When a federal employee retires from federal service, the retiring employee will receive a lump-sum payment for the balance of unused annual leave hours as of the employee’s retirement date. Those employees who separate from federal service will also receive a lump-sum payment for the balance of unused annual leave hours as of their separation date.
Separation from federal service includes leaving federal service before being eligible for an immediate retirement (for example, employees who leave federal service under the “deferred” retirement and “postponed” retirement options). A lump-sum payment for any unused annual leave hours equals the pay the employee would have received had he or she remained employed until expiration of the period covered by the annual leave.
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Calculating a Lump-Sum Payment for Unused Annual Leave Hours
A federal agency calculates the lump-sum payment of a departing or retiring employee by multiplying the number of accumulated and unused annual leave hours by the employee’s applicable hourly rate of pay plus other types of pay the employee would have received while on annual leave. The following types of pay are included in the calculation of a lump-sum payment:
• Rate of basic pay and locality pay adjustment.
• Within-grade increase (if waiting period met on date of separation)
• Across-the board annual adjustments, and
• Nonforeign area cost-of-living allowances and post differentials.
The following two examples illustrate the calculation of a lump-sum payment for unused annual leave hours:
Example 1. Harry retired from federal service on December 31,2022 with 30 years of federal service under FERS. Harry’s SF 50 salary at the time of his retirement was $183,500. He had a total of 448 hours of unused annual leave hours at the time of his retirement. Effective January 1,2023, federal employees received a 4.2 percent pay increase. Harry was also eligible for a 1.0 percent locality pay adjustment. Harry’s pay adjustment as of January 1,2023 (the first day of the 2023 leave year) was therefore 5.2 percent. The amount of Harry’s lump-sum payment for unused annual leave hours that he received in January 2023 within a few weeks of retiring from federal service was computed as follows:
Step 1: Compute Harry’s hourly salary/wage rate as of the day of his retirement:
$183,500/2087 hours* equals $87.93/hour.
* Full time employees work 2087 hours per leave year
Step 2: Multiply the number of hours of unused annual leave by the hourly wage rate had Harry been on annual leave and did not retire:
Multiply $87.93 by the government-pay increase applicable to Harry effective January 1, 2023
$87.93/hour x 1.052 equals $92.50/hour
448 hours of unused annual leave hours times $92.50/hour equals lump-sum payment of $41,439
Example 2. Francine retired from federal service on July 30,2023 at age 62 with 25 years of federal service under FERS. Francine’s SF 50 salary at the time of her retirement was $163,760. She had a total of 330 hours of unused annual leave hours at the time of her retirement. Francine was not due for any within grade increases in the near future nor was there any government-wide pay increase in the period had Francine used her annual leave hours and had she not retired. Francine’s lump-sum payment for unused annual leave hours that she received in August 2023 was computed as follows:
Step 1. Compute Francine’s hourly wage rate as of the day of retirement:
$163,760/2087 hours* equals $78.47/hour.
* Full time employees work 2087 hours per leave year
Step 2. Multiply the number of hours of unused annual leave by the hourly wage rate had Francine been on annual leave and did not retire:
330 hours of unused annual leave hours times $78.47/hour equals lump-sum payment of $25,894.
Taxation of Lump-Sum Payment for Unused Annual Leave Hours
The lump-sum payment for unused annual leave hours is fully taxable, subject to federal and state income taxes, and Social Security (FICA tax) and Medicare Part A (Hospital Insurance Tax) payroll taxes. There are no other withholdings from the lump-sum payment for unused annual leave, including no employee insurance premiums (FEHB, FEDVIP, FEGLI and FLTCIP), and no deduction for TSP contributions can be made from the lump sum payment for unused annual leave.
A retiring employee’s payroll office processes the lump-sum payment and directly deposits the payment into the same bank account that the retiring employee has his or her bi-weekly paychecks directly deposited. The direct deposit of the lump-sum payment into the bank account is completed within four to six weeks after an employee has retired.
At the point of the calendar year a retiring employee’s total wages (including cumulative bi-weekly salary and the amount of payment for unused annual leave hours) exceeds the maximum Social Security wage base for that year, the payroll processing office will then not withhold Social Security (FICA) tax. In other words, if an employee retires at the time of a calendar year at which the employee’s Social Security wages reached the maximum Social Security wage base, then no FICA tax will be deducted from the retiring employee’s lump-sum payment for unused annual leave. This assumes that the lump sum payment will be paid and directly deposited into the retiring employee’s bank account within the same calendar year. For example, during calendar year 2023, the maximum Social Security wage was $160,200 and for calendar year 2024, the maximum Social Security wage base is $168,600.
How Returning to Federal Service Affects the Lump-Sum Payment
In calculating a lump-sum payment, an agency projects forward an employee’s annual leave for all the workdays the employee would have worked if he or she had remained in federal service. By law, holidays are counted as workdays in projecting the lump-sum period. If a departed or retired employee is reemployed into federal service prior to the expiration of the lump-sum unused annual leave period, then he or she must refund the portion of the lump-sum payment that represents the period between the date of reemployment and the expiration of the lump-sum period. An agency recredits the employee’s leave account the amount of annual leave equal to the days of work remaining between the date of reemployment and the expiration of the lump-sum period. The following example illustrates:
Example 3. Same facts as in Example 2 except that Francine returns to federal service as a rehired annuitant after being retired for six weeks (240 hours). Since Francine was paid in a lump-sum for a total of 330 hours of unused annual leave hours and was retired for 240 hours, she must pay back to his agency the excess 330 less 240, or 90 hours. He owes the agency the following amount:
90 hours x $78.47/hour equals $7,062.
After Francine pays back the $7,062, her annual leave account will be credited for the 90 hours of unused annual leave.