How phased retirement works

It has been a little more than 11 years since Congress enacted the Moving Ahead for Progress in the 21st Century Act, creating a new phased retirement option for certain employees covered by the Civil Service Retirement System or the Federal Employees’ Retirement System. 

Federal employees have been able to apply for phased retirement since November 2014. The number who have done so is still small, but for those who have taken advantage of this two-step retirement, it can be a way to ease into the next chapter of life. And it provides an opportunity to serve as a mentor to the next generation of employees. 

In phased retirement, an employee works half time and receives half of their full-time pay, while also getting about half of their annuity. Phased retirees (except for those at the Postal Service) must spend 20% of their working time in mentoring activities.

Eligibility

To take advantage of phased retirement, employees must meet certain criteria:

• They must be employed full-time for three years immediately before entering phased retirement.
• CSRS employees must have at least 30 years of service at age 55 or older, or at least 20 years of service at age 60 or older.
• FERS employees must have at least 30 years of service at their minimum retirement age (55-57, depending on year of birth) or older, or at least 20 years of service at age 60 or older.
• Employees subject to mandatory retirement (such as law enforcement officers, firefighters and air traffic controllers) are not eligible for phased retirement.

Schedule and Limits

Employees who enter phased retirement continue to work at 50% of a full-time work schedule.Their gross pay is cut in half, and is still subject to the employee’s withholdings. Health and life insurance premiums are the same amount that is withheld from an employee working a full-time work schedule.

Agencies can put a time limit on how long an employee can remain in phased retirement. FERS phased retirees do not receive an annuity supplement.

Service Credit

The employee’s annuity is based on the total creditable service they have performed up until the effective date of phased retirement and their highest three years of average salary. Deposits for post-1956 military service must be paid before the phased retirement begins. Any deposits owed for civilian service must also be paid. An employee in phased retirement status will not be able to pay these deposits when they fully retire.

Thrift Savings Plan

Phased retirees continue to be eligible to participate in the TSP. They can contribute to TSP accounts and are subject to the normal restrictions regarding TSP loans, financial hardship withdrawals and age-based in-service withdrawals.

Employees in phased retirement status are not eligible for post-employment withdrawals from the TSP. They are not subject to required minimum distributions or the TSP withdrawal deadline.

All sources of contributions to the TSP (employee contributions, agency automatic 1% contributions, and agency matching contributions) are determined using the employee’s basic pay. If an employee has elected a TSP contribution based on a whole dollar amount, and if the amount is greater than the available pay after other mandatory deductions have been subtracted, no employee contribution will be made for the pay period. In this situation, a FERS employee would not receive an agency matching contribution for the pay period.

Return to Full-Time Work

Under a phased retirement, the idea is for the employee to go through a three-stage process: full-time employment, half-time employment while receiving half of a retirement benefit, then full retirement. It is possible, however, for the employee to end a phased retirement and return to full-time work with their agency’s permission.

In this situation, phased retirement would be treated as a period of part-time employment. The phased retirement annuity would immediately terminate.

Composite Retirement

When an employee in phased retirement status decides to fully retire, their full annuity (known as a composite retirement annuity) will equal the sum of: 

• The phased retirement annuity, updated by any cost-of-living adjustments.
• The amount of the final phased portion of the full retirement annuity. This is the percentage of the full annuity the employee would have received had they not entered phased retirement.

Next week, we’ll look at some examples of how phased retirement can play out. In the meantime, the Office of Personnel Management has more information on phased retirement and the forms needed to apply.