In my last two articles, I wrote about the benefit that accrues to employees who retire with sick leave to their credit. The payoff for that is an increased annuity, a gift that keeps on giving. This time I want to talk about the one-time benefit that comes from retiring with the maximum allowable amount of unused annual leave – the lump-sum payment.

Whether you are covered by CSRS or FERS, you’ll receive a lump sum payment for any unused annual leave you have to your credit when you retire. While that time can’t be used to increase you length of service or your high-3, it will put cash in your pocket.

The lump-sum leave payment is based primarily on your hourly rate of basic pay, plus any locality pay or similar geographic adjustment. In some cases, it may also include other forms of compensation, such as administratively uncontrollable overtime (AUO), supervisory differentials, regularly scheduled overtime pay under the Fair Labor Standards Act, non-foreign area cost-of-living allowances and post differentials, and foreign area post allowances.

Importantly, those hours of unused annual leave will be projected forward as if you were still on the payroll. As a result, if you retire near the end of a calendar year and an annual pay adjustment is going into effect beginning with the first pay period of the following year, any hours that fall under the new pay schedule will be paid at that rate. While you can kiss that advantage goodbye for the present, because of the pay freeze already enacted for 2012, those who retire after the freeze ends will once again be able to take advantage of that feature.

By the way, since the lump sum payment is projected forward, if you go back to work for the federal government before the lump-sum leave period expires, you’ll have to repay the money you received for any days that fall between the date of your reemployment and the expiration of the lump-sum period. However, all is not lost. The days you buy back will be re-credited to your annual leave account.

When you get your lump-sum payment, a number of deductions will have been taken out of it: federal income taxes, state and local income taxes (if applicable), Medicare, and Social Security (FICA), if you are a FERS or CSRS Offset-covered employee. However, no deductions will be taken out for such things as health and life insurance premiums or TSP contributions.