How is My “High-3 Average Pay” Calculated? (Part 2)

Editor’s note: This is the second of a two-part series on the high-3 average pay.

This Part goes into a little more detail about the three basic aspects of the high-3 average pay calculation (see part 1, How is My “High-3 Average Pay” Calculated? (Part 1)).

Again, by definition, the “high-3 average pay” is the “largest annual rate resulting from averaging an employee’s rates of basic pay in effect over any period of 3 consecutive years of creditable civilian service, with each rate weighted by the length of time it was in effect.”  Let’s look at the basic aspects of this calculation in more detail.

Rate of basic pay:  Part 1 of this series told you where to find the most reliable “rate of basic pay” for retirement purposes:  Box 20C on SF 50s or official pay charts.

Why are your pay slips and tax records not reliable sources for your basic rate of pay?  Following are just a few reasons why your official rate of pay and your actual pay records will differ:

1. Rounding of figures in the calculation of your periodic pay (biweekly, bimonthly, monthly, etc.) causes the pay you actually receive to be slightly different from the official annual rate of basic pay.  This makes both your pay slips and your W-2s less-than-optimal sources of basic pay data.Example:  Biweekly pay is usually calculated by dividing the annual rate of basic pay by 2,087 work hours, then multiplying the hourly rate by 80 hours.  When multiplied back out to a year, the annual rate is slightly different due to rounding.
2. Regular overtime pay, awards, bonuses, and other forms of pay are usually not included in the rate of basic pay for retirement purposes.  Therefore, if you worked overtime or got awards during the tax year, your W-2 will reflect a higher total salary than shown on your SF 50.(Remember that your W-2 doesn’t reflect tax-deferred and non-taxable items like traditional TSP contributions and health insurance premiums.  Add those to the wages shown on your W-2 to see your total income figure.)
3. Changes in the rates of basic pay are not tied to the tax year, so it’s common to have two or more rates of basic pay during a single tax year.

Because of these potential differences, always look for the applicable rate of basic pay on SF 50s or official pay charts.

Any period of 3 consecutive years of creditable civilian service:  This is literally the highest-paid 3 consecutive years of service which are creditable under your retirement system.  For most employees, this is the last 3 years of service — but not always.

So when might the 36 months immediately before your retirement not be your highest paid consecutive years of creditable civilian service?  These scenarios are examples:

1. Your last, highest-paid years of service might not be consecutive.  They might be interrupted by breaks in federal employment or breaks in FERS or CSRS coverage.Example:  Perhaps you left federal employment for a while, returned at the same or a higher rate of basic pay, then retired after working only 2 more years.  Your break in service is not creditable civilian service and would be completely removed from the computation.  Your “consecutive years of creditable civilian service” would include your last 2 years of federal employment and the last year of federal employment immediately before the break.
2. Your last years of service might not include your highest-paid years of service.Perhaps you followed your dream to be an Art Therapy Assistant (Grade 7) after many years as a Management Analyst (Grade 14).  After 5 years in your new position, you retire.  Your last years as a Management Analyst would most likely be used for your high-3 average pay calculation, instead of your final years of service at Grade 7.

Leave Without Pay (LWOP) and other non-pay absences (such as furloughs) are usually considered creditable civilian service for retirement purposes – to a point.  Such absences are creditable for retirement purposes unless the absence exceeds 6 months in a calendar year.  If the absence exceeds 6 months in a calendar year, then the time that exceeds 6 months is not creditable.  The clock begins again at the beginning of the next calendar year, when you are given a new non-pay absence window of 6 months.

Since only the time that exceeds 6 months in a calendar year is considered “excess” and therefore not creditable, there is no impact until you have accrued at least 6 months and 1 day of non-pay absence.  At that point, the impact is only the 1 day that is considered “excess.”

If you end up in an extended LWOP or furlough situation during your highest-paid 3 years, then the starting date of your high-3 period will be adjusted to include earlier service equal to the excess non-pay time.

This employee had 4 months of excess non-pay absence in 2013.  Therefore, the starting date of his high-3 period will be 4 months earlier than usual, and the 4 months of excess non-pay status will be removed from the calculation.  This employee’s high-3 average salary period would normally be 7/1/2011 – 6/30/2014, but it will be 3/1/2011 – 6/30/2014 instead, with September – December 2013 completely removed from the calculation.

As you can imagine, non-pay status of more than 6 months in a calendar year usually has the impact of reducing the high-3 average pay, since the non-creditable service is replaced by time at an earlier, usually lower rate of pay.  Non-pay status of less than 6 months in a calendar year, however, will be included in the computation as if the time had been worked and will not impact the computation.

Note:  Some special types of non-pay status are considered creditable service even if they exceed 6 months in a calendar year.  Common examples of these are LWOP while on Workers’ Compensation and non-pay status due to active duty military service for which a deposit has been completed.

Each rate is “weighted” by the length of time it was in effect:  Part 1 of this series thoroughly addressed the concept of a weighted average.

Following is an example that reflects the lack of general pay increases over the last years:

An employee who was a GS 13, Step 10, in the DC area for the last 3 years before retirement and retired on 12/31/2012 had a high-3 average pay calculation that looked like this:

So there you have it:  the basics and some detailed information about the high-3 average pay calculation.  Your servicing personnel office has the resources necessary to estimate your high-3 average pay in connection with a retirement annuity estimate, but OPM will have the final word.