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Dividing Benefits with the Civil Service Retirement System

by

Timothy C. Voit, Financial Analyst

Can it be equitably divided by a Court Order? Not without some safeguards and an extremely good working knowledge of the plan. We are very persistent in telling you that discovery, analysis and evaluation of benefit options should be thoroughly completed before the negotiation and/or drafting of a Court Order commences. This cannot be overemphasized in regard to a Court Order for the Civil Service Retirement System (CSRS). In fact, the attorney with greatest knowledge of the CSRS will undoubtedly secure the most valuable of options and safeguards for his/her client. The attorney with the least amount of knowledge will undoubtedly relinquish valuable options and benefits for his/her client. It's even possible to draft an Order with the knowledge that if certain procedures are adhered to upon application of benefits that the non-participant former spouse will receive nothing at all!

This type of Court Order is not consistent with traditional type non-governmental plans. The Order is called a "Qualified Court Order" (QCO). The major difference between a QCO and a "qualified domestic relations order (QDRO)" is that the CSRS is exempt from the Employee Retirement Income Security Act of 1974 (ERISA) and the Retirement Equity Act of 1984 (REA-84), which amended certain ERISA sections to improve delivery of retirement benefits to former spouses. CSRS is exempt from ERISA under Sections 1003(b)(1) and 1051 of Title 29, United States Code because CSRS is a "governmental plan" as defined in Section 1001(23) of Title 29, United States Code. If you are not aware, this presents several problems in attempting an equitable division of the plan.

The most obvious of the problems that exist is that the participant maintains complete control of the benefit commencement date and benefit pay-out options. Even though the non-participant spouse is awarded a share of the plan benefits, the non-participant spouse has no control over the timing of the payment of benefits or the type of benefit payment. The non-participant must wait until the participant commences benefits.

The term benefits can be very ambiguous. If you divide a share of the monthly benefit and the participant chooses a refund of his contributions, the non participant receives nothing because the order divides an annuity and not a refund of contributions. The Order must be specific. The participant controls the commencement of benefits and the terms and conditions of benefit payment. It is possible in the Order to prohibit the participant from choosing a refund of contributions. This is a very important negotiable point. On the other hand, language could be inserted so that the non-participant would receive his/her share in the event the participant chooses a refund of contributions. What if the participant retires with a disability?

CSRS has many unique features not found in traditional defined benefit plans such as an annual "cost of living adjustment" (COLA). If the Order does not specifically state that the non-participant spouse shall participate in all COLA's that are applicable to the participant, he/she will not automatically receive the annual increase.

Survivor options are another confusing, but extremely important, negotiating issue. Survivor benefits differ from a plan that is in "pay-status" to a plan that is not in pay-status. Unlike a traditional defined benefit plan, a participant can change a beneficiary or survivor benefit after the commencement of benefits, provided he/she is not prohibited from doing so in a QCO. For example, a participant could change the survivor benefit payable to a former spouse and name his/her subsequent spouse as the beneficiary. Or they may cancel the survivor option and change it to a single life annuity option thereby increasing his/her monthly benefit anywhere from 5.5% to possibly as much as 40%. This issue should be considered at the time a present value calculation is being considered. The negotiating implications are that the attorney can secure an excellent concession for other options or benefits.

During the pre-retirement period, it becomes even more confusing. Most importantly, the QCO cannot secure a survivor benefit for the non-participant spouse without the possibility of total loss of survivor benefits if the non-participant is under age 55. The reason is that the plan terms and conditions automatically disqualify a former non-participant spouse from receiving survivor benefits if he/she remarries before age 55. In fact, if survivor benefits are in pay-status and the former spouse remarries, they will automatically cease. If for some reason the payments continue, the non-participant spouse will have an indebtedness to the Office of Personnel Management that can be legally enforced to repay the amounts received in error.

The CSRS has other factors to be considered that are much too numerous to cover in this brief writing. This office has many solutions to the options available and deficiencies in regard to non-participant safeguards in CSRS. We also have a considerable amount of experience in dividing pension assets in other "non ERISA" plans as well.

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