Dividing Federal Retirement Benefits in Divorce, 0919 KSBJ, 88 J. Kan. Bar Assn 8, 28 (2019)

AuthorBy Curtis G. Barnhill
Position88 J. Kan. Bar Assn 8, 28 (2019)

Dividing Federal Retirement Benefits in Divorce

88 J. Kan. Bar Assn 8, 28 (2019)

Kansas Bar Journal

September, 2019

Civil Service, Military Retired Pay & Railroad Retirement

By Curtis G. Barnhill

The federal government is an important provider of retirement benefits to tens of millions of Americans. The rights to these benefits arise from many different situations; for example, pension benefits for federal civilian employees; military retired pay for members of U.S. armed forces; and retirement benefits for private industry employees who worked for a railroad industry employer. These retirement benefits can be divided in divorce by court orders somewhat like qualified domestic relations orders or QDROs (although ERISA does not control any of these retirement benefits).[1] This article discusses these circumstances and provides the practitioner with practical advice on drafting and effectuating such division orders.

I. Federal Employees Pensions

Almost all civilian federal employees are participants in one of two retirement plans: either the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). Included in these two plans are federal civilian employees of the executive branch agencies, the U.S. Postal Service, Congressional employees, and certain employees of the U.S. Judiciary[2] FERS automatically covers civilian employees who began service on or after January 1, 1987; CSRS covers civilian federal employees who began working for the federal government on December 31, 1986 or earlier.[3]

Who participates in CSRS and FERS?

CSRS is a defined benefit plan under which an employee was required to contribute either seven percent or 7.5 percent or eight percent of the employee’s pay[4] The federal government matched that mandatory contribution.[5] The civilian employees in CSRS do not contribute or participate in social security[6]

FERS has three parts: participation in social security, mandated participation at a minimum contribution level in a 401(k)-like program known as the Thrift Savings Plan (see below), and participation in a defined contribution plan known as the Basic Benefit Plan.[7] For purposes of this article, the term “FERS” refers to the Basic Benefit Plan. Most federal employees now are participating in FERS. Some retired federal employees are in CSRS, and some older federal employees may be grandfathered participants in CSRS, or even participants in both CSRS and FERS. It is a good practice to always make inquiries as to which plan(s) a federal employee is participating in.

What is a COAP?

Retirement benefits under both FERS and CSRS are considered marital property in divorces under Kansas law.[8] As such, these retirement benefits can be divided as marital property, be assigned in whole or in part as maintenance, or can be assigned as child support. FERS and CSRS retirement benefits are divided by a “Court Order Acceptable for Processing” (COAP), not by a qualified domestic relations order (QDRO).[9] COAPs are approved and administered by the Office of Personnel Management (OPM) in the Washington, D.C. area.10 OPM will neither review nor comment on draft COAPs in advance.[11]

OPM strongly discourages the use of the term “QDRO” in orders dividing FERS and CSRS benefits.[12] The Employee Retirement Income Security Act of 1974, as amended (ERISA), does not apply to any retirement plan sponsored by a government entity, including FERS and CSRS. Therefore, avoid making references to ERISA or using ERISA language in any order dividing FERS or CSRS retirement benefits, or OPM is likely to disapprove and reject the order. [13]

Neither FERS nor CSRS use ERISA terminology; they have their own terminology in dividing retirement benefits. For example, “Employee” is the term used for the person participating in FERS or CSRS, not the ERISA term “participant.”14 “Former Spouse” is the term used for the ex-spouse who will receive a divided share, not “alternate payee.”15 “Retiree” is the term for an Employee in retirement status.16

How much does the Former Spouse get and when?

When negotiating a division of FERS or CSRS benefits, it is important to keep in mind that the Former Spouse will not be able to start receiving FERS or CSRS benefits before the Employee actually retires or withdraws contributions.17 FERS or CSRS benefits may be divided as (1) fraction or percentage of benefit, or (2) a formula whose values are readily ascertain-able on the face of the COAP, or (3) a fixed dollar amount.18 A pro rata share is defined in OPM regulations as a formula providing to the Former Spouse a portion that is, “one half the fraction whose numerator is the number of months of federal civilian and military service that the employee performed during the marriage and whose denominator is the total number of months of federal civilian and military service performed by the employee.”[19] This is essentially 50 percent of the marital portion.

An Employee’s benefit is generally paid in the form of a lifetime annuity. The COAP should specifically divide the Employer’s annuity and specifically direct OPM to pay the Former Spouse a portion of the Employee’s annuity.20 The Employee can also elect to receive some of the contributions back in a lump sum at retirement or withdrawal. Be certain to include in the property settlement agreement and in the COAP that the Former Spouse has a right to a share of any return of contributions.21

Both FERS and CSRS include cost-of-living adjustments (COLAs), which are determined annually. Employees may also get salary adjustments that might impact the Former Spouse’s award under the COAP.22 The Former Spouse’s share will automatically include proportional increases due to a COLA or salary adjustment under a COAP awarding either fractional, percentage or formula allocation of FERS or CSRS benefits, unless the COAP provides otherwise.23 An award of a fixed dollar amount in a COAP is interpreted by OPM to exclude COLA increases, unless the COAP expressly orders inclusion of COLA increases.24

If the Ex dies, does the Former Spouse still receive benefits?

The Former Spouse does not automatically have a right to survivor benefits under FERS or CSRS unless the COAP expressly provides for an award of a “Former Spouse Survivor Annuity” (FSSA) to the Former Spouse. The Former Spouse’s right to a FSSA should be explicated and clearly provided for in a separation agreement, or an adjudicated divorce decree or mediated agreement. Generally, the Former Spouse’s right to a FSSA terminates if the Former Spouse remarries before 55 years of age[25] (unless the Former Spouse and Employee were married at least 30 years before divorce). To be eligible for an FSSA, the Former Spouse must have been married at least 9 months to the Employee or Retiree who performed at least 18 months of civilian service covered by CSRS or creditable under FERS.26

MALPRACTICE ALERT: An award or assignment of a FSSA must be made in the first court order dividing the marital property of the Employee (or Retiree) and the Former Spouse.[27] OPM will not honor a court order that modifies or replaces the first property division order.28 Draft it right the first time! A “court order” means any judgment or property settlement issued by or approved by any court of any state.29 Tat includes property settlement agreements. Also, OPM will not honor a COAP that attempts to award a FSSA after the retirement or death of the Employee.30

Who pays for the FSSA? The FSSA is not free; there is a cost to it which is paid by a reduction in annuity payments.31 There are two options for paying for the FSSA: a reduction in the amount the Employee receives in annuity payments,32 or a reduction in the Former Spouse entitlement under the COAP.33 Which party pays for the FSSA should be covered in a property separation agreement, a mediation agreement or an adjudicated divorce decree. Otherwise, if the COAP is silent as to which party pays for the FSSA, OPM will collect the annuity reduction from the Employee’s annuity.[34]

The total FSSA benefits for all COAPs for an Employee cannot be more than 50 percent of the Employee’s benefits under FERS35 and not more than 55 percent under CSRS.36 The same basic COLA rules stated above apply to FSSA benefits.37 Generally, all of the above applies to divorces, annulments and separate maintenances, except for FSSA benefits. The Former Spouse can receive FSSA benefits under a decree of divorce or an annulment, but he cannot receive FSSA benefits under a decree of separate maintenance.38

Additional information on CSRS & FERS

The “Handbook for Attorneys on Court-ordered Retirement, Health Benefits, and Life Insurance under the CSRS, FERS, FEHB and FEGLI” (RI 83-116 July 1997) is a detailed and comprehensive guide to dividing CSRS and FERS benefits, as well as certain other benefits for federal employees. This handbook may be downloaded for free from the OPM website at: https://www.opm.gov/retirement-services/publications-forms/pamphlets/ri38-116.pdf

II. Thrift Savings Plan

The Thrift Savings Plan (TSP) is a defined contribution plan for federal civil service employees and military personnel.39 Each Employee’s individual account in TSP is funded through Employee contributions, and in some cases, employer contributions, and gains and losses on investments of the contributions.40 “[A] TSP account can be divided in an action for divorce, annulment or legal separation, or garnished to satisfy a participant’s past-due alimony or child support obligations.”41

Because TSP is a government plan, ERISA does not apply to TSP.42 The term “Participant” is used for the person participating in TSP.[43] “Payee” is the term used for the ex-spouse who receives a divided portion...

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