Article Published at ScoopSanDiego.com: How Divorce Affects Retirement Benefits
Visit ScoopSanDiego.com to read about how divorce affects retirement benefits in this article written by Madeline L. Hill, Esq., owner of QDRO Helper.
Divorce and Your Thrift Savings Plan (TSP)
Many federal employees and members of the uniformed services participate in the Thrift Savings Plan (TSP). This is an asset that is subject to division during divorce, and the contributions made during the time of the marriage are considered community property in California. The TSP is a defined contribution plan that is similar to the 401(k) plans offered by private employers.
Just like FERS and CSRS plans, ERISA does not apply to the Thrift Savings Plan, so instead of being called a QDRO, the Order dividing these benefits is called a Retirement Benefits Court Order (RBCO). A RBCO can be utilized only for a spouse, former spouse, child or other dependent of the TSP participant.
METHODS OF DIVISION
Any award under a RBCO must be stated as either a specific dollar amount, a percentage of the account, or as a formula which accounts for contributions made during the marriage (where all variables in the formula are available on the face of the order or from TSP account records). Usually this percentage, dollar amount, or amount arrived at by a formula are awarded as of the “valuation date.” The valuation date is often the date of separation. In their judgment or marital settlement agreement, the parties should also address whether earnings and losses from the valuation date to the date of actual account division should be included as part of the award to the non-participant spouse (“Alternate Payee”).
Minimum Account Balance. It is also important to note that for an account balance of less than $3,500, the entire amount is distributed to the participant upon retirement and the Federal Retirement Thrift Investment Board cannot make any payments directly to an Alternate Payee if the account is worth less than $3,500. If the account is below this amount, a RBCO is not appropriate and the non-participant spouse will need to seek other remedies with the assistance of his/her family law attorney. Under California law an Alternate Payee is still entitled to his/her community interest in the account, but he/she will have to obtain it in another way, such as an equalizing payment at the time of divorce or a payment directly from the participant upon retirement.
LOANS
The treatment of any loans that are outstanding with the plan as of the date of account division is also critical when dividing a TSP account as it can have a huge effect on the amount awarded to the Alternate Payee. When a percentage of the account is assigned to the Alternate Payee including an outstanding loan in the account balance, i.e. adding the amount of the loan back in, it will result in a larger portion for the Alternate Payee. Subtracting or excluding the outstanding loan from the account balance will reduce the amount paid to the Alternate Payee. Usually, the parties will evaluate when the loan was taken out by the Plan Participant and what the funds were used for to determine if the loan should be considered a community loan (included in the account) or the Participant’s own loan (excluded for the purposes of calculation).
ACCOUNT FREEZE / INJUNCTION
Due to the Participant’s ability to take out a loan before a court order dividing the account can be filed, it can be wise to file a separate order freezing the TSP account, or a preliminary injunction prohibiting loans or withdrawals.
QUESTIONS?
If you need help or have a question about dividing a TSP due to your divorce or legal separation, call 619-786-7376 to speak with one of our California QDRO attorneys today or email us at info@qdrohelper.com.
DISCLAIMER: Any legal information on this blog has been prepared by QDRO Helper for informational purposes only and should not be construed as legal advice. The material posted on this website is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Note that sending an e-mail to QDRO Helper does not create an attorney-client relationship, and none will be formed unless there is an express agreement between the firm and the individual.
Dividing FERS / CSRS Benefits in Divorce or Legal Separation
This article addresses the options for dividing a member’s Federal Employees’ Retirement System (FERS) or Civil Service Retirement System (CSRS) benefits in the event of divorce. FERS covers federal employees hired after 1983; those hired prior to 1983 are covered by CSRS. Orders dividing ERISA governed retirement benefits are commonly referred to as QDROs (Qualified Domestic Relations Orders); however, FERS and CSRS are not governed by ERISA and an order dividing FERS or CSRS due to divorce is called a “court order acceptable for processing” or COAP. The paragraphs below cover, in general terms, the most common issues addressed in COAPs for CSRS and FERS benefits.
Methods of Division
Court orders must provide a method of computing the former spouse’s interest, i.e. the order must provide a formula that can be implemented by the Office of Personnel Management (OPM). The former spouse’s share should be expressed as either a fixed amount or a percentage or fraction of the employee annuity. All variables in any formula submitted to OPM must be ascertainable from the face of the COAP or in OPM records, such as the employee’s periods of creditable service and basic pay rates. The most common method of division for a COAP utilizes a “marital fraction.” Using this formula, a former spouse would receive a share of the employee’s annuity or refund of employee contributions equal to 50 percent times the fraction created by the number of months of civilian and military service performed by the employee during marriage (from date of marriage through date of separation) divided by the total number of months of civilian and military service performed by the employee. This would be described as the former spouse’s “pro rata share.”
Survivor Benefits
To qualify for “surviving spouse” benefits, a former spouse must have been married to the employee for at least 9 months, or a child must have been born of the marriage, or the employee’s death must have been accidental.
Survivor Benefits can be paid to both a former spouse and the employee’s spouse at the time of death (if the employee remarried). However, an Order directing OPM to provide survivor benefits to a former spouse will not be honored if it would cause the total of survivor annuities payable under the Plan to exceed 50% of the employee’s unreduced basic annuity. Typically a former spouse will be awarded at least a portion of the survivor benefits to ensure that all payments to the former spouse do not cease upon the employee’s death.
It is also important to note that if the employee’s former spouse dies or remarries before reaching age 55, then there will be no payment of a survivor annuity.
Survivor benefits will only be awarded if the employee makes an election at the time of retirement that provides for survivor benefits – he/she cannot choose a self-only annuity. There are a myriad of annuity options that can be affected by divorce and remarriage which are beyond the scope of this article; however, employees should contact an attorney or OPM to fully understand their options.
Gross Annuity / Net Annuity/ Self Only Annuity
If a court order states the former spouse’s share of the employee annuity as a formula, percentage, or fraction, OPM must be able to determine which of the 3 types of annuity defined below on which to apply the calculation. OPM will apply the formula to gross annuity unless the COAP states otherwise. Thus, if the parties want to use a net annuity or self-only annuity for the COAP calculation, it should be agreed to by the parties during the dissolution or legal separation process.
Gross annuity means the monthly annuity payments by FERS or CSRS that are payable after reducing the self-only annuity to provide for a survivor annuity, if any, but before any other deduction. Unless the court order provides otherwise, gross annuity also includes any lump-sum credit payments.
Net annuity means the monthly annuity payments under FERS or CSRS that are payable after deducting from the gross annuity any amounts owed by the employee to the United States, for health and life insurance premiums, and for withheld state and federal taxes (excluding excessive exemptions), and amounts payable to another person under another COAP or a child support enforcement order. Other terms used for net annuities include “disposable annuity” and “retirement check.
Self-only annuity, as mentioned in the survivor benefits section, means the monthly annuity payments under FERS or CSRS to a retiree who has elected not to provide a survivor annuity to anyone. This type of annuity is also called “life rate annuity,” “unreduced annuity,” or “annuity without survivor benefit.”
For further reading, the rights of former spouses under qualifying court orders and COAPs that award FERS and CSRS benefits at divorce are detailed in the Code of Federal Regulations. Part 838 of Title 5.
If you need help with a FERS or CSRS Order, please call QDRO Helper at 619-786-QDRO / 619-786-7376 or email us at info@qdrohelper.com.
DISCLAIMER: Any legal information on this blog has been prepared by QDRO Helper for informational purposes only and should not be construed as legal advice. The material posted on this website is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Note that sending an e-mail to QDRO Helper does not create an attorney-client relationship, and none will be formed unless there is an express agreement between the firm and the individual.
CalSTRS QDROs: Methods of Division, Registered Domestic Partners, Joinders & Death Benefits
We will be writing a series of blogs on specific retirement plans and their unique provisions. We are starting with the California State Teachers’ Retirement System, more commonly known as CalSTRS or STRS. For this article the terms “Stipulation and Order Regarding California State Teachers’ Retirement System (CalSTRS)” and “QDRO” are used interchangeably. If you would like to request a blog on a specific plan, please email us at info@qdrohelper.com.
CalSTRS provides three different retirement plans: Defined Benefit Program, Defined Benefit Supplement, and a Cash Balance plan. Members can have any one of these plans, or even all of them. For the Defined Benefit Program, upon retirement members receive a lifetime benefit based on their years of service credit, final compensation, and age. Defined Benefit Program members who have earned service credit after the year 2000 will also have a Defined Benefit Supplement account, which can provide additional funds to members upon retirement or if they leave STRS covered employment. The Cash Balance Benefit Program is designed for part-time, temporary and substitute teachers. Upon retirement, members can choose to receive the contributions and interest on the Cash Balance Benefit as a lump-sum payment of if the account balance exceeds $3,500, it can be rolled over into another qualified plan.
METHODS OF DIVISION
The methods of division available depend on the type of plan and the status of the employee spouse or “member”. For non-retired members who participate in the Defined Benefit plan and/or the Defined Benefit Supplement plan, there are two methods of division available, the “Time Rule Formula” or the “Segregation Method”. For retired members of the defined benefit type plans, the only option for division is the Time Rule Formula.
Below is a chart comparing the differences between the “Time Rule Formula” and “Segregation Method” for CalSTRS.
| SEGREGATION METHOD | TIME RULE FORMULA | |
| When is it an option? | Only if the member is not retired and is not receiving disability benefits. | Can be used if member is retired or active. |
| How is the Award Calculated? | Typically, the nonmember spouse is awarded 50% of the member’s service credit, contributions and interest from the date of marriage through the date of separation. | The nonmember spouse is awarded a percentage of the member’s monthly benefit, and the percentage can be calculated by CalSTRS based upon the service credit earned during marriage. |
| Are there legal holds on the account? | After the court filed QDRO is received by the plan, holds are removed unless there is a longevity bonus or other account enhancement. Each party will have and control his/her own account with the Plan. | Holds remain on the account and the nonmember spouse can request benefit estimates at any time. The nonmember spouse can only receive benefits when the member is receiving a benefit (i.e. there is only one account in which both parties have an interest). |
| When can the nonmember spouse get benefits? | The nonmember spouse can apply to commence monthly benefits at age 55 or older. Benefits are not dependent on the member since the nonmember spouse will have his/her own account. | CalSTRS will not pay the nonmember spouse until the member retires. The nonmember spouse shares the member’s account. |
| Is there a lump-sum distribution option? | Yes, the nonmember spouse can apply for a refund of contributions & interest at any time. | No – the nonmember spouse cannot obtain a refund and does not have access to contributions or interest. |
| How does the monthly benefit work? | At age 55 or older the nonmember spouse can apply for a lifetime monthly benefit, which will be calculated using the member’s salary on the date of separation, the nonmember spouse’s age on the effective date of the benefit, and the service credit awarded to the nonmember spouse. | A proportionate share of the member’s monthly benefit is paid to the nonmember spouse by CalSTRS each month once the member applies for and begins receiving benefits. The benefit is calculated using the member’s salary at the time of retirement. |
| What happens to Defined Benefit Supplements and Cash Balance accounts? | A member’s Defined Benefit Supplement account or Cash Balance account can only be divided by a specified flat percentage. These accounts contain only contributions and interest. Service credit does not apply to these types of benefits. | Nonmember spouse receives a proportionate share of member’s account if specified in the court order. This share is usually determined by the percentage derived from the time rule formula when calculating the nonmember’s percentage of the Defined Benefit account. |
| What happens to the nonmember spouse’s award of service credit, contributions and interest? | They are removed from the member’s accounts and form a new account for the nonmember spouse. | They remain in the member’s account. |
Cash Balance plans must be divided using the Segregation Method and the QDRO must specify the percentage or flat dollar amount that will be awarded to the nonmember spouse.
DOMESTIC PARTNERSHIP & CALSTRS
CalSTRS benefits are considered community property under California law and upon termination of a registered domestic partnership, CalSTRS benefits can be divided. However, the federal government does not currently recognize domestic partners as spouses for tax purposes, so parties should consult with a tax advisor to determine how the division of these retirement benefits will affect each party.
JOINDER
CalSTRS must be joined to be bound by the terms of a QDRO. This means that a joinder must be filed with the divorce court which makes CalSTRS a party to the divorce action, and then CalSTRS must be served with these documents. The joinder will put a legal hold on the account and prevents a member who is not yet retired from making account changes, including changing beneficiaries. A joinder also allows the nonmember spouse to obtain specific account information without a subpoena or the member’s written permission.
WHAT HAPPENS UPON THE MEMBER’S DEATH? / OPTION ELECTION
One-Time Death Benefit
A one-time death benefit is available; the amount paid to the beneficiary(ies) depends on what coverage the member selected and whether the member’s death occurs before or after retirement. Either all or only a community property portion of the one-time death benefit can be awarded to the nonmember spouse under a QDRO. If only the community portion is awarded to the nonmember spouse, then the member can designate another beneficiary for the remainder of the one-time death benefit.
Option Election
If the parties use the Time Rule Formula to divide CalSTRS benefits, the nonmember’s benefits (which are a portion of each monthly payment to the member) will also terminate. If the parties agree that the nonmember spouse is entitled to monthly benefits after the member’s death, the member must elect an “option” naming the former spouse as a beneficiary; he/she cannot choose a Member-Only Benefit. There are four options to choose from to provide benefits for a former spouse:
- 100% Beneficiary Option: This option will provide the beneficiary with 100% of the amount the member was receiving.
- 75% Beneficiary Option: This option will provide the beneficiary with 75% of the amount the member was receiving.
- 50% Beneficiary Option: This option will provide the beneficiary with 50% of the amount the member was receiving.
- Compound Option: This option allows the member to name one or more beneficiaries for specifically allocated percentages of the monthly benefit. This option allows a member to name both a former spouse and current spouse as death benefit beneficiaries.
COMMUNITY PROPERTY STATEMENT OF ACCOUNT
Before making any decisions about the division of a CalSTRS account, the parties should request a Community Property Statement of Account from CalSTRS, which can be obtained by using the request form here.
GET STARTED TODAY!
If you need help with a CalSTRS Order, please call QDRO Helper at 619-786-QDRO or email us at info@qdrohelper.com.
DISCLAIMER: Any legal information on this blog has been prepared by QDRO Helper for informational purposes only and should not be construed as legal advice. The material posted on this website is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Note that sending an e-mail to QDRO Helper does not create an attorney-client relationship, and none will be formed unless there is an express agreement between the firm and the individual.
QDROS for 401(k), 403(b) and 457 Plans
The two most common types of retirement plans are defined benefit plans and defined contribution plans. Defined contribution plans have an account balance, such as 401(k), 403(b) and 457 plans. Defined benefit plans are commonly known as pension plans and pay a monthly benefit in the future with the amount payable determined at the time of retirement.
This blog will briefly discuss the most common issues involved with dividing defined contributions plans due to divorce. These issues are: defining the community property interest, determining how the plan will treat investment gains and losses on the alternate payee’s portion, and deciding how to treat outstanding loans.
DIVISION OF COMMUNITY PROPERTY INTEREST
Parties to a divorce can agree to transfer any percentage or dollar amount to the non-employee spouse (a.k.a. the “Alternate Payee”). Often, funds from 401(k), 403(b) or 457 plans are used to equalize other marital assets during divorce. However, the most common division is the community interest division. This means that the Alternate Payee will receive one-half of the contributions from the date of marriage through the date of separation. Usually, the plan administrator can calculate this amount; however, in some situations the record keeper for the plan will not have records that date back to the date of marriage. If the record keeper does not have adequate records, then this information will need to be supplied by the parties via old plan statements, or the parties can hire an actuary or accountant to estimate the community property interest, and then can stipulate to the amount to be transferred.
GAINS & LOSSES
Typically, gains and losses (or “earnings”) attributable to the amount assigned to the Alternate Payee are also applied to the amount. However, the parties can come to an agreement where earnings are not awarded on the Alternate Payee’s share. If the parties determine a flat dollar amount to be assigned to the Alternate Payee, gains and losses are usually not included. Gains and losses can make a significant difference in the amount of the benefit awarded to the Alternate Payee, so this issue should be considered seriously by the parties.
PLAN LOANS
Another important issue is the treatment of any loans that are outstanding with the plan as of the date of account division. When a percentage of the account is assigned to the Alternate Payee, including an outstanding loan in the account balance, i.e. adding the amount of the loan back in, will result in a larger portion for the Alternate Payee. Subtracting the outstanding loan from the account balance will reduce the amount paid to the Alternate Payee. Usually, the parties will evaluate when the loan was taken out by the Plan Participant and what the funds were used for to determine if the loan should be considered a community loan (included in the account) or the Participant’s own loan (excluded for the purposes of calculation). It is important to know that loans from retirement plans are not assignable, the Participant must pay the loan back even if loans are included for purposes of division. This also means that if 100% of a plan is being assigned to the Alternate Payee, there must not be any plan loans. If there are any outstanding plan loans, then an amount sufficient to cover the loan must be left in the account.
TIMING & TAX ISSUES
Parties should also be aware of timing and taxation issues for defined contribution plan QDROs. Plans will usually allow an immediate distribution to an Alternate Payee. The Alternate Payee may roll the assigned amount to an IRA, take it in cash, or do some combination of IRA rollover and cash distribution, subject to the terms of the plan. If the Alternate Payee is allowed to leave the funds in the plan, the funds usually cannot be accessed without penalty until he/she reaches age 59 ½.
Regarding the taxation of benefits upon distribution, Alternate Payees are responsible for the income taxes on any distributions made to them pursuant to a QDRO. The distribution from the plan is taxable to the participant for distributions made for child support or distributions made without a QDRO. The plan will withhold 20% of any immediate cash distribution for federal income tax, but there is no 10% excise tax when an alternate payee takes a distribution from a qualified plan pursuant to a QDRO. This can help an alternate payee who needs cash before they turn age 59 ½.
Almost all defined contribution plans are divisible by QDRO. The parties’ judgment, divorce decree or marital settlement agreement should address the issues listed above since the QDRO should reflect the judgment and having a written agreement prior to drafting a QDRO will allow for the QDRO process to run more smoothly and efficiently.
Need Help?
Call QDRO Helper at (619) 786-QDRO to speak with a helpful California QDRO lawyer today or click here to get started. You can also email us at info@qdrohelper.com.
DISCLAIMER: Any legal information on this blog has been prepared by QDRO Helper for informational purposes only and should not be construed as legal advice. The material posted on this website is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Note that sending an e-mail to QDRO Helper does not create an attorney-client relationship, and none will be formed unless there is an express agreement between the firm and the individual.