Lump Sum Annual Leave Payout

You’ve decided to cash in your chips. It’s time to throw that PIV card in the trash and walk off into the sunset to enjoy life. You’ve been a subscriber to the Barfield Financial snoozeletter for years. And more importantly, you’ve bought and read Dan Jamison’s FERSGUIDE. So you are well prepared for everything. But….there is still a tad bit of confusion regarding exactly how that annual leave gets paid out.

So, let’s dive into it.

(Also, don’t actually throw that PIV card into the trash. That’s gonna be problematic.)

When you separate (retire, quit, or get fired), you may have an annual leave balance left. Most people can carry over 240 hours from one year to the next. Some can carryover 360 or 720. Then, you can continue to accumulate the current year’s A/L at 8 hours a pay period to tack onto to that carryover balance. Additionally, you may even have some Restored Leave that gets credited to that overall balance too. In short, you could have a lot of leave. I’ve seen balances approaching near 900 hours.

What happens to it?

Unlike sick leave that gets credited (in an unnecessarily complicated way) to your overall working time to increase the percentage of your High 3 you get, the annual leave balance just gets paid out to you. You cash it in. Or as some people say, “you sell it back.” Regardless, you don’t have the option to convert it to creditable service. You just get money for it. In the form of a direct deposit into your bank account about a month after you retire.

It’s very simple on the surface. You multiply the annual leave balance by your hourly rate. And that’s the gross value of your annual leave. Subtract taxes (about 35%, give or take), and you’ve got your rough net payment.

Here’s an example: Cletus retires with an A/L balance of 448 hours. Cletus is an 1811 GS 13-9 in Charlotte. With his AUO/LEAP, Cletus’ hourly rate is $80.09. (for 2024)

448 hours x $80.09 per hour = $35,880.32

That’s his gross annual leave payout. We can estimate the net pay by removing the 2024 IRS Supplemental Federal Income Tax rate of 22%, the FICA Tax rate of 7.65% and a state income tax rate of 4% (your mileage may vary, this is just an example people). That’s a total of 33.65% Subtract that from $35,880.32 and you are left with a net of approximately $23,806.59

However, it’s not quite that simple if you dive into it a little deeper. And here is where the questions start to come in. I’ll deal with the most common questions.

What is included in my annual leave calculation?

Generally speaking: Base Pay, Locality Pay (if you receive this), LEAP/AUO (if you receive this), comp time worked, and restored leave. Some of you may work for agencies that might include other things, but generally speaking, hazardous duty pay, premium pay, travel comp time, retention, etc., are NOT paid out.

What if I retire on December 31st? And there is a raise the next year—will my A/L be paid out at the raise rate?

Yes. OPM takes your leave balance and pays you as if you had stayed on and continued to work. This concept is very confusing for some people. Not sure why. Think of it like this. If you have 448 hours, you have the equivalent of 5+ pay periods (448/80 hours). So OPM will project or artificially create (however you want to look at it) 5 pay periods into the future. And they will pay you as if you had stayed and worked those 5 pay periods. Now, they won’t pay you over the next 5 pay periods. They’ll pay you in one lump sum up front, but it will be covering the next 5 pay periods.

What that means is that if you were scheduled to get a raise during the next 5 pay periods, then you will receive that raise whenever it would have occurred had you continued working. Meaning that your A/L will be paid out at the higher rate if you retired on 12/31 and the raise started in the beginning of January.

If you retired in November, and had 5 pay periods worth of leave, then at least some of those hours will be paid out at the higher rate. The first 2 pay periods would be the theoretical December time frame, so that portion would be paid out at the lower rate, but then the remaining 3 pay periods that would have taken you into the following year, and subject to the raise, would be paid out at the higher rate that included the next year’s raise.

What if they don’t know the raise when I retire?

Very common. You get your lump sum annual leave paid out at this year’s rate. And then next year, if there is a raise, once they know it, you would get an additional check for a small adjustment that would represent the raise on your A/L hours that went into the next year.

What if I am at the capped rate? Will my A/L be capped?

Yes. This is a bit hard to understand. And even harder to accept. But this is yet another example of how much being at the cap hurts you. Let’s assume that you are a GS 15-10 in Houston and you are an 1811. With LEAP/AUO, you should be making north of $240,000 a year in 2024. That would equate to an hourly rate of $115. However, you don’t actually get paid that. And your hourly rate isn’t $115. It’s capped at $91.95.

That means that all of your hours will be paid out at the lower, $91.95 hourly rate. If you have 448 hours, you don’t get $51,520 ($115 x 448 hours), you get $41,194 ($91.95 x 448 hours). About $10k less.

This is tough for some people to swallow, and understandably so, but you’re probably getting used to it by now. You lost lots of money each pay period, your High-3 is $40,000 less than it should be, and your TSP is not as high since you’re not getting the 5% matching on the higher salary, only on the capped salary. This is the last, final insult the mathematicians in the government leave you with as they send you out the door.

What if I retire in May and I haven’t hit the annual cap yet, won’t I get paid out the full amount?

No. Understand, while we talk about the cap in the form of an annual cap, the cap is a bi-weekly cap. The law is written as a bi-weekly thing. The rules are such that you can’t make more than x amount of dollars in a 2-week period. You can see all the bi-weekly caps here. (They are different for each locality—people don’t know that). Outside of USSS and some other special circumstances that allow an additional cap, the cap is set at the biweekly level.

Because OPM does your annual leave as if you had stayed and worked your number of annual leave hours, they cap each future 2-week period, just as if you had stayed and worked. So retiring in March doesn’t help any more than retiring in December.

HOWEVER……

All of that being said, I have seen some people get paid out their full annual leave hourly rate, even above the cap. The vast majority of retirees do not get this. But I have seen it. I believe these to be a mistake? The individuals in question did not confirm it with their HR because they didn’t want to risk having the money taken back. Maybe there is some consideration available that agencies can do to somehow get around the cap? But just this week I spoke with some HR individuals responsible for processing these items and they reiterated that they pay out at the capped hourly rate, regardless of when in the year, the individual actually retires.

Every HR person I have spoken to has told me it was capped at the hourly capped rate. If someone reading this has information to the contrary, please let me know. Again, the vast majority that I have seen have all been capped. But I have seen some that were not. I don’t know if that was a mistake, or simply that there is a workaround somehow.

OPM regs are clear—the A/L is paid out in the same way it would be if the person stayed on the job and worked those hours. Since someone at the cap would be capped, the A/L should be capped as well, is my interpretation from the regs located HERE, as well as what I have seen in practice. But, as that eternal optimist, Lloyd Christmas said, “So you’re telling me there’s a chance!”

What if I come back to work for the government—what happens to my leave?

Here we go back to the OPM way of paying out your leave. Remember (broken record) that they pay it out as if you had continued to work that amount of time into the future? Well, if you come back to work for the government before that A/L time has completely run its course, you’ll have to pay some of it back.

For example, you have the same 5 pay periods of A/L above. After 3 pay periods, you come back to work for the government. If you do that, you’ll have to pay back 2 pay periods of annual leave. Why? Because if you didn’t, you’d be getting paid twice, aka double dipping. Like Seinfeld, Uncle Sam HATES when you double dip. You’d be getting paid your new salary for the first 2 pay periods PLUS 2 pay periods of annual leave for that same period.

This is probably confusing because no normal, sane person would think of a system like this. Most people would say, “I earned my A/L, I should get paid out my A/L and then it’s all done. It shouldn’t be projected into the future as if I continued to work.” I agree with you. But we all know the government regulations are structured to make even Rube Goldberg jealous. They are not designed for them to be simple or easily understood. Undoubtedly, someone somewhere got an award for coming up with this convoluted mess. We all know how that goes. Regardless, this is how it is. There is a little more to this if you are a rehired annuitant so you might want to research all the other ins and outs. Start here.

I heard I should retire at the end of the year so my check comes in the following year and gets taxed less.

If you retire on Dec 31st, then yes, your A/L check will come in the following year. Will you owe less taxes on it? Maybe. If you’re in a lower tax bracket. But understand that the same amount of taxes will probably come out of it initially. If you are in a lower tax bracket, then perhaps you’ll get some of those taxes back when it comes time for tax filing. In my experience not too many people are in a lower tax bracket unless both they and their spouse no longer work and are not drawing anything from TSP.

I heard I should retire in October after I’ve paid in all of my Social Security tax for the year, so that I get my A/L check in the same year and won’t owe 6.5% Social Security Tax on it.

This is a popular strategy for those of you that are high earners and max out the amount going into your Social Security account before the end of the year. If you retire after doing that, and can get your A/L leave check before the end of the year, it won’t be subject to the 6.5% Social Security tax because you’ve already maxed that out. Boom. You save yourself 6.5% in taxes. On a $60,000 check, that can be a good chunk of change for those Christmas presents.

How long does it take to get my A/L check?

This can vary but in my experience, 2-4 weeks after retirement. I have seen it be 8 weeks or longer, but those are not typical. One subscriber told me they didn’t get it for an entire year. Those are aberrations from the norm. Your HR may give you a hard and fast date. And it may come on that date. But it may also not come on that date. I’ve seen things all over the map.

Can I donate my A/L check to my TSP?

No. TSP contributions have to come out of payroll deductions before you retire.

What tax document do I get for my A/L?

Since it will be considered working time, (remember how OPM pays it out in theory!) it will be on a W-2. Your annuity and supplement will come on a 1099-R, but your annual leave payout will be on a W-2.

When do I have to leave before I lose anything over my carryover limit? I’ve heard it’s not actually December 31st?

That’s correct. The leave year rarely coincides with the end of the calendar year. (But it did in 2022). You can generally carry over your use or lose past the end of the calendar year and retire before the end of the leave year and still get paid out for everything. You won’t lose any hours.

Check with your particular payroll processor but for NFC, the following are the end of the leave years for the upcoming years:

Leave year 2024: Ends 1/11/25

Leave year 2025: Ends 1/10/26

Is it worth staying until the end of the year to maximize the A/L check?

I’m sure some people disagree with me and that’s ok, we can still be good friends. But I don’t think it is. Remember, in order for you to earn another day of annual leave, you have to work 2 more weeks. You get one A/L day a pay period. So for every 10 actual working days you give the government, they give you 1 day back of annual leave. You’re still in the hole 9 days every pay period.

Let me illustrate it another way. I was eligible to retire on 10/31. I retired on 10/31. People asked why I didn’t stay until the end of the year since I was so close. I could maximize my A/L check if I would just stay!

Well, I could maximize it. I had 4 more pay periods in the year. I could stay on the books for an additional 60 days. And Uncle Sam would graciously give me 4 days of additional annual leave.

I give up 60, he gives me 4.

I’d rather retire, have the 60 days off, and Uncle Sam can keep his 4 days.

(Also by retiring 2 months earlier, I increased my COLA for the following year. And I got 2 more months of the supplement. And 2 more months of freedom. All of which added up to more than 4 days of value).

Hopefully this helps with some Annual Leave questions. The reality is, please don’t overthink this, guys. This is not something worth expending hours of your life in deep contemplation over. I see guys really obsess over some of our benefits. If it’s something that you’ll never ever think about again, it’s probably not worth putting a ton of time into it. And I doubt you’ll ever think about your A/L check after you get it in retirement.

Enjoy the annual leave payout. It’s a nice little send off. Don’t turn it into something that causes you all kinds of worry. It’s just not that important.