Once you receive a Federal Disability Retirement approval, it can feel like a weight has been lifted off your shoulders as you no longer have to worry about where income will come from. But did you know you can continue to work and earn more income? This is a huge benefit for federal employees that can keep working, but it comes with a few caveats. Let’s dive into some of the limits and restrictions that come with being on disability retirement to help you better understand how to maintain your annuity and stay on track for a secure financial future.
While on Federal Disability Retirement, you have the option to earn additional income through other avenues such as social security or for those who can still work, private sector employment. If you choose to work in the private sector, you are able to make up to 80% of your former position’s current salary until you are sixty years old. With this amount as well as your monthly annuity, you could potentially make up to 140% of your former salary during your first year on disability retirement and 120% every year after until the age of 62.
This 80% cap is the maximum amount you are allowed to make from private sector employment without risk of losing your benefits. If you were to go over that 80% threshold, there are a few things that would happen. Note that only EARNED income will be considered as part of this 80%. This does not include passive income or income you received through investments, rental property income, settlements from insurance claims or estates, alimony or child support. We also recommend speaking with your CPA to determine what portion of your income is considered earned.
What Income Counts Towards The 80% Cap?
If your income does not fall under one of the sources listed above, it will likely be calculated towards that 80%. If the Office of Personnel Management (OPM) determines that your earned income surpasses this amount, starting June 30th of the year following the year that you reported that income, you will stop receiving the monthly annuity payments. If your earned income eventually returns to a percentage of 80 or below, the next year you may be eligible to receive these annuity payments again, starting on July 1st.
To give a clearer idea of this, imagine if for 2020 your income in the private sector was 90% of your former position’s current salary. When you complete your OPM income review in early 2021, the OPM will see that your income is above the 80% threshold and will stop payments on June 30th, 2021. If in 2021, your earned income falls below that 80% mark, when you complete your income review for 2022, your benefits will be recalculated, and you would begin receiving payments again in July of 2022. Please note that annual income reviews are very common and not cause for concern.
What is an Administrative Recovery?
The reason why the OPM would take away your benefits once you meet a certain income threshold is that they would consider you administratively recovered. Administrative recovery is when the OPM considers you to be recovered from your occupational disability due your ability to restore your income via gainful employment. They would no longer consider you disabled which would allow them to cut off your annuity one month after the finding is discovered.
You can also be found administratively recovered if the OPM finds your private sector position to be too similar to your former position. If you are found as administratively recovered and have these benefits stopped, you can appeal this decision. If you have gone over the cap, you must provide documentation that you are back under the 80%.
Loss of Creditable Years of Service
A crucial caveat to note is that if you do go over that 80% figure, you will lose the creditable years of service you have accrued while on disability retirement. For example, if you have been on disability retirement for four years and on your fifth year, you go over that threshold, these 4 years of creditable service towards your regular retirement are lost. Once you come back under that number and begin receiving monthly annuity again, you will begin to earn creditable years of service again but the years you lost will not be recovered.
This is the number one reason that we urge you to be extremely cautious about how much you earn from additional sources of income while on Federal Disability Retirement. Please remember that income from investments, inheritance, insurance or rental properties do not count towards this amount.
Once you get to sixty years of age, the eighty percent no longer applies. At this point, you can earn more than that 80% without risking termination of your Federal Disability Retirement benefits or creditable years of service. This can be an opportunity to earn as much as possible and use it to during your standard retirement once you hit sixty-two.
How you can avoid an Administrative Recovery
Going over the 80% mark can have some very serious impacts on you and your pension. If you are going into a new sector, there are ways to avoid this risk. For example, you could go into a field you are passionate about but that might not pay as well since you now have a fixed and dependable income amount coming in. Check out what other federal disability retirement annuitants have pursued for work in the private sector.
If you found a career that you love but pays too close to this 80% threshold, you can also consider asking for increased vacation time or other benefits rather than an increased salary. Being cautious with the amount of earned income you are bringing in is the best way to protect yourself against losing your benefits.
We help federal employees walk through this every day, but we also recommend speaking with your CPA to confirm what your earned income picture looks like.