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Dividing FERS / CSRS Benefits in Divorce or Legal Separation

by Madeline Hill | Jul 11, 2012 | CSRS / FERS, General QDRO Info

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

by Madeline Hill | Jul 3, 2012 | General QDRO Info

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

by Madeline Hill | Jun 27, 2012 | Defined Contribution 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.

Get Your Free QDRO Guide Today

by Madeline Hill | Jun 20, 2012 | General QDRO Info

The United States Department of Labor has published a guide called “QDROs: The Division of Retirement Benefits Through Qualified Domestic Relations Orders”. You can view the guide here. It answers basic Qualified Domestic Relations Order questions, such as:

What is a QDRO?
Who can be an “alternate payee”?
What information must be included in a domestic relations order for it to be “qualified”?
Who determines whether a domestic relations order is a QDRO?
Will a domestic relations order fail to be a QDRO solely because of when it was issued?
What are the duties of a retirement plan administrator upon receipt of a domestic relations order?
What disclosure rights does an alternate payee have under a QDRO?
What happens if a plan is terminated?
Why is an understanding of the type of retirement plan important?
What are survivor benefits?
When can the alternate payee get the benefits assigned under a QDRO?
What is “earliest retirement age” and why is it important?

This guide is a great foundation for a basic understanding of QDROs. If you have further questions about QDROs, email QDRO Helper today, call us at 619-786-7376. You can also click here to request a new client packet.

QDROs for Child Support and Spousal Support

by Madeline Hill | Jun 14, 2012 | General QDRO Info

The most common use of a Qualified Domestic Relations Order (QDRO) is for the division of marital property. However, QDROs can also be used for child support and spousal support, and to collect arrears for these types of support. Retirement funds for support obligations are often overlooked by family law attorneys, but in many cases may be the only source of funds available. Unlike garnishment of wages, once a QDRO for support is entered by the court and accepted by the retirement plan administrator, even if the employee spouse moves out of state, quits his/her job, or minimizes taxable income by being paid in cash, a properly structured QDRO will ensure payment of outstanding support obligations.

Before assuming that a QDRO will solve all of your support problems, you should be aware of certain retirement plan limitations and other obstacles, which we have outlined for you below. We also explain how different types of retirement plans work better for arrearages than others. It is critical to remember that retirement plans are not forced to comply with California family law; if there is a conflict between the terms of the plan and the QDRO, the terms of the plan prevail.

Types of Plans and Timing

The two most common types of retirement plans are defined benefit plans (traditional pension plans) and defined contribution plans (such as 401(k) plans). QDROs will usually not be approved by the plan if QDRO changes the standard method of payment by the Plan.

For defined benefit plans, payments can usually only be made once the employee has reached the earliest retirement age allowable by the plan, and the payments will be made on a monthly basis. This means that if a person is a long way from retirement, it may be years before the retirement plan assets become available for support obligations. Defined benefit plans are best for a monthly support obligation for an employee who is at or very near to retirement age. Support QDROs for pension plans should specify the amount that the alternate payee will receive each month. Typically a lump-sum amount for support arrears will not be payable by a defined benefit plan. Unless the employee spouse obligated to pay support is already retired, a pension plan QDRO may not be an immediate solution.

In contrast, defined contribution plans are ideally suited for payment of lump sum child or spousal support arrears. Once you obtain a court order saying the lump sum that is owed, it is a fairly straightforward process to get a QDRO in place for the payment of that lump sum from a defined contribution plan. It is also important to note that more than one support QDRO can be filed for each retirement plan. For example, one QDRO could be filed for arrearages from 2001-2005 and another could be filed for arrearages from 2006-2011. Unlike pension plans, most defined contribution plans will not honor an order for a payment to be made for a support obligation on a monthly basis. Rarely, if a defined contribution plan is the only support asset for child support or for long term spousal support, then a court may order that a lump sum be withdrawn from the defined contribution plan. The lump sum would then be placed in an interest-bearing account and the monthly support payments could come from the account.

Tax Issues

The QDRO should always specify the tax responsibility of the parties, otherwise the plan may just assign tax liability to the recipient of the funds. However, the general rules are: (1) for child support, the employee (plan participant) is liable for taxes on the amounts paid out for current or back child support; and (2) for spousal or family support, the recipient (alternate payee) must pay taxes on the amount received by him/her. Often for defined contribution plans, the plan will automatically withhold 20% of any distribution, so the total amount of the payment may need to be adjusted to account for tax issues.

The Process for Child Support or Spousal Support QDROs

In the simplest terms, the process for obtaining a QDRO for back child support or spousal support is:

Locate the original judgment or court order that said what amount was to be paid (i.e. the original order for $500/month child support).
For child support, you can contact the state/county child support agency to obtain a record of the amount owed.
Have a QDRO drafted by an attorney or utilize form FL-460.
Send the draft QDRO to the plan administrator for approval, revise if necessary.
Once approved by the plan administrator, obtain the parties signature on the QDRO and file it with the court.
Send a certified copy of the QDRO filed at court and signed by the judge to the plan administrator.

Questions?

If you have questions about QDROs for spousal support or child support you should consult with your family law attorney or contact an attorney at QDRO Helper by calling 619-786-QDRO (7376).

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.