Divorce is a complicated process and the devil is in the details. The process of deciding how to split two peoples’ lives can be daunting, and often there are different views of what’s “fair”. Being a federal employee or the spouse of one further complicates the process, as the federal benefits have their own features that are critical to know about when going through a separation.
There are a unique set of questions that feds should often ask when deciding how to split their federal benefits, and many folks are left with a “what now” feeling after the process is over. I’ve come across cases where people didn’t understand how to properly split their federal benefits and didn’t end up with the results they intended to have.
I had the privilege of speaking with Jessica Markham, Managing Attorney at Markham Law Firm, a Family Law firm located in Bethesda, Maryland. Markham Law Firm has received numerous awards and honors including Best Law Firm (US News and World Reports) and Best Family Law Firm- Top Winner (Daily Record). Jessica is highly regarded as “a gold standard” and specializes in the divorce process for federal employees. She has authored a book for other Family Law attorneys entitled Representing Federal Employees in Divorce (American Bar Association) which will be published in 2020, on the intricacies of the divorce process for federal employees as an effort to help attorneys give feds the best advice they can.
Here’s a snapshot of our conversation - let’s jump right to it!
Thiago: Thanks for chatting with us, Jessica. We’ve both worked with federal employees that have come to us with a lot of questions about the process of divorce, what the numbers all mean, and how it differs when splitting federal benefits. It’s a difficult enough process itself, and then you add the complexities of the federal benefits on top and it can become quite overwhelming at times. The first question we usually get is what happens to the annuity, whether it’s FERS or CSRS. Can you talk a little about that?
Jessica: Hi Thiago. I’m happy to talk with you today! While this can be quite complex, the general principle is quite simple. The pension annuity can be divided between the employee and the former spouse. The former spouse may also receive a survivor annuity (for a cost) so that the former spouse’s share of the pension will continue, even if the employee passes first.
With respect to insurance, the I assume we’re talking if the couple has their health and life insurance policies through the federal employee – in that case the former spouse could be eligible for a variety of continuing coverage options for health insurance coverage at the former spouse’s expense, specifically Temporary Continuation of Coverage (which is sort of like COBRA) and FEHB Spouse Equity Coverage (health insurance). With respect to life insurance, courts of different jurisdictions differ on whether they will order maintenance of life insurance. The employee can agree to maintain the spouse as a beneficiary, or can assign ownership of the policy to the spouse.
Thiago: So what can happen in court is different than what can happen in a negotiated settlement? Interesting point. So then what happens if the Federal employee gets remarried and wants to elect their new spouse to receive their survivor annuity?
Jessica: In that case, they need to do so within two years of the marriage, and there has to be some of the survivor benefit available to give, meaning the former spouse must not be receiving the maximum. However, even if the former spouse is getting the maximum, it is still a good idea to fill out the election form, in case the first spouse dies. Then the benefit for the new spouse “pops up.”
Thiago: So the second spouse can be a replacement on death or a replenishment to the maximum benefit. This is all very complicated. The pension election will also have an impact on the FEHB. Can you talk about some mistakes that you’ve seen federal employees make when negotiated their insurances?
Jessica: Sometimes the parties agree that the pension isn’t going to be split, and in that case the former spouse misses out on insurance benefits. The biggest thing to remember is that the former spouse only needs to get a dollar per month of the pension to be eligible to continue FEHB during the employee’s life. They also need to get $1 per month survivor benefit for the former spouse to be able to keep FEHB after the employee’s death, assuming the spouse passes first. Keep in mind the premium is at the full expense of the former spouse – the federal employer won’t subsidize it, so it can be quite costly.
Thiago: That gets expensive fast. A lot of folks forget to consider the cost of healthcare. So, let’s talk about the TSP. We’ve worked with Family Law attorneys that didn’t realize that OPM speaks their own language when it comes to the legal documentation needed, and it’s held up the process for federal employees. What are some factors that you would encourage federal employees to consider when thinking about how to split their TSP?
Jessica: It certainly is its own language. In fact, the definitions are included in the federal code if you ever need some light bedtime reading. A big consideration to keep in mind is if the parties took out a loan from the TSP to pay for the acquisition or improvement of a non-marital asset. How will you factor it? Be careful. OPM can divide a TSP account either based on the amount of funds actually in the account at the time of the division, or OPM can divide the account pretending that the loan has been paid back in full. Similarly, the funds in the account are invested into various funds, so is the former spouse also going to receive any earnings, gains, or losses based on the investments between the time the agreement is signed until the time it takes OPM to process the order.
Finally, and this is especially applicable during a market downturn, like we have now, but whether the agreement states the former spouse will receive a dollar amount or a percentage of the account could result in very different amounts being transferred. For example, if prior to COVID-19 the parties agreed that the former spouse would receive $50,000 from the TSP, as a flat sum, it is not credited with investment experience while you wait for the money (earnings, gains, and losses). Say for example, at the time, the $50,000 represented 25% of the TSP balance. While the court is signing the order and OPM is processing, COVID-19 descends and the market plummets. Now, that $50,000 represents 60% of the TSP account. That is not what the parties intended. The former spouse just got a windfall.
Alternately consider another scenario. The parties stated the former spouse would get 25% of the TSP, which at the time was equal to $50,000, but the intent was to compensate the former spouse dollar for dollar (and grossed up for taxes) for a different asset, then after the market plummets, the former spouse is no longer getting $50,000 but 25% of the new TSP balance. The former spouse was short changed.
A long answer but there are a lot of things to think about. These are just a couple examples.
Thiago: Those are great points. A lot can happen between the agreement and the execution of it – I’m certain there are folks out there that had unintended consequences because of the recent market downturn. Is there a way out if that happens or do both parties need to agree to a new language and amend the agreement?
Jessica: It is possible to amend the agreement, of course by mutual agreement. A court is not going to reopen an old case because someone didn’t like the end result of the pension split years later. You also can amend the COAP dividing the pension, but there are various layers of rules regarding timing on that, both OPM rules and IRS, so it’s best to get it right the first time.
Thiago: So, we’ve talked a bit about how a federal employee splits their benefits with a non-fed spouse, but what considerations should be made when both parties are federal employees? What should they consider if they’re covered under FERS vs CSRS?
Jessica: That’s a loaded question.
CSRS participants generally didn’t participate in Social Security, whereas FERS participants do, which makes any kind of retirement division more complicated to analyze. Since Social Security isn’t divisible per federal laws, a comparison or equalization of the marital share of these pension systems is difficult. You can’t do a straight 50% of each, because then the FERS participant is getting a windfall due to receiving a share of what the CSRS participant would have contributed to Social Security.
Keep in mind, if you have two federal employees with two pensions, it might not be worth it to divide both pensions and provide survivor benefits – both parties will then be paying the costs of a survivor benefit for only one party to actually receive the benefit. You’ll want to consider “each keeps their own”, and to the extent the values of each are very different due to years of service and high-3 average salary, you can offset when discussing other assets.
Thiago: Jessica, it’s clear that a federal employee should find an attorney that specializes in working with feds if they are going through mediation and a divorce. There are just so many circumstances where the negotiation can yield unintended results and making changes after the fact is tough and expensive, so folks will want to get this right the first time.
Jessica: I absolutely agree. One other important piece of information to mention is that while the benefits and retirement structures mentioned here are the main systems provided by the federal government, there is a lot more out there to look out for, including agency or job specific benefits – for example Foreign Service members, firefighters, air traffic controllers and law enforcement officers all have additional benefits that may be divided with a former spouse upon divorce, such as an annuity supplement. You must also check to see if an employee is eligible for early retirement due to their special employment category, or has eligibility for any type of special hazard-type pay (foreign service, CIA, etc.).
Thiago: Often, it’s hard for people to recognize what any of the numbers mean when splitting these benefits and that’s where we’ve found ourselves most helpful as advisors. It’s important that federal employees understand their new financial circumstance in terms of how it affects their lifestyle, and how to get through that “what now” phase so they can move into a future that’s economically safe and secure.
Jessica: The transition from operating as a married couple/family with two adults and potentially two incomes to a mutual downsizing to fit the new budget is difficult. I encourage anyone, not just federal employees or their spouses, to seek the help of a financial advisor if they are unsure how to adjust.
Thiago: This has been incredibly insightful. Thanks for spending some time with us and we hope to chat again soon.
Jessica: It was my pleasure. Thanks for having me!