The FERS Supplement Earnings Test: What Federal Retirees Need to Know

FERS Supplement: Understanding Earning Basics

What is the FERS Supplement Earnings Test?

The FERS Supplement earnings test is a mechanism designed to reduce the supplement payment for retirees who earn income above a certain threshold after retiring from federal service. Its purpose is to ensure that the supplement is primarily benefiting those who have genuinely retired and are not continuing to earn significant income.

Who is Subject to the Earnings Test?

The earnings test applies to most FERS retirees receiving the supplement. However, there are some important exceptions:

1. 
   Special category employees (e.g., law enforcement officers, firefighters, air traffic controllers) are exempt from the earnings test until they reach their Minimum Retirement Age (MRA).
2. The test does not apply to disability retirees or those who retired under the MRA+10 provision.

How the Earnings Test Works

The earnings test functions similarly to the Social Security earnings test. Here's how it operates:

1. There is an exempt amount that can change yearly. For the current earnings amount, visit https://www.opm.gov/. For the year 2024, the amount was $$22,320. Remember, the actual calculation of the FERS Supplement can be complex, and online calculators may not capture all the nuances of your specific situation or the current year's rules.
2. For every $2 earned above this exempt amount, the FERS Supplement is reduced by $1.
3. The reduction is applied on a monthly basis to the supplement payment.

Calculating Earnings for the Test

Understanding what counts as earnings is crucial. The Office of Personnel Management(OPM) provides guidance on what constitutes "earned income" for this test:

• Wages or salary from employment (including overtime, bonuses, and severance pay)
• Net earnings from self-employment
• Deferred income earned but not received during the calendar year

It's important to note that not all income counts towards the earnings test. The following types of income are excluded:

• FERS pension income
• The FERS Supplement itself
• Investment income
• Distributions from TSP or IRAs
• Annual leave payments
• Rental income from real estate

Example Calculation

Let's consider an example to illustrate how the earnings test works:

John retires at age 57 and receives a FERS Supplement of $1,000 per month. In 2024, he takes a part-time job and earns $30,000.

1. Earnings above exempt amount: $30,000 - $22,320 = $7,680
2. Reduction amount: $7,680 ÷ 2 = $3,840
   This division is based on the earnings test rule that reduces the supplement by $1 for every $2 earned above the annual exempt amount12. In 2024, the exempt amount is $22,320. John earned $7,680 above this limit, so his annual reduction is half of that excess, which is $3,840.
3. Monthly reduction: $3,840 ÷ 12 = $320
   This division converts the annual reduction amount into a monthly figure. Since the FERS Supplement is paid monthly, OPM applies the reduction on a monthly basis. Dividing the annual reduction by 12 months gives the amount that will be subtracted from John's monthly supplement payment, which is $320.
   

John's monthly supplement will be reduced by $320, leaving him with $680 per month ($1,000 - $320).



Commonly Asked Questions About FERS Supplement

Q: When does the earnings test start applying?

A: The earnings test begins applying the year after you start receiving the supplement, but only counts earnings from the point you reach your MRA.

Q: Do I need to report my earnings to OPM?

A: Yes, OPM requires FERS Supplement recipients to report their earnings annually. You should report any earned income from the prior year after your retirement. This includes salary, self-employment earnings, and other forms of earned income.

OPM will send you instructions on how to report your earnings when it is required. Typically, this comes in the form of an Annuity Supplement Earnings Report. The earnings report is usually sent out early in the year (often around May). There is generally a deadline to return the supplement survey, often around May 15th. However, if you receive it after the deadline, you should return it as soon as possible.

Q: What happens if I don't report my earnings?

A: Failing to report earnings could result in serious consequences:

• Your supplement may be suspended or terminated. The Office of Personnel Management (OPM) requires annual reporting of earnings to determine if reductions to the supplement are needed.
• You could face penalties or be required to repay any overpayments if it's discovered you failed to report earnings. OPM conducts audits and cross-checks with Social Security Administration records.
• Deliberately failing to report earnings could be considered fraud against the government.
• Even if you don't report earnings, OPM may still reduce or stop your supplement based on earnings information obtained from other sources.
• If your supplement is stopped due to non-reporting, you would need to provide proof of lower earnings and go through a reinstatement process to have it restored.

The best approach is to accurately report your earnings as required. This ensures your supplement is calculated correctly and helps you avoid potential legal or financial issues down the road. If you have concerns about reporting, it's advisable to consult with a financial advisor familiar with federal benefits or contact OPM directly for guidance.

Q: Can my FERS Supplement be reduced to zero?

A: Yes, if your earnings are high enough, your supplement could be completely eliminated for that year. Here's a detailed explanation:

Earnings Test and Reduction

The FERS Supplement is subject to an annual earnings test, similar to Social Security benefits. This test can result in a reduction or complete elimination of the supplement if your earnings exceed certain thresholds.

1. Earnings Limit: There's an annual exempt amount, which changes yearly. In 2021, this limit was $18,960.
2. Reduction Rate: For every $2 you earn above the annual limit, your supplement is reduced by $1.
3. Complete Elimination: If your earnings are high enough, the reduction can eliminate the supplement entirely.

Example of Full Reduction

Let's consider a scenario:

• Your annual FERS Supplement is $12,000 ($1,000 per month)
• In a given year, you earn $42,960 from employment

Calculation:

1. Earnings above limit: $42,960 - $18,960 = $24,000

2. Reduction amount: $24,000 ÷ 2 = $12,000 (earnings test rule reduces by $1 for every $2 earned above the annual exemption)

In this case, the reduction amount ($12,000) equals your annual supplement, so it would be reduced to zero.

Reinstatement

If your supplement is reduced to zero but your earnings decrease in subsequent years:

1. You can provide proof of lower earnings, typically through tax returns.
2. File to restore the supplement with OPM.
3. After review and approval, OPM can reinstate your supplement.

Remember, the FERS Supplement automatically ends at age 62, regardless of earnings.

Q: Does the earnings test affect my regular FERS annuity?

A: No, the earnings test only applies to the FERS Supplement. Your basic FERS annuity is not affected.

Q: Are there any strategies to minimize the impact of the earnings test?

A: Some retirees choose to limit their work income to stay under the exempt amount. Others may focus on generating passive income through investments, which doesn't count towards the earnings test.

Q: How does the FERS Supplement earnings test differ from the Social Security earnings test?

A: While similar in concept, the FERS Supplement earnings test has a different exempt amount and applies regardless of age until the supplement ends at age 62. The Social Security earnings test has varying rules based on whether you're below full retirement age or in the year you reach full retirement age.

Q: What if my earnings fluctuate from year to year?

A: The FERS Supplement earnings test is an important consideration for federal retirees planning to work after retirement. While it can significantly impact the supplement amount, understanding how it works allows retirees to make informed decisions about post-retirement employment and income strategies.

If your earnings fluctuate from year to year while receiving the FERS Supplement, it can affect the amount of your supplement due to the annual earnings test. Since the earnings test is applied annually, the impact on your supplement will also change from year to year. It may be reduced more in high-earning years and less (or not at all) in lower-earning years.

Also known as the Special Retirement Supplement (SRS), FERS Supplement is designed to bridge the gap between early retirement and Social Security eligibility for certain FERS employees. The FERS Supplement serves to provide income that mimics the Social Security benefit earned during federal service and bridges the time between retirement and age 62, when Social Security eligibility typically begins.To receive the FERS Supplement, you must be under the FERS system (not CSRS), younger than age 62, and retire with an immediate, unreduced retirement benefit.

For those considering retirement or already receiving the FERS Supplement, it's crucial to stay informed about the current exempt amount, keep accurate records of earned income, and report earnings as required by OPM. By doing so, you can avoid surprises and ensure you're maximizing your retirement benefits within the rules of the system.

Remember, while the earnings test may seem like a limitation, it's designed to balance the needs of retirees with the fiscal responsibility of the federal retirement system. With proper planning and understanding, federal retirees can navigate this aspect of their retirement benefits effectively.