Dividing Federal Retirement Plans and Divorce

As with most pensions or retirement assets in a divorce, they should first be valued to determine if an offset is possible. Deciding the value of a pension determines whether or not you (the federal employee spouse) can keep the entire pension on their side of the marital asset ledger without having to draft a court order to divide the retirement benefit.

As a rule, the Office of Personnel Management (OPM) accepts a functional equivalent of a qualified domestic relations order (QDRO), referred to as a Court Order Acceptable for Processing (COAP), but not a QDRO, as one may know in the private sector.

There are multiple issues to be considered that can dramatically skew the COAP in favor of one spouse or the other. A slight change in verbiage means tens of thousands of dollars difference in value in favor of one or the other spouse.

For example, settlement agreements, or final judgments, often reference FERS or CSRS as an “account.” This is a dangerous term since the Office of Personnel Management (OPM) interprets “account” as only a refund of employee contributions. This is not the same as dividing the pension (annuity) over the lifetime of the federal employee.

Government pension plans are exempt from QDROs, so if you observe federal pensions being divided by a “QDRO” or referred to as an “account,” it is imperative to seek a second opinion.

FERS vs. CSRS Retirement Plans

When offsetting marital property values in divorce, the difference between FERS/CSRS and traditional non-governmental plans could mean tens of thousands of dollars. You could also lose valuable benefits when dividing these plans with a court order without retaining an expert specializing in these types of orders.

The main difference between the FERS plan and the CSRS plan is that the FERS member also contributes to Social Security where Social Security is not a divisible marital asset. Participants in the CSRS do not.

The question then becomes: should both plans be entirely valued for property offset since the Social Security benefits of a FERS participant are not a divisible asset?

Valuing FERS & CSRS Pensions

Determining the value of a FERS or CSRS retirement annuity is performed much like any traditionally defined benefit pension. That is, determining the value of a lifetime income stream based on only the amount accrued as of the date of divorce or separation. However, the annual cost-of-living adjustment is also factored in.

When dividing the actual monthly benefit, you can use a percentage, a flat dollar amount, or a fraction, which pro-rates the final retirement benefit. Pro-rating the retirement benefit this way uses the years of marriage relative to the years of service but increases the amount the spouse of the federal employee would receive. Not all states allow for the use of “pro rata,” but many states do based on their domestic relations laws.

Other issues to consider in both the valuation of CSRS/FERS or court order division are:

  • Survivor /benefits, if retired, as Survivor benefits have value

  • Disability retirement vs. benefits paid from a disability insurance policy

  • COLAs

  • Years to Retirement requiring an analysis of whether an offset is advantageous for a client or court order division of the annuity by COAP

Thrift Savings Plan Issues

Determining the marital value of a TSP requires separate calculations. The TSP Board will not compute marital components, i.e., contributions and earnings between two points in time. No program can calculate various levels of contributions and varying amounts of earnings over a period of time, whether the federal employee is invested in one fund or several funds available under the TSP.

Loans are another issue to consider since only the federal employee can repay a loan. The question is: should the former spouse’s share be reduced by a portion of the loan amount?