Cost of Living Adjustments: How COLAs Work for FERS Annuitants

Understanding Cost-of-Living Adjustments (COLAs) – Part II – How COLAs Work for FERS

 Federal annuitants and survivor annuitants receive cost-of-living (COLAs). COLAs are set by law. This is the second of two FEDZONE columns discussing the calculation of COLAs for federal annuitants and survivor annuitants. The first column discussed COLAs for CSRS and CSRS Offset annuitants. This column discusses COLAs for FERS annuitants and survivor annuitants. In most years, a FERS COLA is not the same as the CSRS and CSRS Offset COLA.

Some Definition with Respect to COLAs

Before explaining the computation of the FERS COLA, a definition of terms is necessary and presented here:

1. Base quarter. The 3^rd calendar quarter which starts July 1 and ends September 30.
2. Consumer Price Index for Urban Workers (CPI-U). The index published monthly by the Department of Labor reflects changes in consumer prices for urban wage earners and clerical workers.
3. Base quarter price index. The arithmetical mean of the CPI-U for the three months comprising a base quarter – July, August and September.
4. Cost-of-living adjustment (COLA). An increase in an annuity based on the increase in the CPI-U between two consecutive base quarters.
5. Effective date. COLAs are effective on December 1 of the year in which an annuitant becomes eligible. Increases are first reflected in annuity checks payable in January following the effective date.
6. Annuity commencing date. The date an annuity first begins to accrue.

Eligibility for FERS COLAs

FERS COLAs do not apply to FERS annuitants who are under age 62 as of December 1^st during any year, with following exceptions:

1. Disability annuitants. This includes military reserve technicians who are medically disqualified for military service, or the rank required to hold their positions. However, disability annuitants who are receiving 60 percent of their high-three average salary do not receive COLAs.
2. Employees who retired under “special provisions.” These employees who are classified as “special provision” employees which include law enforcement officers, firefighters, or air traffic controllers.
3. Spouse, former spouse and insurable interest survivor annuitants.

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FERS COLA Rate

As is true with the computation of a CSRS COLA, the amount of a COLA under FERS is initially determined by the percent change in the base quarter price index from the previous year to the year in which the COLA is to become effective and adjusted to the nearest 0.1 of one percent. There is one more step in the final determination of the FERS COLA, as explained here: FERS COLAs are 1 percent less than the increase in the CPI-U as determined under the law. However, if the CPI-U increase is between 2 and 3 percent, then the FERS COLA is reduced to 2.0 percent. If the actual increase is 2 percent or less, then the FERS COLA matches the CPI increase.

The amount of a FERS COLA is summarized in the following table:

The following illustrates the FERS COLA for the year 2024:

9.6/296.4 x 100 = 3.24%

3.24% – 1.00% = 2.24%

FERS COLA Rate = 2.2% (adjusted to the nearest 1/10 of 1%) effective December 1, 2023

FERS COLA Increase

The FERS gross monthly annuity is the monthly annuity payable to a FERS annuitant after the following adjustments (when applicable) have been made: (1) Reduction for survivor benefits; (2) Reduction for early retirement under “MRA + 10” and “MRA + 20” retirement options, and (3) Reduction for early deferred provision.

The following example illustrates:

Example 1. Janet is a FERS annuitant and retired from federal service on December 31,2022 at age 62 with 30 years of service. Janet is giving a full 50 percent survivor benefit to her husband. Janet received her first FERS annuity check on February 1,2023 and received the same monthly annuity check throughout 2023, computed as follows:

FERS monthly annuity: $3,600

Less: Cost of survivor annuity benefit (10%): (360)     

Net monthly FERS gross annuity:      $3,240

Since Janet becomes age 63 during 2023, she is eligible for her first FERS COLA effective December 1, 2023. That COLA (see above) is 2.2 percent.

Effective January 1, 2024, Janet’s monthly annuity is as follows:

2023 gross monthly annuity ($3,600) x 1.022 = $3,679.

FERS monthly annuity: $3,679

Less: Cost of survivor annuity benefits (10%): (360)

Net monthly FERS gross annuity:      $3,319 (effective 1/1/2024)

Note: When a FERS disability annuit increases because of a COLA, the reduction for the Social Security benefit also increases.

Proration of First Year COLA

For FERS annuitants who are not eligible to receive a COLA during their first year (or more) applied to the annuity rate, the initial COLA they receive after becoming eligible is the full COLA without proration. The FERS annuitants who fall in this category are:

1. Annuitants under age 62 whose annuity commences at least one year prior to reaching age 62.
2. Disability annuitants whose annuity benefits are based on 60 percent of their high-three average pay.

Survivor Annuities

This information is with respect to FERS survivor annuities for a spouse, former spouse or an insurable interest.

An annuity to a FERS annuitant’s designated survivor annuitant (a FERS survivor annuity) normally commences on the day after death. FERS survivor annuities are increased by COLAs after they commence even though the survivor annuitant is not yet age 62. However, proration rules apply to the first COLA paid to the designated survivor annuitant of an annuitant who dies before having been retired for a year, or to the survivor of a FERS employee who died while in federal service. The following two examples illustrate:

Example 2. A FERS annuitant is age 59 when he retires in June 2021. He dies at age 61 in June 2023. The annuitant had not received a COLA because he had not reached age 62. In December 2023, the designated survivor annuitant receives a full FERS COLA for 2024 because the deceased FERS annuitant’s annuity had begun more than a year earlier.

Example 3. A FERS annuitant is age 60 when he retires in June 2023. The annuitant dies in November 2023. In December 2023, the designated survivor annuitant is eligible for a prorated COLA based on the fact that the deceased annuitant’s annuity commenced in June 2023. Half of the regular COLA would be payable because six months (June – November 2023) had passed. Since the 2024 FERS COLA is 2.2. percent, the FERS survivor annuity would receive a COLA of: 6/12 x 2.2% = 1.1%.

When a retiree dies, the potential survivor benefit calculated at retirement is increased by the total percent that the annuitant’s annuity had increased since retirement. If the annuitant had received no COLA increases because he or she was under age 62, there is no increase in the survivor annuity benefit. On the effective date of the next COLA, the survivor annuity is determined on the length of time that has passed since the annuity was first payable to the deceased annuitant. If at least one year has passed since the deceased annuitant’s annuity commenced, the survivor annuity is increased by a full COLA. If less than one year has passed, the COLA is prorated based on the annuitant’s annuity starting date.

FERS survivor annuities do not have CSRS components. The entire survivor annuity is subject to FERS COLA rules, even if it is based on a basic annuity employee that includes a CSRS component.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

How COLAs Work for FERS