Separating from Federal Service Mid-Career Part 1 of 3
Are you planning to leave your federal job soon? Are you too young to retire? If you are planning to separate mid-career (before you meet the age and service requirements to be eligible for an Immediate Retirement), there are a few things you should consider.
If you are separating from your federal job and are not applying for retirement immediately, you will want to schedule an appointment with your agency benefits office for a complete understanding of all your options regarding your future retirement and benefits. The following are just a few things you will want to discuss and understand.
FEGLI: The Federal Employees Group Life Insurance will terminate upon your separation. You will have a 31-day extension of your coverage (for free) after the date of your separation and you will be allowed to convert to an individual policy that would commence on the 32nd day.
This conversion may be helpful to folks who aren’t as healthy and are perhaps less insurable, but if you are healthy, it is likely that you can find a better policy on your own if you take the time to shop around. Why pay “more for less” when you can “pay less for more?” HERE is a good place to start shopping. Of course, if you are going to be working somewhere else, you might also want to look into any special policies or coverage that might be available through your new company.
Click HERE for more information about FEGLI when you separate.
FEHB: Your Federal Employees Health Benefits coverage will also be terminated upon your separation; however, similar to FEGLI, you will have a free 31-day extension of your coverage after the date of your separation.
If you are interested in Temporary Continuation of Coverage (TCC), you will have a 60-day window from the date of your separation to enroll. But under TCC, you pay the full premium (enrollee and government share) plus a 2 percent administration fee. But if you are healthy and insurable, it’s possible that you might be able to shop around and find equivalent coverage for a cheaper price. Some folks will initially sign up for TCC when they separate (this is done through your agency), but will convert to a cheaper policy through the same health insurance provider. Just call the carrier you belong to if you would like to discuss these options.
Of course, if you are going to work somewhere else, you would want to review the health insurance coverage that might be available through your new company. Also, losing your FEHB coverage might be a qualifying life event (QLE) that allows your spouse to obtain health insurance coverage outside of a typical open season through their own company.
Click HERE for more information about FEHB when you separate.
Sick Leave: Your unused sick leave balance will be frozen upon separation, but in most cases, your sick leave balance would be restored if you should return to federal service later.
If you don’t meet the age and service requirements for an Immediate Retirement on the date of your separation, but are eligible for a Deferred Retirement later, the sick leave would NOT be used in the computation of your future pension (unless you returned to federal service and later retired under the Immediate Retirement provisions). However, if you are eligible for an Immediate MRA+10 Retirement under FERS when you separate, but you are postponing your application for retirement to avoid the reduction for early age, then your sick leave balance will be used to give you additional service credit in the computation of your pension once you apply for the Postponed Retirement under FERS.
Annual Leave: Your unused annual leave will be paid out to you in a lump sum payment (from your agency payroll office) once you separate from federal service. On average, it takes several pay periods (2 to 6 weeks) for your agency to process this payment. Most agencies have this paid out within two pay periods. This payment will be considered taxable income in the year in which you receive the payment.
Thrift Savings Plan: If you are younger than 70 ½ years old when you separate from federal service, no one is going to force you to make any immediate decisions regarding your TSP account as long as there is at least $200 in your account. Click HERE for more details regarding the required minimum distribution for separated employees who have reached the age of 70 ½.
Your TSP account is portable. In most cases, you can leave it right where it is and your Traditional TSP account will continue to grow tax deferred. You can no longer take any loans or make direct contributions into the account, but you can transfer other accounts that you might have (i.e. IRAs or eligible employer plans) into your TSP, if you so desire. Or, in the alternate, you can transfer the TSP into these accounts or keep these accounts separate.
Keep in mind, if you have an outstanding TSP loan when you separate, you will be required to pay it back in full fairly quickly to avoid it being treated as a taxable distribution. If you are expecting a lump-sum payment for your annual leave, you might have time to use this money to pay back your loan. Click HERE for more information regarding TSP loans.
Of course, if you ever return to federal service, you would be allowed to make direct contributions into TSP from your federal payroll again. Click HERE for more information regarding your TSP withdrawal options.
In Part 2 of this series, we will discuss the effect on your pension if you were to leave federal service mid-career. We will also discuss the VSIP (Voluntary Separation Incentive Payment) and Severance Pay.
James Marshall is a federal retirement benefits specialist and the owner of Federal Retirement Planning LLC. For more information, please visit the Federal Retirement Planning LLC website.