice must be directed to the individual employee and must:
  • inform the employee that he or she faces involuntary separation from his or her position or from the federal service;
  • specify the reason for the proposed action (impending organizational change, etc.); and
  • state the date proposed action is to be effective.

General Eligibility Requirements—The eligibility requirements to retire for CSRS and FERS employees facing involuntary separation are essentially the same as those for early voluntary retirement. In brief, the employee must:

  • meet the age and service requirements (at least 50 years old with at least 20 years of creditable service or at any age with at least 25 years of service);
  • meet the minimum civilian service requirement, which is at least five years of creditable civilian service;
  • separate from a position subject to either CSRS or FERS coverage;
  • if covered by CSRS, meet the “one-out-of-two” requirement—that is, be covered by CSRS for at least one year within the two-year period immediately preceding the separation (there is no “one-out-of-two” requirement for FERS employees); and
  • not decline a reasonable offer of another job.

A job that meets all of the conditions below is a “reasonable offer.”

  • The agency offer of the position must be in writing.
  • The employee must meet established qualification requirements for the position.
  • The offered position must be in the employee’s agency, including an agency to which the employee with his/her function is transferred in a transfer of function between agencies.
  • The offered position must be within the employee’s commuting area, unless the employee is under a geographic mobility agreement.
  • The offered position must be the same tenure—that is, same service (competitive, excepted, Senior Executive Service, etc.), same type (career, permanent, indefinite, etc.), and same work schedule (full-time, part-time, etc.).
  • The offered position must not be lower than the equivalent of two grade/pay levels below the employee’s current grade or pay level. The grade or pay level for an employee who is not under grade retention is the grade or pay level of the position currently occupied. The grade or pay level of an employee who is under grade retention is the retained grade or pay level.

Retirement Options—When an employee qualifies for more than one type of retirement, the employee is entitled to apply for the option he or she prefers. That choice may depend on the employee’s interest in subsequent federal employment. For example, if the employee is already eligible to retire and voluntarily exercises that option, pay on re-employment generally will be reduced by the amount of the annuity. On the other hand, if the retirement is for discontinued service after an involuntary separation, the annuity is terminated and the employee acquires a new retirement right, unless the re-employment is excluded from retirement coverage. See Chapter 4, Section 4.

Eligibility for Severance Pay—While a separation that meets discontinued service criteria also meets the severance pay criteria, severance pay is not payable in situations in which the employee is eligible for discontinued service retirement.

Annual Leave—Under 5 CFR 630.212, an employee who has received a specific notice of termination in a RIF or relocation (including transfer of function) situation may use annual leave past the date the employee would otherwise have been separated in order to establish initial eligibility for immediate retirement, including discontinued service or voluntary early retirement. Eligible annual leave for this purpose includes all accumulated, accrued, and restored annual leave to the employee’s credit prior to the effective date of the RIF or relocation and annual leave earned by an employee while in a paid leave status after the effective date of the RIF or relocation. The employing agency may approve the use of annual leave donated to an employee under voluntary leave transfer or leave bank programs, as of the effective date of the RIF or relocation. Advanced annual leave may not be used for this purpose.

Sick Leave—See Credit for Unused Sick Leave in Section 3 of this chapter for policies on crediting unused sick leave in annuity computations.

Annuity Computations—In general, annuities for early voluntary and discontinued service retirees are calculated in the same way as those for employees who have completed a full career (see above). However, there are some exceptions.

  • CSRS: If the retiring employee is under age 55, the annuity rate is reduced by one-sixth of one percent for each full month (2 percent a year), the worker is under age 55. The reduction is permanent and will not be eliminated when the individual becomes age 55.
  • FERS: There is no annuity reduction for FERS employees who take an early voluntary retirement. However, if the FERS employee has a CSRS component and is under age 55, that portion of the annuity will be reduced in the same way it is for full CSRS employees. Once again, that reduction will be permanent.

In general, a FERS-covered employee taking an early voluntary retirement or DSR will receive a Special Retirement Supplement when he or she reaches the minimum retirement age (see Section 4 in this chapter).

Commencement of Annuities—The commencing date of an annuity is the day on which a retiring employee is put on the annuity roll. An early retiree’s entitlement to an annuity begins in accordance with the following rules:

  • Early Voluntary Retirement—Under CSRS, the annuity of an employee who meets the age and service requirements to retire, is in a pay status, and retires during the first three days of a month will begin the day after separation. The annuity of such an employee who retires after the third day of the month will begin on the first day of the month following retirement. Under FERS, regardless of the retirement date, the annuity will begin on the first day of the month following separation.
  • Discontinued Service Retirement—Under CSRS and FERS, the annuity of an employee who meets the age and service requirements and is involuntarily separated begins on the earlier of the day after separation or the day pay ceases.

See Commencing Date of Annuities in Section 4 of this chapter.

Cost-of-Living Adjustments (COLAs)—See Chapter 4, Section 3 for information on how and when COLAs are granted.

Eligibility to Continue Insurance—See Chapter 2 for rules on continuing insurance benefits into retirement.

Survivor Annuities—The rules governing the provision of a survivor annuity to a surviving spouse of an early voluntary or discontinued service retiree are the same as those for an employee who retires after completing a full career. See Section 4 of this chapter.

Lump-Sum Annual Leave Payment—All employees leaving the government will receive a lump-sum payment for their unused annual leave. See Lump-Sum Payments in Chapter 5, Section 1.

Taxability of Retirement Income—All retirement annuities are treated as ordinary income in the year they are received. However, a small portion of an annuity is nontaxable. See Chapter 14, Section 3. Additional information is contained in IRS Publication 721, Comprehensive Tax Guide to U.S. Civil Service Retirement Benefits. To obtain a copy of the IRS publication, call (800) 829-3676 or download it at www.irs.gov/pub/irs-pdf/p721.pdf.

Thrift Savings Plan Account—All those who leave government service, whether for retirement or other reasons, are provided a range of withdrawal options. See Chapter 6, Section 4.

Other Considerations—Employees who are eligible for optional retirement because they have completed a full career still may choose to go out on a discontinued service retirement, if that option is available. While the amount of annuity will be the same, there is an advantage in taking a DSR if they return to the federal service. Their annuity will simply stop and they will begin earning a regular salary. When they retire again, their annuity will be computed on their total years of service and what is often a larger “high-3” years of average salary.

The annuities of employees who aren’t eligible for optional retirement, take a DSR, and return to work for the government generally will be terminated (see Chapter 4, Section 4). When they leave government again, their annuities will not be reinstated unless they are entitled to an immediate annuity based on the new separation. If they don’t have the right combination of age and service for an immediate annuity, they might be eligible for a deferred annuity. (See Retirement: Main Types and Eligibility Conditions in Section 1 of this chapter.)

Employees who go out on early voluntary retirement and return to work for the government generally will have their salary reduced by the amount of their annuity. Their full annuity will resume once they leave government again. In addition, they may be eligible for either a supplemental or recomputed annuity, depending on the amount of time they worked. (See Supplemental and Re-determined Annuities in Chapter 4, Section 4.)

Under both early voluntary retirement and discontinued service retirement, annuities will continue in full if retirees go to work elsewhere or become self-employed.

Advantages and Disadvantages of Early Retirement

Although employees who meet the age and service requirements need not take an early retirement, it could be to their advantage to do so. For instance, they will receive an annuity payment every month for the rest of their lives. Their annuities will be increased by cost-of-living adjustments (subject to the rules explained in Chapter 4, Section 3).

In addition, if they have been enrolled in the Federal Employees Health Benefits program for five years before retirement or from their first opportunity to enroll (this requirement can be waived in certain situations), they will receive the same health insurance coverage as when they were employed (see FEHB Coverage After Retirement in Chapter 2, Section 1). The same is true of Federal Employees’ Group Life Insurance program coverage (see Life Insurance in Retirement in Chapter 2, Section 2).

While the cost for FEGLI coverage will be the same, the FEHB premiums for Postal Service employees will increase to the amount paid by all other federal employees and retirees; under negotiated agreements, the Postal Service pays a higher percentage of the health benefits premiums for its employees.

Eligibility for coverage in the Federal Long Term Care Insurance Program and the Federal Dental and Vision Insurance Program continues for early retirees, with no prior enrollment requirement and with premium rates the same as for active employees. However, pretax payment of FEHB and FEDVIP premiums, which effectively lowers their cost to the enrollee, is not available to retirees.

There also are potential downsides to taking an early retirement. Obviously, those who retire early won’t receive as large a retirement benefit as they would have accumulated had they continued working to a later date. As a result, their annuity may be insufficient to meet their needs, especially if they have no expectation of further employment.

Further, CSRS employees under age 55 will have their annuity permanently reduced for every month they are under that age. That’s one-sixth of 1 percent per month or 2 percent per year. There is no reduction under FERS. However, those who transferred to FERS and will receive a combined CSRS and FERS annuity will have that reduction imposed on the CSRS retirement portion.

Regardless of whether an individual retires voluntarily or under a DSR, his or her spouse will be entitled to a survivor annuity. A full survivor annuity for CSRS survivors is 55 percent of the basic, unreduced annuity. For FERS it is 50 percent. Although an individual may provide a reduced annuity for a spouse (25 percent under FERS and any level down to $1 under CSRS) or no survivor annuity, it may only be done if the spouse consents in writing and that consent is notarized.

A former spouse also may be eligible for a survivor annuity if the marriage was dissolved on or after May 7, 1985, and a qualifying court order is on file with OPM awarding the benefit. (See Chapter 4, Section 1, Survivor Benefits.)

Applying for Early Retirement

Employees who are eligible for an optional, early voluntary or discontinued service annuity should fill out an Application for Immediate Retirement (Standard Form 2801 under CSRS, SF 3107 under FERS) and file it with the appropriate office of their agency. These forms are available from your personnel office or at www.opm.gov/forms.

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