Phased Retirement Approved For Postal, Federal Employees

August 2, 2012

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A recent highway funding law contains a provision of special interest to postal and federal employees: The legislation authorizes federal agencies to allow full-time retirement-eligible employees to opt for “phased retirement.” The phased retirement provision will take effect when the Office of Personnel Management (OPM) issues regulations for implementing the new law.

Phased retirement will allow postal and federal employees to retire from a portion of their full-time employment and receive a pro-rated pension for their service. During phased retirement, federal employees may work 20 percent to 80 percent of their full-time schedule and continue to receive a pro-rated salary and pension credit for the time worked. Federal workers who opt for “phased retirement” must spend at least 20 percent of the time worked to mentor new employees, but USPS employees are exempt from this requirement.

When phased-in retirees fully retire, their annuities will be adjusted, increasing their lifetime retirement income.

The law provides an exception to the tax code so that phased-in retirees will not be taxed on their partial annuities.

Under current law, federal agencies may offer part-time employment to retirement-eligible workers, but the employees may not begin receiving accrued pension benefits while the work part time. Federal employees currently face one of three choices upon reaching retirement age:

  • Voluntarily retire and collect an annuity based on the pension computation formula;
  • Continue to work full time, in most cases increasing the number of service years used in calculating their pension, or
  • Voluntarily retire and return to federal employment as a re-employed annuitant.

The phased retirement provisions are part of a bill signed by President Obama on June 29 that extends federal aid highways, highway safety programs, and transit programs and extends the current interest rate on subsidized undergraduate student loans.

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