New wrinkle on the notion of postponing your federal retirement

The government might employ some two million people, but no two federal employees are alike. That's why career and retirement planning can be complicated.

The government might employ some two million people, but no two federal employees are alike. That’s why career and retirement planning can be complicated. For instance, what if you’re old enough to retire but have less than 30 years in? For insight into what’s known as MRA plus 10, the Federal Drive with Tom Temin spoke to long-time federal retirement expert Tammy Flanagan.

Interview Transcript: 

Tom Temin All right, well, it’s good to see. Well, audience can’t see you, but I can on the zoom recording here. But people that have been in for a long time but not long enough. And they’re the age that they can retire. What is the issue here. And it sounds like something that’s coming up a lot.

Tammy Flanagan Yeah. We have this thing. It’s unique to the Federal Employees Retirement System. We never had this under the old civil service system, but it’s the ability to reach the age of retirement, which for argument’s sake, let’s say, is 57. It’s a little bit younger if you’re older, like I am. But for most current employees, their minimum retirement age is 57. But if they don’t have 30 years of service to retire with a full and reduced immediate retirement, they could retire with as little as ten years at 57. But they’d take a pretty significant age penalty. It would be 5% for every year that they’re under 62. So instead of taking that age penalty, they can resign and then postpone the application so they can postpone it for a year or two years, they could postpone it all the way to age 62. But therein lies the problem. Because whenever they’re claiming that postponed benefit, they’re on their own filling out the application, trying to figure out how to fill in the blanks on the application and make those elections. And some of those folks are choosing the wrong date by one month, and it’s losing their health insurance. It’s giving them a whole different calculation of their benefit.

Tom Temin Wow. Well, let’s go back to the issue of postponement in the first place. Because if you resign but apply later, does the pension still go up?

Tammy Flanagan Well, it doesn’t go up. You just lose that age penalty. So, if you were going to retire at 57, let’s say with 15 years of service, that would normally be 15% of your high three. And just to make it simple, let’s say the high three is 100,000. So, you’d be entitled to 15,000 a year, but because you’re only 57, that 15,000 would be reduced by 25%. So, you’d only be getting 75% of the benefit, or 11,250. So, to avoid that big reduction of 25%, you can resign. You’re eligible for the benefit, but you’re postponing the application. And the longer you put it off, the longer you delay that application, the less of that age reduction you’ll take. So, if you don’t need the money, you don’t need the health insurance. Maybe you’re going to go back to work someplace else, or maybe your spouse has all those benefits. Then you can claim it later. But you got to know what you’re doing when you file the application.

Tom Temin And before we get to that month error, just to be clear, it doesn’t rise beyond 62. That’s where it maxes out.

Tammy Flanagan That’s right okay. There’s no reason to delay beyond 62, although some people will because they’re still working. They don’t need the money. They don’t want the taxable retirement income. So, they can wait until they’re 70 and then they expect retroactive payments. But again, that can be an issue.

Tom Temin And we’re talking about the FERS annuity. Correct.

Tammy Flanagan That’s right. The first basic this has nothing to do with Social Security or the Thrift Savings Plan. This is that part that some people call the government pension, the part that’s administered by OPM, the Office of Personnel Management.

Tom Temin All right, then clarify what is the month error that you can make. How does that work? That sounds really scary.

Tammy Flanagan Right? Well, to explain that, let me say that there’s two types of retirement that are very similar. The one I just talked about is a postponed MRA plus ten. The other one is called a deferred retirement. And they sound the same, don’t they? If you looked at deferred and postponed in the dictionary, it sounds about the same meaning. But a deferred retirement is whenever you’re not eligible for an immediate benefit. So, it might be an employee 42 years old is has 15 years of service, and they can either defer their retirement to their MRA and take the age reduction or defer it until they’re 62 and get no age reduction. But on a deferred retirement, there’s no health insurance, there’s no sick leave credit. It’s just that basic annuity benefit. Well, the people who are postponing it, in other words, the people who were eligible when they left, they were old enough. They had ten years or more service, but they’re postponing only to avoid the age reduction. They’re fully expecting to reinstate their health insurance, their government life insurance, dental and vision coverage. All the benefits that most people get with the immediate retirement. Plus know if you have 1000 hours of sick leave saved up, you want credit for that too? Well, if they choose a date at least two days before they turn 62, they’ll get all of. That, you know, it’s wonderful. But, you know, a lot of us think, well, we got to be at least 62 before we retire to get this full benefit. So many of these folks inadvertently are choosing the end of the month after they turn 62. They lose all of those extra benefits. That is then called a deferred retirement with no sick leave credit, no insurance coverage, no nothing. And they’re caught way off guard. They’ll get a letter from OPM saying, well, you got two choices. You can either accept what we’re going to give you, which is basically no insurance, no sick leave, or we’ll backdate everything back to when you were 57 and apply the age reduction and let you reinstate the insurance.

Tom Temin We’re speaking with Tami Flanagan. She’s a principal with federal So that means you have a two-day window to do this.

Tammy Flanagan Well, yeah, you have to choose a date at least two days before you turn 62. And it kind of says that on the application instructions. But honestly, Tom, I had to read it four times before I understood what it really meant. So, I can’t imagine that a federal employee who never worked in HR can figure that out. And to understand the connection between that specific date and the reinstatement of their insurance. And that’s what’s been the issue, because I’ve had people, very well-educated people contacting me, saying they applied for their what they thought was their postpone retirement. And we’re sadly mistaken that OPM called that a deferred retirement because they chose the date one day, sometimes after age 62 or the end of the month of their 62nd birthday, and they’ve lost those very, very valuable benefits.

Tom Temin Wow. So, you could do it three days in advance of your birthday or a week ahead, just not the day after.

Tammy Flanagan That’s exactly right.

Tom Temin Yeah. Happy birthday. Yikes. Wow.

Tammy Flanagan Yeah. I’m trying to help some of those folks to see if we can get their retirements backdated. And so far, we haven’t been too successful because the law does say exactly what OPM telling them. But I just think the instructions on the application are not crystal clear, especially since they are filling these applications out without the assistance of anybody in HR telling them what that specific date should be.

Tom Temin Wow. So, make an appointment in your iPhone and make sure you get that application. And before the birthday party of 62 or 57.

Tammy Flanagan Read the form very carefully.

Tom Temin And I wanted to switch gears here for a minute. You have been getting a lot of questions about Postal Service health benefits program. That’s fairly new. And of course, sometimes it takes ten years till people figure these things out.

Tammy Flanagan Yes, we got this new Postal Service health benefit plan, which is a subset of the Federal Employees Health Benefit Plan. So, because of some legislation that passed a few years back, they have to create this new separate risk pool for the Postal Service employees and retirees to go under their health insurance. So, starting on January 1st of 2025, all the postal employees, all the postal retirees have to choose a Postal Service health benefit plan, which very much could be the exact same plan they’re in under PHP, but it has to be the postal service variety of it. So, I think what I anticipate happening is we’ve got a lot of older retirees who don’t like change, right? Been in the same health plan for 35 years, and now we’re telling them, you’ve got to change. Even if it looks the same, even though it sounds the same, they’re still not, you know, very sure of themselves about this change. So, I think we’re going to run into some confused retirees and some very stressed-out people at the time this change takes place. Although OPM is trying to make good preparations for it to go smoothly.

Tom Temin We’ll see. But a given supplier say, a GEHA for example, if they have a federal employee health benefit plan and a postal service, likely they’re going to be very close. Fair to say.

Tammy Flanagan I would say initially they’ll be almost identical. I think what may happen over time, because you have to have at least 1500 postal employees in order to make one of those plans, a postal service plan. So, if that plan becomes under the PSHB or Postal Service health benefit program, you may find over time that risk pool may change. All those postal retirees now have to go under Medicare. So that may actually lower their premiums over time, because Medicare is taking over most of the bill for the older retirees. So, we’ll see what happens. Time will tell. But there has to be a reason, a monetary reason, I would think, for pulling these folks out into their own separate pool.

Tom Temin And earlier we were talking about penalties for people that file for their deferred retirement too late, you know, after their birth date, in the case of postal Service health benefits. There is also an exception in Medicare, where most people, if they apply too late, there’s a lifetime penalty. But that doesn’t happen in this case.

Tammy Flanagan Well, there’s a special enrollment period. Medicare has several special enrollment periods, and the most common one is if you’re working past age 65 and then you retire. If you’re over 65, you can enroll in Medicare right after you retire with. Then eight months of retirement with no penalty. So, somebody who might work, you know, till they’re 72 years old, could delay part B with no penalty and pick it up right after they retire. Well, the postal retirees are going to be required to have Medicare. Federal employees typically could choose not to have it or to have it, whatever they choose to do, and many people do. About 25% of postal retirees didn’t take Medicare when they were eligible. So, under this new law, they’re really encouraging part B in fact, younger employees will have to take it, or they’ll lose the Postal Service health benefits. So, they’re offering a special enrollment period from now, April 1st until the end of September. For anybody who’s over 65 in the Postal retirement system or, you know, civil service or first retirement system, which is where postal employees are, they can enroll in part B right now without a penalty, even if they’re 95 years old. What a golden opportunity to pick up part B at the same price you would pay at age 65. But again, I’m not sure that these folks are going to necessarily take advantage of this golden opportunity because again, it’s a change.

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