U.S. Federal Pensions in Divorce – Value for Offset or Divide by Court Order?
Including Commentary on U.S. Military Outside the U.S.
By Tim Voit, Financial Analyst
Voit Econometrics Group, Inc.
Naples, Florida, USA
U.S. retirement plans, for those U.S. citizens or employees of the U.S. Federal Government, are often mishandled in divorce cases around the world. Mishandled in either determining the value of the pension plan, the pension amount considered marital, or mishandled in how to divide the benefit pursuant to a court order. It is hopeful that the following assist the courts, the attorneys, or simply the readers in understanding the federal and military benefits in the context of divorce. This article is not meant to favor the federal employee or the former spouse, but draws attention to what each party should be concerned with in regard to valuing or dividing federal pensions.
The family law attorney outside the U.S. confronted with a U.S. private pensions, or U.S. Federal pensions in particular, should pay careful attention to what benefits can actually be paid out - currently, in the future, in a lump-sum, or only as a monthly payment at some retirement age.
The emphasis here in this article will be on U.S. federal pensions, which are encountered most often in other countries. U.S. Military retired pay is also addressed, briefly, at the end of this article but covered more extensively in another article.
Often times the courts in other countries will expect that a retirement plan can, or will, make a lump-sum distribution to a former spouse in a divorce when, in nearly half of all the cases, this cannot be done, either because the plan is designed to pay out only a monthly pension payment or the plan has limitations on when a distribution can occur if they do allow for lumps-um distributions. A local court cannot order a retirement plan governed under federal laws to make a distribution at their choosing or within a certain time period. This not only applies to the federal government retirement plans, but to private sector retirement plans as well.
In effect there are two different types of retirement plans here in the U.S., with the same two types found in other countries as well, that is, a defined contribution plan and defined benefit plan. A defined contribution plan, otherwise referred to as a savings plan, profit sharing plan, employee stock ownership plan, is a retirement account comprised of marketable securities (investments) which are based often on employee and employer contributions.
A defined benefit plan, often referred to as a pension plan, is designed to only pay out a monthly pension benefit at some pre-defined retirement age in the future and is generally 100% employer funded with very little or no employee contributions. These monthly pension payments are for life and can be adjusted annually (increased) for cost-of-living. Most pensions in the private industry of the U.S. (non-government) do not generally increase benefits after retirement, however most U.S. government plans do. The increases are applied to the retirement benefit itself and should not be confused with cost-of-living increases between the date of divorce and retirement. The increases, whether referred to as cost-of-living-adjustments (COLAs) or not, if applied to the retirement benefit are considered a normal form of benefit and not something that accrued after the marriage, in other words it is typically part of the retirement benefits.
It is worth mentioning that pensions, again which are designed to pay a monthly pension payment, are generally valued, where a lump-sum present value is determined as of a certain date, say the date of separation. This present value represents the amount necessary to pay pension payments in the future, but should not imply that the pension plan can pay a lump-sum. The lump-sum value is only used to buy out or offset the value of the other spouse’s share. In essence, one-half of the value is given to the former (non-employee) spouse, with cash or other assets in exchange for giving up their share (or rights) to the pension.
The defined contribution plans, for example, 401(k)s, savings plans, profit sharing plans, stock plans, have account balance and the value is whatever the account is worth on any given day.
When Are Federal Pension Benefits Paid? With regard to the U.S. Federal pensions, they are specifically designed to pay out a monthly pension payment at a certain retirement age based on years of service. A non-law enforcement federal employee (general employee) can receive a pension benefit at age 62 having worked more than 5 years, age 60 with more than 20 years of employment, or any age after age 55 with 30 years of service, depending on year of birth. If a general or regular federal employee terminates employment before retirement, benefits are only payable at age 62. This is important in pension valuations because the valuation should not predict the future but rather deal with the facts as known at this time. In other words, if an employee, or pension plan participant, has 21 years of service, the pension should perhaps not be valued at their age 55 assuming they will attained or accrue 30 years of service.
Aside from the different types of retirement plans, the U.S. federal government has two pension plans, the Civil Service Retirement System (before 1984) and the Federal Employees’ Retirement System (FERS) for those that started after 1984. It is also representative of many municipal plans, which provide retirement benefits for employees of local government institutions.
The difference between FERS/CSRS and traditional non-governmental plans could mean tens of thousands of dollars, in terms of offsetting marital property values in divorce, or result in valuable benefits lost with regard to dividing these plans pursuant to court ordered division.
The federal government also offers the federal employees an opportunity to participate in the Federal Thrift Savings Plan (TSP) which both the employee and employer contribute to and has an account balance. If someone is knowingly (or unknowingly) trying to claim that the only plan they have is the federal TSP plan, this is not true. If they have a TSP account, they will also automatically have a FERS or CSRS pension benefit payable in the future, since the FERS/CSRS cannot be opted out.
Tip: You may hear from your client that their spouse only has the Thrift Savings Plan. An individual cannot waive participation in either FERS or CSRS, therefore, if only provided with a TSP Account Statement inquire about the pension and obtain a statement of benefits regarding the pension plan. The value of the pension is often worth more than the TSP account.
Defined benefit plans are often overlooked because they do not generally have account statements mailed to the parties’ home, this, since the pension benefit is not based on any account balance. The pension benefit is based on years of service and average annual income in which a pension benefit simply accrues over time. It is paid out of a pension fund.
Plan Administrator of Federal Pensions: Both the FERS and CSRS plans are administered by the same plan administrator in Washington, D.C., the Office of Personnel Management (OPM), but if the divorce occurs prior to retirement, information will have to be obtained from the employing entity or agency.
Tip: OPM will not compute an accrued benefit, accrued as of a particular date. Often they will provide a “projected” pension benefit, typically used for retirement planning purposes. This will include future years of employment and future earnings up to an assume retirement age. If you represent the employee spouse, request from the employer a calculation of the accrued monthly pension benefit as though they terminated employment as of the date of divorce, or date of separation. The accrued benefit would then based on years of service, and earnings, up to the date of divorce. You can use the accrued benefit to determine the lump-sum present value of the FERS or CSRS pension.
Employee contributions into the FERS or CSRS is not the value! In many cases, we have seen settlements between divorcing parties mishandled because it was assumed that the employee contributions into these pension plans (CSRS or FERS) represented the lump-sum present value. The value is the present lump-sum value of the monthly pension to be paid based on statistical life expectancy and mortality (probability of death). The employee contributions are unrelated to the monthly benefit the participant will receive at retirement. In fact most, if not nearly all, pension plans in the private accept no contributions from the employee. If you accept the employee (only) contributions as the value of the FERS or CSRS pension, the non-employee spouse is then cheated out of the larger employer funded benefit.
Employee contributions into pension plans only exist to provide for, in part, a small death benefit in the event a plan participant dies unmarried, and/or to only partially offset the cost. It is not the value, i.e., the FERS and CSRS plans are not related to 401(k) savings plans.
As an illustration of this point, we observed a case where an employee account balance, or contributions, totaled approximately $50,000, yet their accrued monthly benefit, accrued as of the date of divorce, was $3,000 per month or $36,000 per year, payable for life. Therefore the employee contributions of $50,000 could not be invested to pay $36,000 per year for the rest of someone’s life, with annual increases applied to the retirement benefit!
In yet another example, a FERS participant claimed that their $4,000 employee contributions was the present value of their FERS plan, 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. Therefore, it is incumbent upon the attorney representing the non-plan participant to ask of the plan "what is the participant's accrued monthly retirement benefit as of a certain date" and “when” or at what age can they commence their retirement benefits.
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).
The primary difference between the FERS plan and the CSRS plan is that participants in the FERS plan also contribute to Social Security here in the U.S., while participants in the CSRS do not. This leads to the question of whether or not both plans should be valued in their entirety for purposes of property offset, since the Social Security benefits of the FERS participant, or other private plan participants for that matter, are not considered marital assets under U.S. Federal law.
CSRS employees receive more pension benefits than FERS because they will not receive Social Security. Therefore a portion of the CSRS pension benefit, or lump-sum value has to be deducted since Social Security is not a marital asset. For the CSRS pension benefit to be comparable to the FERS pension, and the fact that FERS employees also receive Social Security, the portion of the CSRS pension representing Social Security (enhancement) has to be determined and deducted from the CSRS value.
Tip: Although other cases exist around the country, this issue was addressed in Kelly v. Kelly, 198 Ariz. 307, 9 P.3d 1046 (Ariz. 09/14/2000) where the wife was in FERS and the husband was in CSRS. Here, the courts recognized that valuing or dividing a husband’s CSRS retirement benefit was also awarding a portion of his social security, or what he would have receive in equivalent benefits, yet without any adverse affect on the wife’s social security benefits.
One method of extracting out the enhanced portion of the CSRS benefits, otherwise referred to as the Social Security element, or benefits in lieu of Social Security, is to calculate what the Social Security benefit would have been had the participant contributed to Social Security during their years of participation in the CSRS plan. This entails compiling the participant's earnings history under the Plan, information often available through the participant's employing entity, and then proceeding to enter this information into the Social Security program to determine a Social Security benefit. A present value is computed based on this benefit and subsequently deducted from the overall present value of the CSRS plan.
Another approach is to determine the benefit that would have accrued had the CSRS plan participant been a FERS participant. The difference in the two calculated benefits would then give the attorney, or the courts, a clue as to how much of the CSRS is attributed to Social Security, or benefit in lieu of. The formula for computing the FERS benefit is quite simple, 1% x Years of service x average salary over highest 3 years. The CSRS is a little more involved but either formula is easily accessible via the Internet.
It should be apparent that the deduction of the Social Security element from within the CSRS pension benefit greatly depends on the circumstances of the case. Again, a classic example is when one spouse is in the CSRS plan and the other spouse is in the FERS plan, yet the Social Security benefits of the FERS spouse, or any spouse in the private sector, is not considered in the equitable division of marital assets. However, nor should the entire value of the CSRS pension be considered because of this issue of the Social Security element, or enhancement. It should also be noted that another aspect of the plan federal employees may participate in, is the CSRS Offset. CSRS Offset participants do contribute to Social Security, much like FERS, however upon commencement of Social Security the CSRS benefit is reduced, or offset, by the amount of Social Security received, the opposite of what occurs when one is a full CSRS participant.
As with most pensions or retirement assets in divorce, they should first be valued to determine whether or not the participant can retain the entire pension without the need for drafting an Order to divide the benefit, with the objective being to provide for an equitable distribution of all retirement benefits. Valuing the monthly benefit, for either FERS or CSRS, is performed much the same way as any traditional defined benefit pension, however, factoring in the annual cost-of-living-adjustment should not be ignored. For instance, a 2 to 3 % COLA increase can increase the lump-sum present values upwards of approximately one and a half times, a valuable aspect of the Plans sometimes overlooked by evaluators.
Court Orders Acceptable for Processing (COAPs) & Court Ordered Sharing of a Pension: Lastly, 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. The federal government will also not accept court orders from other countries, so the attorney in any country outside the U.S. will have to have the court order entered here in the U.S. or the pension valued and more marital assets awarded to the non-employee spouse in stead of sharing in the pension.
Our firm can and does assist law firms around the world on valuing U.S. pensions and dividing them by a court order or QDRO. Please contact our office if you have any questions relating to the issues mentioned in the preceding paragraphs.
Tim Voit is the author of Retirement Plan Benefits & QDROs in Divorce, published by CCH and available through CCH’s online bookstore, and an expert at determining the value of retirement plans. Tim Voit also drafts court order and QDROs to divide pension plans around the U.S. and in other countries. Tim Voit teaches at the International College classes on the Valuation of Retirement Plans and has developed online programs or both the International College, now Hodges University, and CCH for Continuing Legal Education course. Mr. Voit provides expert witness testimony in the valuation of pension benefits and drafting QDROs or like orders in several states and countries. Tim Voit provides questions and points of interest to the attorney for trial and can testify on these issues at an affordable fee anywhere in the world. Questions, or general inquiries can be made by contacting Tim Voit via email at firstname.lastname@example.org
Valuing & Dividing Military Retirement Benefits
Timothy C. Voit, Financial Analyst & Todd K. Voit, PhD, Economist
The U.S. Military retirement is similar to the federal government in that it does not accept nor recognize, qualified domestic relations orders (QDRO’s) to divide retirement benefits or retired pay. However, like the federal government, the military a Court Order Acceptable for Processing, similar in some respects to a QDRO. Specifically, the division of military benefits is governed under the Uniformed Services Former Spouses’ Protection Act (USFSPA) under Title 10 U.S.C. Section 1408. While the Act is a method of enforcement of federal law, the question of divisibility and entitlement is a state law issue.
Valuing the Military Retired Pay
Benefits are payable to a full-time active member at any age after accruing 20 years of service. Depending upon the age at which the member attains twenty years of service, the greater the lump-sum present value will be. Keep in mind that this is a defined benefit plan and that no account balance exist. We have observed other “experts” assume that there is an underlying account balance in which the monthly benefit is amortized into a principal and interest portion.
Benefits are strictly paid based on the member’s years of service and rank. The same is true for Reservist or the National Guard except that points are accumulated and the Reservist, or National Guard member, cannot commence benefits until their age 60. The benefit then is based on the number of points accrued and the Reservist’s rank. Given the difference in the retirement ages or eligibility dates, the lump-sum present value for the reservist is not going to be as large as say for an active full-time member with twenty years or more of service that can retire at any age.
For property offset purposes, a value can be determined even though the individual has not yet vested. Vesting is not an issue in divorce and in the United States. The most recent paychart should be obtained and utilized for the purpose of determining an accrued benefit, as of a particular date such as the date of separation, and valued based upon the appropriate retirement – age 60 for Reservist and National Guard, or the age a full-time active person is expected to attain 20 years of service.. A competent expert familiar with the Military should be used to value such benefits.
Other issues surrounding the lump-sum present value of the monthly military retired pay is the Cost-of-living-Adjustment (COLA), pay grade or rank at the time of marriage, as well as at the time of divorce. This is one plan where for Reservist and National Guard, the value of the points increase prior to retirement based upon the increases in the basic pay (income before retirement). In effect the points become more valuable as time goes on. This is important if the court is going to award a share of the military retired pay through a court order.
If you represent the former spouse of the military member, you may consider awarding points. If you are the Military member, or their attorney, you would want to quantify the benefit at divorce or separation and based the value or court order award on that accrued benefit.
Division of Benefits: According to the USFSPA
The Act provides several benefits to former spouses including direct payment of retirement benefits to a former spouse of a retiree, provided: 1) the amount of the award cannot be more than 50% of disposable retired pay1, 2) the period of marriage must over-lap 10 years of creditable service for purposes of property division, 3) the court cannot treat military retired pay as property unless the court has jurisdiction over the participant. This may be the state of domicile and not the home of record. The court order must also be entered in the United States.
The Act only allows for a division of “disposable retired pay”. Disposable retired pay is the total monthly retired pay to which a participant is entitled less amounts: owed to the U.S. Government for previous overpayments or recoupments, Deductions from retired pay due to a court martial fine, deductions for Survivor Benefit Plan (SBP) premiums, and most importantly, disability pay benefits.
Close attention should be paid to the latter of the four deductions. Disability pay is not treated as “retired pay” and is not divisible by state courts nor can a portion be awarded to a former spouse. However, it has in the past replaced retired pay dollar-for-dollar, therefore an incentive exist for the military member to claim as much as disbility as possible. This does not mean that a former spouse is still not entitled to their share, if their portion of the benefit is reduced, only that the military will not pay any portion considered disability directly to a former spouse. The same is true of the retirement benefit itself, and the ten year rule. Simply because the military will not make direct payments to a former spouse, because there is less than ten years of marriage that overlaps with service, does not, nor probably should not, imply that the court cannot order the military spouse to make direct payments to their former spouse.
Several other important points to consider when one, or both, parties to a divorce have military retirement benefits.
One-Year Rule: First, for a non-member spouse to be eligible for survivor benefits, the court order dividing the military retirement, or notification by the former spouse, or their attorney, asking to be retained as the survivor/beneficiary, must be receive by the DFAS within one year after the divorce. In other words, if you as an attorney are drafting the Order, and you fail to submit, and you fail to submit a Certified Copy of the Order by certified mail return receipt requested, within one year after the divorce, that non-member spouse will lose their eligibility for the Surviving Spouse Benefits. In addition, the spouse must submit a “deemed election” letter to be assured of SPB benefits.
Although it was mentioned earlier that benefits awarded to a non-member former spouse cannot exceed 50% there are some exceptions. For instance, up to 65% can be awarded when the question of child support and arrearages come into play. Also keep in mind that there can only be one beneficiary to survivor benefits unlike private pension plans where proportionate shares may be awarded when there is more than one former or subsequent spouse. Former Spouse and children coverage is also available.
In summary, when valuing or dividing military benefits, discovery cannot be overemphasized. When gathering information, it is important to note, that the Defense Finance and Accounting Service (DFAS) located in Cleveland, Ohio only has benefit information on a member at the time of retirement or after the member retires. For information on the member’s benefits prior to retirement, for purposes of valuing the benefit or division, the attorney can either seek out this information from the member’s chain of command or by contacting the Military Spouse’s personnel service centers:
A full and complete explanation cannot be covered within the scope of this article. The information presented here, and throughout this article, is meant to be informative and to assist the attorney in the discovery process. Readers are encourage to seek out competent legal and tax advice and not rely solely on the contents of this, nor other, articles presented by Voit Econometrics Group, Inc.. © 2008, Voit Econometrics Group, Inc.
1 the exception is for the Court Order to award the non-member spouse child support or child support arrearages therefore up to 65% can be awarded to a non-member spouse.