Leaving federal service, whether voluntarily, through early retirement, or as a result of a reduction in force, triggers a series of benefit decisions that have permanent financial consequences. Understanding what happens to each benefit at separation, and what options are available, is essential before you walk out the door.
Your FERS Retirement Contributions
When you leave federal service before reaching retirement eligibility, you have two options for your FERS contributions.
You can request a refund of your contributions, including interest. The taxable portion can be rolled into a traditional IRA or eligible employer plan to avoid immediate withholding and taxes. This option provides cash in hand but permanently eliminates the service credit associated with those years unless you later return to federal service and make a redeposit.
Alternatively, you can leave your contributions in the retirement fund and elect a deferred retirement. With at least five years of creditable service, you can claim a monthly annuity once you reach the applicable eligibility age , 62 with five years of service, or your Minimum Retirement Age with 10 or 30 years depending on the pathway. The trade-off is that deferred retirees cannot carry FEHB coverage into retirement, which is a significant consideration covered below.
One important detail many departing employees miss: if you take a refund and later return to federal service, you can redeposit the refunded amount plus interest to restore the service credit. The longer you wait, the more interest accrues. Acting quickly if you plan to return is always the better financial decision.
Your TSP Account
Your TSP account stays open after separation as long as your vested balance is at least $200. You are always fully vested in your own contributions and the agency matching contributions. The 1% automatic agency contribution requires three years of service to vest, or two years for certain positions.
After separation, your options include leaving the funds in the TSP to preserve access to its low expense ratios and the unique G Fund, rolling the balance into an IRA or another qualified retirement plan, or taking distributions.
One critical point on distributions: if you separate from federal service during or after the calendar year in which you turn 55, you can withdraw from your TSP without the 10% early withdrawal penalty. This is the Rule of 55, and it applies specifically to the TSP. If you roll your TSP into an IRA before age 59½, you permanently lose this advantage. Any withdrawal from the IRA before 59 and a half triggers the penalty regardless of your age at separation.
For law enforcement officers and other special provisions employees, the penalty-free threshold is even earlier, age 50 with 20 years of covered service, or any age with 25 years.
Health Insurance (FEHB)
FEHB coverage continues at no cost for 31 days after separation. After that, you can elect Temporary Continuation of Coverage (TCC) for up to 18 months. Under TCC, you pay both the employee and government shares of the premium plus a 2% administrative fee. To put that in perspective, the government covers roughly 72 to 75% of your FEHB premium while you are actively employed.
Life Insurance (FEGLI)
FEGLI coverage continues free of charge for 31 days after separation. After that window closes, you have the option to convert your group coverage to an individual policy without a medical exam. Conversion is available regardless of your health status, which makes it particularly valuable for employees with existing conditions who might not qualify for affordable private coverage.
Converted policies are typically more expensive than comparable term coverage on the open market, so healthy employees may find private alternatives more cost-effective. The conversion option must be elected within the 31-day window; it cannot be exercised after that period closes.
FEDVIP and FSAs
FEDVIP dental and vision coverage ends immediately upon separation with no extension or conversion option.
Flexible Spending Account balances are handled differently depending on the type. Healthcare FSA funds can generally be used for eligible expenses incurred before the separation date. Dependent care FSA balances can typically be used for expenses incurred before the end of the plan year. Any unused balance beyond those windows is forfeited. Check with your agency benefits office on the specific rules for your plan before your separation date.
Your Annual and Sick Leave
Unused annual leave is paid out as a taxable lump sum at your current rate of pay. For long-tenured employees with significant leave balances, this payment can be substantial. It is issued by check, not direct deposit, so verify your address is current with your agency before you separate.
Unused sick leave has no cash value at non-retirement separation. It is simply forfeited. If you return to federal service, your sick leave balance is reinstated.
The Decision That Matters Most
The choice between taking a contribution refund and electing deferred retirement is the single most consequential benefits decision most separating employees face. The refund provides immediate cash but eliminates future annuity income and FEHB eligibility. The deferred retirement preserves both, but requires leaving contributions in the fund and accepting a gap in health coverage. Neither option is right for everyone, and the math looks different depending on your years of service, age, health situation, and plans for re-employment.
A Federal Retirement Consultant (FRC®) can model both scenarios against your specific numbers and help you make the decision that protects the most long-term value from your federal career.
