Taxation of lump-sum annual leave payment

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Q. I understand that the lump-sum payment for unused annual leave is treated as wage and salary income and is subject to federal and state (if any) income tax, FICA (Social Security) and Medicare taxes. How is it treated for Thrift Savings Plan purposes? Are individual and government matching contributions made? Can a retiring employee top up their contributions from the lump sum (up to the IRS-determined maximum)?

A. It’s considered earned income for tax purposes, but is not eligible to TSP deferral nor does it serve as the base for automatic agency contributions.

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