Fear of FERS: A Primer for Federal Pension Division
Article Date: Tuesday, May 01, 2012
Written By: Gene Brentley Tanner
Ms. Smith is going through a divorce. She meets with you to discuss her property division case. She mentions her husband’s employment with the federal government and asks what rights she has to the federal retirement and how she might be able to continue a flow of payments to her after he dies. She also is concerned with health care coverage and life insurance.
What should you tell her? Can you competently handle this case, or should you consider referring it out? Do you need to bring an expert or consultant on board? Ms. Smith could be any one of the many federal employees, retirees and their spouses who may consult with you. The purpose of this article is to provide you, the attorney, with answers to the same questions a client may ask in a federal pension division case.
First, it is important for the family law attorney to be aware that the current spouse who is going through a divorce is not automatically a “former spouse” for purposes of dividing the federal retirement. In order to qualify as a “former spouse, one must have been married to the federal employee/retiree for at least nine months and that employee must have at least 18 months of creditable federal service. To help you determine whether this requirement is met, you must for the employee’s entry date of service. The date of hire will also tell you which retirement system is involved. The Civil Service Retirement System (CSRS) covers most employees hired before 1984. The Federal Employee Retirement System (FERS) generally covers employees hired by the federal government after 1983 plus other federal employees who elected to transfer from CSRS to FERS. In order to determine the applicable entitlements which the former spouse may receive, you must first ascertain if the employee/retiree is a member of CSRS or FERS.
Once the determination is made that Ms. Smith is a former spouse and her husband is a member of CSRS or FERS, the family law attorney needs to compute the amount of creditable service. What is creditable service? Creditable service is service where the employee’s pay is subject to retirement deductions; each one is called a deposit. Timing matters as to when the creditable service was completed as well as to whether the creditable service was completed under CSRS versus FERS.
CSRS and FERS Overlap
If there is an overlap of service for CSRS and FERS, then the possibility of a transfer from CSRS to FERS coverage exists. If there was a transfer to FERS from CSRS, then the rollover of creditable service from CSRS to FERS will depend on when the service was completed. If the service was before Oct. 1, 1982, then no deposit is necessary for the credit, but the annual benefit will be reduced. If the employee’s service was on or after Oct. 1, 1982, then the deposit into FERS must be paid in order to gain the credit. There are instances where the federal employee did not make a deposit for creditable service in the past. There is a remote chance that the past deposits can be recouped. If federal service was completed before 1989, then the deposit for FERS can be paid retroactively to get credit under FERS. For federal service after 1989, it is almost impossible for deposits to be retroactively paid in order to recoup the missed years.
If there were refunds of retirement deposits made while the employee was covered under FERS, then you cannot redeposit the funds later in order to recoup the lost creditable years.
In addition, under a CSRS pension, it is important to factor in the employee’s/retiree’s unused sick leave when calculating creditable service. Accrued unused sick leave can count towards “creditable service” with CSRS if the retiree is entitled to an immediate retirement but not a deferred retirement. With FERS, unused sick leave is not creditable for annuity computation except in the limited area of CSRS to FERS transfers. It should be noted that the accrued sick leave can also be a stand-alone asset for property division.
After figuring out Ms. Smith’s rights as a former spouse, the type of coverage and the amount of creditable service, the family law attorney needs to consider where the federal pension can be divided, the formalities for the pension division order and specific federal codes that come into play. First, it must be stated that only a court of the United States, District of Columbia, Puerto Rico, Guam, Northern Mariana Islands, Virgin Islands or Indian (Native American) courts can divide a federal pension. As a result, no foreign property division will be honored by the agency which processes federal pension division orders, the Office of Personnel Management (OPM). Moreover, the Employee Retirement Income Security Act (ERISA) does not play any part in dividing CSRS and FERS pensions since both are exempt “governmental plans.” As such, there is no early benefit available to the former spouse. The drafter of the federal pension division order should also refer to the federal pension division order as a Court Order Acceptable for Processing (COAP) since the term QDRO is not an acceptable method to divide CSRS or FERS benefits. The only exception to that rule is if the pension division order expressly states that it is written in conformity with OPM’s regulations and actually is written in conformity with OPM regulations.
There are three components of the federal pension that can be divided. The first is the refund of employee contributions. Employees contribute a certain portion of their earnings each month toward the defined benefit annuity that they will receive upon retirement. This contribution can be refunded in lieu of receiving the employee annuity upon retirement. State court orders can prevent the refund of employee contributions but only if the former spouse has been awarded a portion of the employee annuity or a survivor annuity. Both FERS and CSRS permit a COAP to bar refunds of employee contributions. Why is such a bar important? Simply put, if the former spouse wants a continuous annuity payment, then the COAP should limit the employee’s ability to get the refund. Otherwise, she will be entitled to no survivor annuity. The best practice is to have the limitation on the refund of employee contributions in any order/agreement that references the division of the federal pension.
With the limitation on the refund of employee contributions in place, what share of the federal annuity will the former spouse be entitled to? While the formula used in N.C. Gen. Stat. §50-20.1 shall be utilized for the determination of the marital portion to be divided, it is important to understand what types of employee annuity is available. There are four types: immediate retirement, deferred retirement, early and discontinued service retirement, and disability retirement. The retirement type for which the employee/retiree qualifies determines the benefits available for the former spouse.
1. Immediate Retirement
First, there is no reduction with this annuity that exists with some of the other types. Moreover, under FERS, there is a retiree annuity supplement that is paid to the retiree up to the age of 62 as a means to approximate that retiree’s anticipated Social Security benefits. There is no retiree annuity supplement for CSRS. Lastly, in order to receive the immediate retirement, one of the following must occur:
• The federal retiree at age 62 needs 5 years of creditable service;
• The federal retiree at age 60 needs 20 years of creditable service
• The federal retiree at the minimum retirement age has at least 30 years of creditable service.
2. Deferred Retirement
In lieu of an immediate annuity option, a former employee who does not have enough creditable years of service for an immediate annuity can elect a deferred annuity. Employees with 10 or more years of service can start receiving the deferred annuity at the “minimum retirement age” (between 55 and 57 years of age). The employee can also opt to receive the deferred annuity after reaching the age of 62 in order to avoid an age reduction.
3. Early and Discontinued Service Retirement
If the employee is involuntarily separated or if the employee’s area of federal service is discontinued, the employee may be able to retire based on discontinued service or involuntarily separation from federal service. These are nuanced varieties based on whether the reason for retirement is due to reductions in work force, major reorganization of the agency or relocation of units and worksites. In these situations, the employee must be age 50 or above with at least 20 years of service, unless he has 25 years of service, in which case, age is not a consideration.
4. Disability Retirement
If the employee has at least 18 months of creditable service, then he or she may qualify for this.
The family law attorney also needs to consider what measures need to be taken in order to procure survivor benefits for the former spouse. There is a former spouse survivor annuity and the insurable interest annuity that is available. The insurable interest annuity is rarely preferred since it is more costly. As to the former spouse survivor annuity, the former spouse can receive this benefit if it is specifically ordered in the COAP and does not interfere with any other former spouse survivor annuity award for the employee based on prior orders or elections made by him or her. The survivor annuity for the former spouse will continue until one of the following events occurs: (1) the former spouse dies; (2) the former spouse remarries before age 55 (unless the marriage between the federal retiree and former spouse lasted at least 30 years); or (3) the court order specifies another terminating event. Note that a court order which awards a FERS survivor annuity will also award the former spouse a similar share of the basic employee death benefit unless otherwise indicated.
Often, a former spouse will ask her attorney whether the employee/retiree has to make an election for former spouse coverage. She may also ask whether a survivor election for another spouse will replace the court ordered survivor benefit. First, an election by the federal retiree is not necessary. Also, the court order awarding the former spouse a survivor benefit will trump any contrary elections made by the retiree so long as OPM, or other proper agency, has been served with the COAP.
With deferred retirement, survivor benefits are a little trickier. For instance, suppose a former employee, who is entitled to a deferred annuity, dies before his or her retirement commences. How do the survivor benefits work? The former spouse of a separated CSRS employee entitled to a deferred annuity can get survivor benefits only if the employee dies after age 62 and the employee filed an application for retirement benefits. Under FERS, the former spouse of a separated FERS employee entitled to a deferred annuity can get survivor benefits without the restrictions above. However, under FERS, a survivor annuity is payable only if an employee has 10 years of creditable service. Otherwise, the survivor benefit is payable only as a lump sum death benefit. Note that the former spouse, if eligible, can receive both the lump sum death benefit and the former spouse survivor annuity under FERS.
Your client will likely be concerned with the applicable costs associated with maintaining the former spouse survivor annuity coverage and which party is responsible for paying the premium. For starters, the maximum available survivor annuity is 55 percent of self-only (total retired pay with no deductions factored in) annuity rate for CSRS and 50 percent for FERS. The premium under FERS for survivor benefits is a 10 percent reduction in the total annuity if survivor benefits equal 50% of the total annuity, or a 5 percent reduction in the total annuity if survivor benefits equal 25% of the total annuity. For CSRS, the premium is 2.5 percent of the first $3,600 of basic annuity plus 10 percent of the remainder of the basic annuity. The COAP can require that the survivor annuity premium be paid solely by the retiree or the former spouse or that it be divided proportionally. By default, the survivor annuity premium will be paid from the employee’s annuity unless otherwise stated. Equally important, the premium for the survivor annuity must be paid from the employee annuity or the former spouse’s share of the employee annuity. The attorney should be sure that the former spouse annuity is sufficient to cover her share of the applicable cost for maintaining the survivor annuity if she is to be responsible for maintaining the coverage. Otherwise, there is a likelihood that the COAP will not pass muster with OPM and that could harm your client’s rights to survivor annuity benefits.
A notable area for possible mistakes by the family law attorney is in trying to modify the survivor annuity once it is established in a COAP that has been implemented by OPM. A modification of the former spouse survivor annuity in any court order shall not be effective if the modification is issued AFTER the date of retirement or death of the federal employee and that modification changes or replaces the first order dividing the marital property between the retiree and the former spouse. “Issued” means the date the order was actually filed with the clerk’s office. As a result, the use of “nunc pro tunc” as a means to sidestep this rule will not suffice. Also, keep in mind that within 18 months of the commencement date of the retiree’s annuity, the retiree can change his existing spouse survivor annuity election to provide coverage to a new spouse and as a consequence, diminish the former spouse annuity if there is not a filed order in place awarding the former spouse survivor annuity.
Where To Send The COAP
One consideration by the family law attorney might be where to retrieve the information about the employee/retiree and where to send the applicable court orders? If the employee is currently employed with the federal government, then the employing agency is the proper source for employment and pay information. If the employee retires, then the proper source for information is OPM. If the employee has moved around different agencies, then all information regarding the employee’s prior service is available only through OPM as to those prior services. As to where to send the COAPS, the proper place is to OPM.
Prior Military Service
There are also instances where a federal employee has prior military service and the employee combines that service with his federal service. In other situations, the former servicemember may be receiving a military pension while working as a federal employee. In those instances, the following should be considered by the family law attorney representing the former spouse. First, the receipt of military retired pay can bar “credit” for the military service for the CSRS/FERS pension unless the retiring employee waives the military retired pay. In addition, if a share of the employee’s military retired pay has been previously awarded to a former spouse, the retiring employee cannot get credit for the military service for CSRS/FERS unless he or she consents to OPM continuing to pay the former military spouse the same amount under the federal retirement. Moreover, if the employee wants to take credit for the military service, a deposit must be paid to credit the service in order to establish rights to the annuity. There is one exception when the military service was performed before FERS coverage. In that instance, the military service credits will be computed using CSRS rules.
Federal Employee Health Benefits (FEHB) Coverage
Quite often, the former spouse will ask the attorney if he or she can continue to receive federal health, dental and vision insurance after the divorce. Former spouses of Federal employees or retirees may not continue to receive Federal Employee Health Benefits (FEHB) coverage under the employee/retiree’s enrollment AFTER divorce since he or she does not qualify as a family member. However, a former spouse may independently be eligible for continued medical coverage so long as they meet four criteria:
i. The former spouse must have been covered as a family member under the employee/retiree’s FEHB enrollment for at least 1 day during the 18 months prior to the divorce; and
ii. The former spouse must be entitled to receive a portion of the retirement annuity after the employee retires OR a survivor annuity at time the employee/retiree dies; and
iii. Within 60 days after divorce, apply to the agency employing office where the Federal employee works at the time of divorce (or OPM, if retired) by submitting written notice about wanting to continue FEHB coverage under the spouse equity provisions of FEHB law (if divorce happened after retirement and employing office is the retirement system). The application can be made by letter, written statement or use of Standard Form 2809; and
iv. The former spouse cannot remarry prior to age 55.
The COAP cannot make a former spouse of an employee or annuitant eligible for Federal Employees Dental and Vision Insurance Program (FEDVIP) benefits.
The attorney representing the former spouse should consider the issues surrounding the premium payment for the former spouse FEHB coverage. For instance, who pays the premium for the FEHB coverage? Can the premium be “shifted” to the employee/annuitant and paid from his or her annuity? As to those questions, the former spouse is responsible for paying the full premium although a court order or agreement can make the employee/retiree responsible for the cost by direct payment to the former spouse. However, it should be noted that the premium for FEHB cannot be paid directly from the employee/retiree’s annuity. It can be paid from the former spouse’s annuity or paid directly to OPM.
It is also important that the attorney makes the former spouse take steps to get Temporary Continuation of Coverage (TCC) during the determination of FEHB coverage by OPM. The Standard Form 2809 above can be utilized to apply for TCC in addition to the regular FEHB coverage. TCC can last up to 36 months following the parties’ divorce.
How long does FEHB coverage last? It depends on the type of annuities awarded to the former spouse. If the former spouse receives only a portion of the retiree’s employee annuity, then the former spouse is eligible for independent FEHB coverage only until the federal employee/retiree dies. In order for the FEHB coverage to continue until the former spouse dies, the former spouse must be awarded a survivor annuity in the Court Order Acceptable for Processing COAP. Also, FEHB coverage can lapse if the federal employee on whose service benefits the coverage is based leaves Federal service before establishing title to an immediate annuity or a deferred annuity or if the employee is separated from federal service and the requirements for deferred annuity are not satisfied. If the federal employee takes a refund of contributions or if the former spouse does not make the premium payments, then the FEHB coverage for the former spouse will lapse.
If the former spouse’s FEHB coverage lapses, can be it revived? The answer for the former spouse is most likely not. If the former spouse’s FEHB enrollment is terminated for any reason above, then there is no option to re-enroll. If the former spouse fails to pay the applicable premium, then the policy will be irrevocably cancelled after 15 days from when the former spouse receives notice of non-payment. The former spouse can petition OPM that circumstances beyond the former spouse’s control prevented him or her from making the timely payment. This petition must be filed within 30 calendar days from the date of termination and will have to be accompanied with a verification of the circumstances.
Federal Employee Group
Life Insurance (FEGLI)
One area that the attorney for the former spouse should contemplate is whether it is possible for the former spouse to get any rights to the Federal Employee Group Life Insurance of the federal employee/retiree. The answer is yes so long as an irrevocable assignment is made. The federal employee or retiree can make an irrevocable assignment to a third party of his or her FEGLI rights, benefits, or responsibilities for their basic, standard optional and additional optional insurance (but not Family optional insurance). This is the only way to transfer effectively ownership to a third party. Otherwise, the employee/retiree can alter the beneficiary at any point regardless of any prohibition in a state court order.
While every client whom an attorney represents is not a former spouse of a federal employee/retiree, the clients who fit that role have specific dilemmas which should be discussed between the attorney and the client. When a Ms. Smith retains you, it will be important to consider the principles as discussed in this article in order to ensure that you, as well as your client, have a full understanding of the pertinent issues that may arise. Otherwise, the former spouse may lose benefits and entitlements that he or she could have otherwise obtained. •
Brentley Tanner is an associate at the Law Offices of Mark E. Sullivan, P.A. in Raleigh, North Carolina. He can be reached at email@example.com.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.