Whether you are employed under CSRS, CSRS Offset or FERS, when you retire you’ll receive a lump sum payment for your unused annual leave. This is clearly one of the best deals going. That’s because the more leave you have accumulated, the more money you’ll get.
Here’s a quick rundown on the types of pay that are included in a lump-sum payment:
- Basic pay
- Locality pay
- Administratively uncontrollable overtime pay, availability pay, and standby duty pay
- Night differentials (but only for wage grade system employees)
- Regularly scheduled overtime under the Fair Labor Standards Act for employees on uncommon tours of duty
- Supervisory differentials
- Nonforeign area cost-of-living allowances and post differentials
- Foreign area post allowances
One of the little-appreciated features of the lump-sum payment system is that those unused hours of annual leave are projected forward when you retire. In other words, the hourly rate of pay you’ll receive for that unused leave will be the one you would have gotten if you were on annual leave during all those hours. So, if you retire at the end of the year, any hours that cross over into the next pay year will be valued at the following year’s pay rate (remember, pay raises kick in at start of the first full pay period of January, not January 1). Thus, some leave earned at a lower pay rate will be cashed in at a higher one. However, if you would have received a within-grade increase during that lump-sum payout period, it will not increase your hourly rate. To receive credit for that, the increase would have to have taken place no later than the day on which you retired.
As a rule, the only deductions that will be taken out are for federal taxes (and state and local taxes, if applicable). However, if you are subject to garnishment of your wages or owe a debt to the federal government, deductions will be taken for them, too.
At the end of the calendar year, the gross amount of your lump sum payment will be reported on your W-2. Because of the tax liability, the later in the year you retire, the higher those taxes may be. That’s because the lump sum will be piled on top of the salary you earned before retirement. Leaving at the beginning of a calendar year would limit the tax impact, because the lump sum payment would be added to the reduced income from your annuity.
One final note. If you are reemployed in the federal service prior to the expiration of the period of annual leave you were paid for, you must refund that portion of the money which represents the time between the date you are reemployed and the expiration of the lump-sum period. That repayment will result in those hours being credited to your new annual leave account.