Is the FERS Supplement Taxable? Federal and State Rules
Clarify the tax implications of your FERS Supplement. Get essential insights into its income status and how it aligns with your broader retirement plan.
The Federal Employees Retirement System (FERS) Supplement provides a financial bridge for eligible federal employees who retire before becoming eligible for Social Security benefits. This supplement ensures income continuity until regular Social Security payments can begin at age 62. It is fully taxable income.
Federal Taxability of the FERS Supplement
The FERS Supplement is treated as ordinary income for federal tax purposes. It is 100% subject to federal income tax, similar to a pension or annuity. This contrasts with Social Security benefits, where only up to 85% of benefits may be taxable depending on a recipient’s total income.
Recipients of the FERS Supplement must include the full amount as part of their gross income when filing federal tax returns. The Office of Personnel Management (OPM), which administers the FERS Supplement, reports this income on Form 1099-R.
Federal income tax withholding from the FERS Supplement is handled by OPM. Retirees can adjust their withholding by submitting a Form W-4P to OPM, to manage their tax liability and avoid underpayment penalties. Review withholding elections annually, especially if there are changes to income or tax situations.
State Tax Implications
While the FERS Supplement is fully taxable at the federal level, its treatment for state income tax purposes varies significantly across jurisdictions. Some states do not impose a state income tax at all. These states include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Other states may tax pension income, including the FERS Supplement, fully, or offer exemptions. Some states exempt all pension income; others provide exemptions based on age or income thresholds.
Retirees should understand their specific state’s tax laws regarding pension and retirement income. Consulting state tax authority resources or a tax professional is recommended to determine specific tax implications.
How the FERS Supplement Relates to Social Security
The FERS Supplement is designed to serve as a temporary income bridge for federal employees who retire before reaching age 62, the earliest age at which Social Security benefits can begin. It provides a portion of Social Security benefits earned through federal service until the retiree becomes eligible for Social Security payments. This supplement is administered and paid by OPM, not the Social Security Administration, despite mimicking Social Security benefits.
Unlike Social Security benefits, which have specific taxability rules, the FERS Supplement is 100% federally taxable as regular income.
Receiving the FERS Supplement does not obligate a retiree to begin drawing their Social Security benefits at age 62, nor does it reduce future Social Security benefits. Retirees can choose to delay claiming Social Security until a later age, up to age 70, to receive higher monthly benefits. The FERS Supplement will, however, cease at age 62 regardless of when Social Security benefits are initiated. The supplement is subject to an earnings test, similar to Social Security, which can reduce or eliminate the benefit if earned income exceeds certain annual limits.