QDRO Corner: FERS Annuity Supplement – MSPB Decision!

The MSPB is the Merit System Protection Board. It is a quasi-judicial agency existing within the executive branch of the federal government. One of its tasks is to review the “significant actions of the Office of Personnel Management.” The Office of Personnel Management (OPM) is the administrator of the Federal Employees’ Retirement System (FERS).

A part of the FERS pension is the Annuity Supplement. This is a benefit paid to certain employees upon their retirement and is meant to act as an early social security payment to encourage these employees to retire early. Such employees this applies to are law enforcement, air traffic controllers, firefighters, and the like. This Annuity Supplement is paid between the person’s retirement and age 62 when the full payment from the FERS pension is paid.

Within the regulations governing the administration of FERS, there are sections describing how to divide each element of FERS. The provision regarding the Annuity Supplement says that it would be treated (for the purpose of any court order) in the same way the employee annuity is treated. OPM had initially understood this language to mean that if the annuity supplement was not explicitly divided within the court order (as is required for the division of the employee annuity), then it would not be divided.

Around 2016, OPM changed its interpretation and decided it would divide a retired employee’s Annuity Supplement, and that such division would apply retroactively even if the court order was silent on the matter. As such, OPM would be treating the Annuity Supplement the same as the employee annuity by dividing it in the same manner that the employee annuity is divided. The reason for this was to create continuity between FERS and its predecessor plan, the Civil Service Retirement System (CSRS). Under CSRS participants did not pay into social security, so the benefit under CSRS is larger than under FERS because CSRS was designed to include the social security benefit. Since the Annuity Supplement is an approximation of a social security payment but to certain FERS participants, OPM believed it needed to correct its approach.

This decision caused a change to a great many retiree’s benefit payments. Not only would the people receiving the Annuity Supplement have to divide those funds, but their benefits were further reduced to pay the amount of the Annuity Supplement that their former spouse should have been receiving since the employee retired.

One affected retiree appealed OPM’s decision to divide his Annuity Supplement and to retroactively adjust the payments to his former spouse in 2018. Due to a lack of quorum on the MSPB, the case had been sitting until its decision in November 2023.

The MSPB decided that OPM’s original treatment of the Annuity Supplement, i.e.: as a separate element of the FERS plan that must specifically be divided was the correct interpretation. As such, any payments that OPM adjusted during the period 2016 through the MSPB’s decision in 2023 must be reversed.

The MSPB’s analysis explains that the language of the regulations requires the treatment of the two elements under the court order to be the same. The treatment is first whether the part of the plan is divided. Second, if it is divided, how is the former spouse’s share to be calculated. The regulations do not require that the two pieces, specifically the Annuity Supplement and the employee annuity, be calculated in the same manner. More importantly, also, that OPM’s justification that the FERS and CSRS plans should have continuity in these areas was unsupported. The fact that they are different plans and interact with social security differently inherently means that the two plans should be different in their administration.

What does this mean for the attorney handling a divorce that includes a FERS pension?

As per usual, be specific. First, does the annuity supplement even apply? If the federal government employee’s job is nothing like law enforcement, air traffic control, or firefighter, chances are they are not even eligible for the benefit. If they are eligible though, be clear, and award the former spouse a share if that’s what the parties agree. Make sure the award is in the parties’ agreement and the court order dividing the FERS pension. Notably, OPM will not double-check the parties’ agreement to make sure everything made it into the FERS Order. However, OPM can reject the order if additional awards are made in the court order that are not included in the agreement or divorce decree.

If you represent a client and federal government retirement benefits are at issue, contact us at 240-396-4373 can schedule a consultation with us to discuss the benefits, how they are accrued, what can be divided, and how long the division process takes.

Major Differences in ERISA Governed Plans, and Non-ERISA Governed Plans

The Employees’ Retirement Income Security Act (ERISA), as revised, includes many protections for former spouses (or soon-to-be former spouses) as it relates to the submission of QDROs. Chief among them is that once a plan is on notice of a former spouse’s viable claim to the participant’s interest in the plan, the plan has a responsibility to protect that former spouse’s interest through the submission of a court-executed QDRO or the expiration of 18 months, whichever first occurs.

What are these protections?

For a defined contribution account the plan will usually prevent the participant from taking loans or making withdrawals from the account. For defined benefit accounts the plan can go as far as preventing the participant from commencing benefits or pausing benefit payments altogether, or can begin to withhold a portion for the former spouse pending the final order. For financially dependent spouses, the submission of a draft order for the purpose of implementing these protections can be a tactic to preserve the marital estate while the divorce is pending.

What is a viable claim from a former spouse?

ERISA does not clearly define what needs to be submitted to a plan for these protections to be put in place. Most ERISA-governed plans are very cautious and will put up protections when they receive a draft DRO.

Non-ERISA governed plans, however, only have such regulations if they are specifically written into their plan rules. Non-ERISA governed plans can protect their participants much more strongly. Imagine this scenario: a draft QDRO is submitted to the plan to ensure it will be accepted by the plan once in final form. The plan takes a while to review, but then responds with a few small edits.

The former spouse makes the edits and submits the draft for a second review. The plan again takes a while to complete the review. During that time the participant retires and commences benefits. The plan then responds to the former spouse’s second draft with substantial changes due to the participant’s retirement changing the benefits being available to the former spouse. Now the former spouse has to scramble to get the QDRO entered and to chase the participant for their share of the benefits that have been paid to the participant.

Alternatively, some non-ERISA governed plans have voluntarily put stricter protections in place for more day-to-day type activities. Specifically, the Thrift Savings Plan (federal government employees and military) requires spousal consent for any withdrawal or loan. While this is great to protect the marital asset, for a person who otherwise needs access to the funds for say, paying an attorney’s retainer fee, it may be a way for the former spouse to block the participant’s access to funds in a time of need. Recently, Congress has considered adding similar protections to ERISA, though no final decision has been made.

Why would these restrictions not be in the existing draft of ERISA?

Perhaps because the title of the statute is the Employees’ Retirement Income Security Act – as some courts have noted, the intent is to protect the asset of the employee, not their beneficiary. However, the protections exist once the former spouse’s claim is raised perhaps because the statute recognizes the need to transfer retirement funds to a more financially dependent spouse. After all, the need for QDROs and QDRO protections arose as divorce became more acceptable and there was one party with substantial retirement assets from employment and the other party had little to no retirement due to being a fulltime homemaker. As a former spouse has a marital claim to the retirement asset, they have a different standing from any other beneficiary.

As attorneys, what can we do to best protect our clients?

Gather information about the plan as early as possible. Figure out what are the plan’s procedures and how quickly they review and implement QDROs. If there is any concern regarding depletion of assets ask the plan what is required to freeze the account. Get the QDROs drafted in advance of a divorce. If there is no freeze on the account from any action prior to the divorce, then upon divorce the plan is unaware of any claim from the former spouse and will allow the participant to make any decision allowed under the plan rules. Not only does this protect the former spouse as best as possible, but it also gets the transfer done as close to the divorce as possible. It allows the parties to move forward from the divorce without the need to go back and get this done later, and as unattached as possible.

Have additional questions?  Contact our office at 240-396-4373. 

QDRO Corner: Clever Work-Arounds for Common Plan Prohibitions

It’s a common situation, the parties finally reach an agreement after painstaking negotiations, and rather than have someone change their mind, the parties sign the agreement before checking the rules of the retirement plan. They then hire an attorney to draft the QDRO. The QDRO attorney then has to tell the parties that they’ve agreed to something the retirement plan cannot accommodate and they have to go back to the negotiation table with their divorce counsel. Speaking from experience, this is pretty bad news to have to tell parties.

Pension Plans and the Cost for Survivor Benefits.

Many pension plans, like FERS and CSRS for federal government civilian employees, allow for the cost of the survivor benefit to be shifted. Meaning, that the retirement order can state that one party or the other will fully bear the burden of any reduction incurred for the future survivor benefit. Other plans, such as the military retired pay, Maryland State Retirement and Pension System, and most international organization retirement systems, do not allow for such shifting and instead require that the reduction be taken “off the top” or before the benefit payment is divided between the parties.

 The common issue we see is that parties have agreed to shift the cost of the survivor benefit for a plan that does not accept that language in their retirement orders. For many agreements, this cost in particular is a large point of contention and is only awarded to the former spouse on the condition that the former spouse would pay that cost. So what now?

In cases where a reliable estimate can be obtained or prepared the best case is to simply change the phrasing. Instead of using a formula in the retirement order in which the plan has to fill in the information, do it based off of the estimate and reduce the former spouse’s share to a percent of the whole. To best protect each parties’ interests, include a clause that says once the participant begins to receive benefits the parties will revisit the calculation to ensure the proper amount is awarded to the former spouse. This way the retirement order is in place as of the divorce, and the former spouse is already receiving a reduced benefit to account for the survivor benefit from the start of the benefit payments. If the estimate done during the divorce is too different from the actual payments, the parties can have an amended retirement order prepared and submitted. 

If no reliable estimate can be prepared, the parties can still agree as they would, to the formula amount awarded to the former spouse, but that once the benefit payments begin, the former spouse will reimburse the participant on a regular schedule for the cost of the survivor benefit, upon proof being shown of the cost, until an amended QDRO can be effectuated.

Neither of these are as simple as having the plan shift the cost themselves, but they are good back-up solutions to an otherwise potentially deal-breaking situation.

Defined Contribution Accounts and Earnings, Gains, and Losses

Parties can agree that a transfer out of a 401k-type account include earnings, gains, and losses thereon from a certain date through the date of transfer. This allows the transfer amount to go up and down with the market investments of the account until they are transferred to the former spouse. Recently, some financial institutions have stopped allowing for this calculation, instead requiring that the transfer amount be described as occurring on the date of transfer.

This can result in wildly different outcomes. For example, imagine a transfer amount was $50,000 with earnings, gains, and losses as of the date of divorce and the transfer actually happens 6 months thereafter. During those 6 months, the market crashes and suddenly that $50,000 is equivalent to $20,000 after the earnings, gains, and losses are applied. The parties clearly intended that the former spouse should receive $20,000 in such a circumstance. If this plan prohibition was in place, however, then the former spouse would receive $50,000, and the participant would have a substantially smaller balance remaining in their account than the parties intended. So, what now?

If the account funding the transfer is no longer the person’s active retirement account, as in there are no contributions, withdrawals, or active investment scheme changes happening in the account the solution is to simply reduce the former spouse’s share to a percent and describe the transfer amount as the percent as of the date of transfer. From the example above, if the $50,000 with gains and losses the former spouse was supposed to receive would be 50% of the account, then after the market crashes and the entire account balance is $40,000, the former spouse would still receive 50% of the account, but it would be $20,000.

What if the account is receiving mandatory employer contributions? The parties may want to get a financial professional involved, but they could estimate where the account balance should be at the time, they anticipate the transfer to be made based off of expected employer contributions during that time. With the estimated contributions and market fluctuations thereon added, the parties could come up with a percent of the account for the former spouse’s share, with a continency to prepare an amended QDRO if something wild happens in the meantime.

Keeping with the same figures, if the former spouse should receive 50% or $50,000, that means the account has $100,000 at the time of the valuation. If the parties anticipate that the employer contributes $20,000, the former spouse should receive $50,000 or 41% of the account. Market changes will impact the transfer amount here, same as above. 

If you run into a similar situation and need help finding a creative solution contact us at 240-396-4373 and we can discuss your case and if we can help.

QDRO Corner: Thrift Savings Plan UPDATE

Effective June 1, 2022, the TSP has a new administrator for processing court orders AND a new record keeper. The switch to the new administrator had caused substantial headaches in many areas, resulting in an investigation by the Government Accountability Office which is scheduled to begin before the end of the year.

As it relates to family law, however, here is the relevant information regarding the changes to TSP:

1.    Valuation dates for dividing a TSP account prior to June 1, 2022 MUST be the end of a quarter. If the date is not such a date, then the TSP court order administrator will use the closest quarter-end date for the valuation date. What does this mean for parties? Take control and pick a quarter-end date for any valuation date prior to June 1, 2022.

2.    Division forms allowed: a percentage of the account as of a date certain (or the transfer date) or a dollar amount specifying whether gains and losses are to be included on the dollar amount if as of a specific date. **Historically the TSP would allow for a percentage of the account’s accrual between two dates. This division type is no longer accepted, and will result in a rejected Order. How to handle this change? Treat the TSP like any other defined contribution account, and if there is a premarital interest, subtract it from any transfer calculation.

3.    The TSP court order administrator charges $600 to review and implement the court order. Previously no such fee was charged. How to handle this change? Include in any agreement or court argument how the fee should be paid, if entire by one party or the other, or shared between the parties. It will come from the retirement account and/or the funds being transferred depending on which party is supposed to cover this fee.

The above items tend to be more hurdles to jump over while reaching an agreement. This final major change makes it (somewhat) easier to submit the order to the TSP court order administrator.

1.    Scans of certified court orders can be uploaded directly to the TSP court order administrator. Although making a submission includes submitting your own email address, I am yet to receive a confirmation email. However, after making the online upload, the webpage refreshes to say that a determination will be made in 20 business days. Many orders that we have submitted have not received a determination letter within 20 business days. Instead, we have had to call TSP to confirm the order was still under review.

On the whole, what does this mean for parties seeking a divorce where a TSP is involved? Only that there are a few more pieces to consider in the negotiations. 

One final piece of information: many orders submitted during the transition period were lost. If you submitted an order in May/early June and have not heard back, you may want to call TSP to check if they have the order, as you may need to resubmit it.

QDRO Corner: FERS Disability Retirement

Last month we discussed the military pension disability retirement – this month we will focus on the FERS disability retirement, for all the federal government employees we represent.

Unlike with the military pension, there is some negotiating that can happen with respect to FERS disability pensions. First though, how FERS disability works. The employee receives the greater of their regular FERS annuity or a percentage of their high-3 average salary less a percentage of their social security disability benefits (see OPM publication for more information regarding the calculation). 

At age 62, the employee’s annuity is automatically recalculated to be as if the employee continued working until the day before their 62nd birthday, including an extension of their service time and cost of living adjustments applied to their salary computation during the time that the employee was received disability benefits.

The FERS disability benefits received prior to age 62 are divisible by Court Order and there are points to negotiate on this. Specifically, how the former spouse’s share of the pension should be calculated during the period that the employee is receiving disability benefits. If the Court Order states the award to the former spouse as a portion of the employee’s annuity without any specific distinction for disability benefits then the former spouse will receive a share of the payments actually made by OPM to the employee.

Alternatively, the Court Order could state that the former spouse’s share can be defined that if disability payments are made, the former spouse’s share shall be calculated as if the employee is paid their full FERS benefit.

Since the employee’s benefit could be reduced based on the amount of social security benefits while receiving FERS disability, this could be a financially important distinction for the former spouse. While such a division would likely result in a larger reduction to the funds received by the employee while on disability, the employee will receive social security benefits, which are non-divisible.

QDRO Corner: Federal Pension Plans

There are 34 federal pension plans (according to a 1996 report by the General Accounting Office). Of these pension plans, approximately 97% of the federal workforce participate in either the Federal Employees’ Retirement System, Civil Service Retirement System, or the military pension system.

Each plan has its own set of rules for vesting, contributions, and division upon divorce. The plans also are maintained by different agencies. For example, the Office of Personnel Management manages FERS and CSRS, whereas the Defense Finance Accounting Service manages the military pension system, and the Department of State manages the Foreign Service Pension Systems. If you represent a person who has worked at any time for the federal government (as a civilian or military member) or their spouse, it is very important that you have them look into the benefits available to them. 

While approximately 97% of the federal workforce participate in one of the three plans listed above, the federal workforce is very large, so it is quite possible you may represent someone in the remaining 3%. Other common plans in the DC Metropolitan area include the Foreign Service Pension System and the Federal Reserve Plans.

Many of these plans will also allow the interest to be transferred from one plan to another, should the employee work for an agency and accrue interest in one plan, and then transfer agencies and begin to accrue interest in another plan. In a settlement agreement, it is important to address the possibility of the employee consolidating their interest into one plan, and if representing the employee, to address whether any of the interest is pre-marital.

If you think you have a client or an opposing party with a federal pension plan and need assistance determining the possible benefits or what can be divided by a court order, we can help .