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|Federal Pensions in Divorce
By Tim Voit, Financial Analyst
Retirement plans tend to be the largest marital asset in a divorce, in terms of value, whether you are a family law attorney dealing with these issues on a daily basis, or an attorney who knows of (or is related to) a federal employee, here are some important issues to consider if the federal employee you know is going through a divorce. Federal employees include, only in part, employees of the U.S. Postal System, IRS, FBI, Department of Labor, Transportation, FAA, Homeland Security and alike. This article touches on what is at stake with regard to retirement plan assets, how to protect the federal employees' interest, or that of the former spouse depending upon who you represent, and whether to offset the value or divide the retirement plan by a court order (deferred distribution).
Issues related to federal pensions are many times not addressed adequately in the settlement agreement, and therefore make it difficult to go into much detail in a Court Order Acceptable for Processing (COAP), the federal government's functional equivalent to a QDRO in the private sector. In a COAP, a slight change in verbiage can mean tends of thousands of dollars in favor of one or the other spouse.
As with any pension plan you either determine it's value, for purposes of offsetting one-half of the marital value with other assets, or the pension is divided by a court order (COAP). There also tends to be some misunderstanding of what will be provided to a former spouse of a federal employee, pursuant to a court order division, and sometimes terminology and benefit options are confused with what is provided in the private sector. Government pension plans are exempt from ERISA (Employee Retirement Income Security Act of 1974) and therefore benefits which can otherwise be provided in a QDRO, pertaining to private sector pension, will not apply to government pension plans .
Legal or QDRO malpractice also begins with the client's expectations and when they do not receive what they expect, or what they are told they will receive, you as the attorney or advisor will have a problem difficult to resolve many years later.
There are also three major federal retirement plans most commonly encountered in divorce. They are the Civil Service Retirement System (CSRS), the Civil Service Offset plan, and the Federal Employees Retirement System (FERS). Each are very different in the calculation or payment of the benefit and which of the three a spouse will be participating in will likely be determined by the period of time the federal employee began federal employment. Other federal pensions not mention, but similar to either of the above, are the Judicial Retirement system, for federal judges, the State Department Retirement System, Foreign Service, and United Nations to name a few. CSRS and FERS are the most common and therefore will be the only pension plans referred to in this article. The above retirement annuities are automatic, or in other words, participation is mandatory. A separate and distinct but common plan that is voluntary is the federal Thrift Savings Plan or TSP.
Discovery Tip: If a federal employee makes a claim that they only have a TSP account, undoubtedly they will have a FERS or CSRS pension benefit as well. Again, CSRS/FERS participation is automatic, while TSP is voluntary.
There are generally two types of retirement plans, defined benefit (pension) plans, again designed to pay out a monthly pension benefit, and defined contribution plans (401ks, etc) which are comprised of an account balance whereby the value depends on the underlying marketable securities, e.g. mutual funds. CSRS and FERA are defined benefit plans designed to pay out a monthly pension benefit for life with annual increases.
What is confusing to some is that the federal pension plan does allow for small employee contributions, however employee contributions into a pension plan should not be confused with the value, as the plan is still designed to pay out a monthly pension benefit. This monthly pension benefit, for which the value pf the pension is derived from, most often far exceeds the amount of the employee contributions.
The employee (only) contributions into a federal pension are not even related to the benefit that will actually be paid out and only serves to provide a small death benefit in the event the federal employee dies unmarried or shortly after retirement.
For example, a FERS participant claimed that their $4,000 employee contributions was the present value of their FERS pension, with almost 20 years of service, keeping in mind that the contributions for FERS participants are a great deal less than for CSRS participants. Therefore, $4,000 over 20 years would appear somewhat understated. In actuality, the participant may have accrued a monthly benefit of approximately $1,000 per month after 20 years payable at their age 60, or $12,000 annually, resulting in a lump-sum present value nearly ten (10) times the value of the employee account balance, or approximately $60,000 in present value terms depending upon their current age.
In reality, the government's portion of the contributions, including funding the annual cost-of-living adjustment (COLA), constitutes the majority of the overall value of the monthly pension benefit. This means that the employee contributions alone fall way short of the actual value, yet sometimes the employee account balance is the only information provided to the attorney.
Again, if you represent the non-federal employee, and the otherside provides documentation as to the "amount" of the "employee" contributions, it is not wise to accept this as the value. This is true of many municipal pension plans similar in plan design as the federal pensions. Employee contributions of twenty or thirty thousand dollars into some of the municipal pension plans will not fund, or provide for, $3,000 per month for the rest of someone's life (with cost-of-living-increases).
If there are not sufficient assets to allocate to the former spouse, in lieu of dividing the pension benefit, it is only logical to divide the pension by a court order (COAP) wherein each party shares in the benefit at retirement. Dividing the benefit opens the door, however, to a whole host of issues not yet addressed and not often contemplated by the parties, the attorneys, or even the courts.
Practice Pointer (II): The Office of Personnel Management (OPM) who administers the plan will NOT calculate accrued benefits as of certain date, which is almost always needed in a divorce for valuation purposes. Finessing of the language is all that is necessary if the monthly CSRS/FERS is to be divided by a COAP.
Caution: If the FERS or CSRS pension is divided by a court order, if the non-employee spouse is awarded "one-half of the employee contributions" and the participant elects to receive a monthly pension benefit instead of a refund of contributions, the non-participant spouse would receive nothing upon the participant's retirement, because the order awards contributions and not a portion of the annuity (monthly pension benefit).
With regard to using a court order to have the pension benefits paid to a former spouse of the U.S. federal employee, a few issues are worth pointing out. The FERS and CSRS plans do not accept the same terms and conditions as QDROs. QDROs apply to private industry retirement plans, although some government plans accept the term or title "qualified domestic relations order". The court order still cannot provide the same type of benefits as a QDRO, except for the Thrift Savings Plan.
If dividing the accrued pension benefit by a court order, remember that the plan is designed to pay a monthly pension benefit, therefore the order should be drafted with emphasis placed on the monthly amount to be paid. Although the FERS and CSRS plan allows for a refund of employee contributions, this is rare since doing so would forfeit all of the employer or government's paid benefits. You may consider stating that the employee is not to elect a refund of employee contributions. Also keep in mind that if the employee dies all benefit payments will stop unless the non-employee spouse is also awarded survivor benefits, or a portion of the survivor annuity based on their share.
Other considerations when dividing the CSRS or FERS by a COAP, is whether the former spouse's share is to revert to the federal employee spouse, should the former spouse predecease the federal employee, or paid to the former spouse's estate. The former spouse's can also be paid to the children of the marriage so long as the federal employee spouse is alive. Keep in mind that the difference between CSRS and FERS is the fact that CSRS predates Social Security and therefore CSRS members receive a portion in lieu of Social Security. In fact the difference in the contribution rate, between CSRS and FERS, is 6.2% coincidentally what individuals pay into Social Security. Because Social Security is not a marital asset consideration should be given to the CSRS member to discount their CSRS annuity by a Social Security element. For more on this issue visit http://www.vecon.com/articles/csrsfinal.htm.
Tim Voit is the author of Federal Retirement Plans in Divorce - Strategies and Issues, available through www.vecon.com, and Retirement Benefits & QDROs in Divorce, a CCH publication. Mr. Voit is also the author of several articles on pensions in divorce. For the rest of the article on Federal Pensions visit http://www.vecon.com/articles/csrsfinal.htm
For more articles regarding divorce financial planning/investment , visit http://www.divorcemag.com/articles/Financial_Planning/
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