Retiree Annuity Supplement: The icing on your retirement cake

The FERS Supplement, Social Security Supplement, Special Retirement Supplement. Depending on who you talk to in the office, you’ll hear these names used for the retirement benefit the Office of Personnel Management calls the Retiree Annuity Supplement in Chapter 51 of the CSRS/FERS Handbook. Many articles incorrectly state that this benefit is only for those employees covered by the Federal Employee Retirement System. For foreign service federal employees covered by the Foreign Service Pension System, the RAS functions the exact same way as it does for Civil Service FERS Special Category Employees, which include law enforcement, firefighters and air traffic controllers. The foreign service annuity supplement is outlined in 22 U.S. Code § 4071d(c).

What is the Retiree Annuity Supplement?

Simply put – it’s extra money that’s paid with your monthly annuity check in retirement. The purpose of the supplement is to provide an income bridge until federal retirees are eligible to start Social Security. On the foreign service monthly annuity statement, the RAS isn’t a separate line item. For FERS retirees receiving their annuity from OPM, there will be a separate line item for this benefit.

Who Gets It, and When?

You must retire with an immediate unreduced pension and be under age 62 in order to receive the RAS. The RAS will terminate at the end of the month prior to you turning age 62, regardless of whether or not you start claiming Social Security. You can choose to start Social Security anytime between ages 62 to70.

Examples of immediate unreduced annuities include:

-MRA (age 57 if born in 1970 or later) + 30-years of service

-Age 60 + 20-years of service

-Age 50 + 20-years of service (Special Category Employees (SCE), Foreign Service, and some others)

-25-years of service + any age for SCE (1811 Foreign Service Special Agents but not 2501 Foreign Service Special Agents)

Those individuals retiring under a deferred, postponed, disability, or MRA + 10 retirement are not eligible for the RAS. If you happen to retire before your MRA through involuntary retirement, or voluntary retirement due to a Reduction in Force (RIF) or major reorganization, you can get the RAS, but it’ll only start once you reach your MRA. Members of Congress retiring at age 50 + 20-years of service or any age + 25-years of service must also wait until MRA to start receiving their RAS.

How Much is the Supplement?

While the exact formula is too complicated for this article, there’s a reliable formula to estimate the benefit. (1) Take your whole years of creditable service, (2) divide that number by 40, and then (3) multiply that number by your age 62 Social Security benefit. You can get your age 62 estimated Social Security benefit any time by creating a “My Social Security” account on SSA.gov. An important note for computing whole years of service. Do not include military time or your sick leave balance, just include whole years of creditable civilian service. 

For example – Let’s say you have 23 years of service and your estimated SS benefit at age 62 is $2,400. Your RAS will be around $1,380. How did we get that? 23 years of service / 40 = .575. Your age 62 SS benefit of $2,400 (x) .575 = $1,380.

Is the Supplement Taxed?

Of course! The RAS is fully taxable as ordinary income on the federal level (the same tax that you paid on your W2 income). As far as state tax goes, it depends on how your state taxes federal pensions and retirement income. One common misconception is that the RAS is taxed like Social Security because people have called it the “Social Security Supplement.” The RAS is not taxed like Social Security, it is not administered by the Social Security Administration, and will have no effect on your Social Security benefits.

Supplement Reduction Due to “Excess Earnings”

Unfortunately, once you reach MRA, the supplement can be reduced all the way down to $0 depending on the amount of earned income you have above the Social Security exempt amount, which for 2024 is $22,320. For every $2 you earn above $22,320, the RAS is reduced by $1. This earnings test applies to all federal employees, regardless of the retirement plan you’re covered by. Thankfully, the reduction only applies to your RAS, not your annuity.

The key words with this reduction are earned income. We’re talking about earnings from an employer (W2, 1099) and net self-employment income. A simple way to determine if income is classified as earned income is to see if FICA (payroll) tax or self-employment tax is deducted. If it is, it’s most likely going to count as earned income for the excess earnings test.

What doesn’t count? Earned income does not include your annuity, withdrawals from the TSP, IRA distributions, passive rental income, the lump-sum annual leave payout, dividends, interest, capital gains, spousal income, inheritance, gifts, alimony, and some other sources listed on OPM Form RI 92-22 (Civil Service) and DS-5026 (Foreign Service).

You do get a little break in the year that you reach your MRA. You only include earned income that was earned after you hit your MRA. 5 U.S. Code § 8421a states, “Any earnings attributable to a period before attaining the applicable retirement age under section 8412(h) shall not be considered in determining the excess earnings.” Certain Air Traffic Control instructors who are under contract with the FAA can earn income even after MRA and exclude it from the earnings test.

Excess Earnings Reduction Example – Foreign Service & Civil Service SCE

-In 2022, Sam retired at age 52 from the Foreign Service (or Civil Service SCE) with a RAS of $1,500/month ($18,000/year).

-From 2022-2027, Sam receives his $18,000 RAS annually and works a post-retirement job. The salary for this job doesn’t matter since he hasn’t reached MRA. Sam’s RAS remains $18,000 for each year since it does not get a Cost-of-Living-Adjustment (COLA) and isn’t subject to the earnings test.

-February 28, 2027 is Sam’s 57th birthday (MRA). His annual salary in 2027 is $48,000. For the rest of the year after hitting MRA, Sam’s earned income totaled $40,000 ($4,000 per month (x) 10 months (March to December) = $40,000).

Sam receives his full RAS of $18,000 in 2027, but it will be reduced in 2028 because he has reached MRA and has earned income over the Social Security exempt amount. This is where the process differs slightly between Foreign Service and Civil Service.

Foreign Service

January 2028 – Sam submits form DS-5026 (FSPS Annuity Supplement Report) reporting the $40,000 he earned after reaching his MRA. The DS-5026 needs to be submitted in the beginning of January (the 2024 due date was January 8th). If the form is not received by Department of State HR, the RAS will be suspended. Based on Sam’s earned income, his supplement will be reduced starting February 1, 2028. If Sam was forgetful and didn’t submit the DS-5026, he would notice his February pension check was much smaller. At this point, he could contact DOS HR, submit his DS-5026, and get his RAS reinstated. In our scenario above, his reinstated RAS would be at a reduced amount.

Civil Service

April/May 2028 – Sam receives Form RI 92-22 (Annuity Supplement Earnings Report) from OPM. OPM states, “All applicable annuitants should receive the mailing by the end of May each year.” Sam sends in the form to OPM reporting the $40,000 of earned income that he received last year after hitting his MRA. Starting with his August 1, 2028 pension check, Sam’s supplement will be reduced. 

How is the Supplement Reduction Calculated?

These are the steps for figuring out Sam’s reduction, using the 2024 exempt amount since we don’t know what it will be in 2028. This method is the same for Foreign Service and Civil Service.

Step #1: Sam’s earned income after hitting his MRA (3/1/27 – 12/31/27) was $40,000 

Step #2: $40,000 of earned income minus the exempt amount ($22,320) = $17,680 over the limit

Step #3: The reduction to the RAS is $1 for every $2 earned over the limit. Therefore, Sam’s RAS will be reduced by $8,840 ($17,680 over the limit divided by 2).

Step #4: The original RAS of $18,000 is reduced by $8,840 for a new RAS payment of $9,160/year. Sam’s monthly RAS went from $1,500 to $763. If Sam’s post-retirement earned income is reduced, his RAS can be adjusted upwards and even fully restored to $18,000 if he dips below the exempt amount.

Can Your Spouse Get a Supplement?

Yes! If you pass away, and your spouse is under age 60, the spousal supplement is a benefit that is intended to act as an income bridge until they can begin Social Security survivor benefits at age 60. Whether they claim Social Security survivor benefits or not, the spousal supplement (not the survivor annuity) will end at age 60.

Your surviving spouse must be: (1) under age 60, (2) receiving a survivor annuity, (3) eligible for Social Security survivor benefits at age 60, which is based on your Social Security record, and (4) they must not be eligible for Social Security parent benefits or disability benefits. In addition to these four criteria, the deceased must have had 5-years of creditable civilian service with at least 1-year of creditable service under FERS. 

The math for calculating the spousal supplement is not as easy as the employee estimate. The spousal supplement is the lesser of either: (1) the hypothetical CSRS (old retirement system) survivor annuity (–) FERS survivor annuity. This is calculated using your years of service up until your death and calculated as if you were covered by CSRS. (2) the hypothetical Social Security survivor benefit payable at age 60.

Two final points for the spousal supplement that are different than the employee RAS. There is no earnings test for the spousal supplement, and the spousal supplement is increased by FERS COLAs.

Tyler Weerden, CFE is a financial planner and the owner of Layered Financial, a Registered Investment Advisory firm located in Arlington, Va. In addition to being a financial planner, Tyler is a full-time federal agent with 15 years of law enforcement experience on the local, state, and federal level. He has served in both domestic and overseas Foreign Service assignments.