Dividing Federal Pensions By Mark Cherniak [As published in the Michigan Family law Journal, August/September 2005; This article is included as originally written and published with some changes or updates only. It should be used for general information purposes, and not as a complete up to date version as to the matters expressed. Thank you.]
Introduction There are significant differences between pensions for federal government employees and those for the private/local government sectors. As such, the family law practitioner should be familiar with some of the important differences and features when negotiating a federal pension division in a divorce or separation, or preparing the court order that actually divides the pension or other retirement plan. The four basic federal retirement plans are: Military pension, Civil Service Retirement System (CSRS), Federal Employees Retirement System (FERS), and Thrift Savings Plan (TSP), the TSP being akin to the standard 401(k) or other employment defined contribution plan. This article focuses on the two most common- the CSRS and FERS. The exact plan should be identified through discovery or otherwise. If the federal employee started employment after 1/1/84, then it will be a FERS plan, but the converse is not necessarily true; a CSRS employee hired before 1984 may have transferred into the FERS plan. An order dividing a federal retirement plan is not called a QDRO or EDRO, but a “Qualified Court Order” (QCO) or “Qualified Court Order Acceptable for Processing” (COAP). However, if the contents of the order otherwise meet the federal requirements, it may be accepted despite being misnamed a QDRO. (footnote 1) The parties are not referred to in the order as the participant and alternate payee as in a QDRO, but rather the “employee” and “former spouse”. A former spouse is eligible for a QCO if the former spouse is still alive, was married at least 9 months to the federal employee or retiree, and the employee was employed at least 18 months under either a CSRS or FERS plan. Unlike a QDRO, the QCO is not promulgated under ERISA or REA, (footnote 2) but falls under, and must refer to part 838 of Title 5, Code of Federal Regulations.
Benefit Options Unlike most private or local government plans, under a federal pension plan, the employee maintains complete control of the benefit commencement date and payment options. The former spouse must wait until the employee starts collecting benefits before receiving their own. In other words, there is no provision or the option that the former spouse may start collecting benefits when the employee reaches “earliest retirement age”, regardless of retiring. The QCO may designate a death beneficiary for the former spouse’s share of benefits, such as his or her estate or the parties' children. The federal pension will continue paying benefits to the estate designees or children for the duration of the retiree's life. If the order is silent on the issue, the former spouse’s annuity will revert to the employee if the spouse dies first. In dividing the benefit with a QCO, as with a QDRO, a percentage, flat dollar amount, or coverture fraction can be used, but there is no provision for payment over the former spouse’s lifetime. The coverture fraction, or “pro rata share” is defined as: A division of a fraction whose numerator is the number of months of federal service performed during the marriage, and the denominator is the total number of months of federal service performed. Often, "pro rata share' as defined under applicable law is not desired, which is the same as prospective coveture. Accrued coverture is preferred with the denominator of the fraction defined as the total number of months of service performed through a given date, usually the date of divorce. If the accrued coverture fraction denominator is used, it is important to include the point in time to which the fraction is applied short of actual retirement (date of divorce in the common case presented), and to state the fraction applies to the benefit payable as of that date in the hypothetical case the employee retired, or otherwise discontinued service, at that time. There are three types of federal retirement benefits subject to the QCO: Employee annuities, refunds of employee contributions, and survivor annuities, which if applicable, should be addressed by separate provisions in the QCO. Unless some other consideration is present in the total property settlement, a soon to be former spouse should not agree to just divide the employee contributions (nor value the entire pension based only on employee contributions), because if the employee chooses a monthly retirement benefit as an annuity, the former spouse will receive nothing. Moreover, there are significant employer contributions to the retirement plan, so dividing the employee contributions only, gives the former spouse a potentially significant shortfall. The QCO should include language protecting the former spouse from the employee seeking a refund of contributions, either barring any refund or dividing it with the former spouse.
Surviving Spouse Provisions Traditional surviving spouse benefits are referred to in federal plans as “survivor annuity, death benefits, or former spouse annuity”. As required by current Michigan law, (footnote 3) surviving spouse benefits must be specified in the divorce judgment to be included in the QCO, and a true copy of the judgment must be sent with the QCO to the plan administrator to verify this. A peculiar caveat for federal pensions is if the former spouse remarries before age 55, survivor benefits are automatically terminated. (footnote 4) One exception is if the parties were married more than 30 years. The order granting a former spouse annuity must be submitted before the employee’s retirement or death. Providing the entire former spouse annuity is not granted to one former spouse, the QCO can permit the employee to designate a subsequent spouse for any residual surviving spouse benefits. The cost of the annuity reduction to provide for a former spouse annuity is paid from the “gross” employee annuity, unless the QCO directs otherwise, but this direction is limited to a reduction from either the employee’s or former spouse’s annuity, as opposed to some other form of payment. “Gross” annuity is defined as the total employee annuity after providing for the former spouse annuity, thus in essence both parties pay for the former spouse annuity. If that is what the parties intend, generally no provision is needed in the QCO for this.
Plan Increases The QCO can provide for salary or pay and COLA adjustments at the same percentage as for the employee. These adjustments are automatically included if the former spouse’s annuity is based on a percentage or fraction division, unless the QCO expressly sets forth otherwise. An exception exists for COLA adjustments between the date of divorce/separation and the date of retirement; those are not automatically included and must be specified in the QCO to apply. Plan Administrator QCOs for CSRS and FERS plans should be sent to the Office of Personnel Management (OPM), which administers these plans at: Office of Personnel Management Court Order Division P.O. Box 17 Washington D.C. 20044-0017 The OPM is also the source of plan information for former employees and retirees; information on active employees must be secured from the employing agency. The OPM will not pre-approve proposed orders. Both the QCO and Judgment of Divorce (or Legal Separation) must be submitted in court certified form (not true copies). The former spouse must keep the OPM advised of a current mailing address, and should keep a court certified copy of the divorce/separation judgment when applying for benefits. As under ERISA for QDROs, the OPM must notify the former spouse if the QCO is rejected and the reasons for the rejection. An excellent treatise addressing dividing federal retirement plans in detail and other benefits is: A Handbook for Attorneys on Court-ordered Retirement, Health Benefits and Life Insurance, available free of charge on line from the United States Office of Personnel Management. (footnote 5) ___________________________________________________________________________ Footnotes: (1) The author of course does not suggest testing this, and the proper title should be used. (2) Employee Retirement Income Security Act and Retirement Equity Act. (3) Roth v. Roth, 201 Mich. App., 563 (1993); Quade v. Quade, 238 Mich. App. 222 (1999). (4) The termination before age 55 provision can also be avoided by providing for an “insurable interest annuity”, but these have their own limitations, are more expensive, and the plan cannot enforce orders to provide insurable interest annuities. (5) www.opm.gov/asd/pdf/ri83-116.pdf