When facing divorce, both federal civilian government employees and their spouses need to be familiar with how their retirement accounts are structured, funded, and ultimately, how they could be affected by a divorce. Most federal civilian employees these days are covered by FERS, the Federal Employee Retirement System. FERS consists of three components: the Basic Benefit Plan, Thrift Savings Plan and Social Security. If you or your spouse are a federal employee, here is what you need to know about the treatment of FERS benefits in Virginia divorce:
BASIC BENEFIT PLAN
The Basic Benefit Plan is the defined benefit plan component of FERS. It is a monthly annuity that employees are eligible to receive upon retirement.
Eligibility: All federal government civilian employees, with very few exceptions, hired after December 31, 1983 are automatically enrolled in the Basic Benefit Plan.
Vesting: In order to be vested in the Basic Benefit Plan, the employee must have a minimum of five years of creditable civilian service. This is an important point to keep in mind for employees who leave the federal government civilian workforce before retirement.
Employee Contributions: Employees are required to pay into the plan each pay period, with their respective agency withholding the cost from the employee’s pay. Although recent proposed legislation may increase employee contributions, most employees currently contribute 0.8% of their pay towards their future monthly annuity. The federal government also contributes to each employee’s future annuity.
Retirement Alternatives: An employee’s age and years of creditable service are two of the major factors when considering retirement options within the Basic Benefit Plan. The retirement options can also be tied to a Minimum Retirement Age. An employee’s retirement benefit can be reduced should they choose to retire at the minimum retirement age and do not have a certain number of years of creditable service.
Benefit Calculation: The retirement benefit under the Basic Benefit Plan is calculated by taking 1% of the employee’s “high-3 average pay” and multiplying that by the employee’s years of creditable service. The “high-3 average pay” can be for any three consecutive years of creditable service.
Division of Basic Benefit Plan in Virginia Divorce: Virginia divorce courts are granted authority by the Virginia Code to divide the employee’s monthly annuity under the Basic Benefit Plan, but must do so in accordance with federal requirements for the order to be enforceable.
Under Virginia Code Section 20-107.3, the monthly annuity provided by the FERS Basic Benefit Plan is “marital property” to the extent it was earned during the parties’ marriage, and before the final separation of the parties. Virginia courts will typically award the spouse 50% of the “marital share.”
Federal law provides several options for division of the employee’s Basic Benefit Plan upon divorce—whether it is by agreement of the parties or by ruling of the court in a contested case. Division of the annuity can be done by using a percentage, flat dollar amount or by a “prorata share.”
The “prorata share” is defined by § 838.621 of Title 5 of the Code of Federal Regulations as a percentage of the employee’s monthly annuity benefit, to be computed by multiplying 50% times a fraction, the numerator of which is the number of months of creditable service that the employee performed during the marriage, divided by the employee’s total number of months of creditable service. This percentage is then multiplied by the monthly annuity amount for the employee at his or her retirement.
THRIFT SAVINGS PLAN
The federal Thrift Savings Plan (TSP) is the defined contribution plan component of FERS. It operates like a 401(k) plan, meaning the employee has their own individual TSP account, which changes in value over time based on employee and government contributions plus any earnings or losses on the money in the account. Employees have the choice as to how to invest their money among three TSP investment funds, with varying levels of risk.
Eligibility: All federal government civilian employees, with very few exceptions, hired after December 31, 1983 are automatically enrolled into TSP. There is a six to twelve month waiting period for new employees before they can participate in TSP.
Employee Contributions: Employees can make their own contributions via elected payroll deductions. The money withheld from their pay is taken out before federal and, in almost every case, state taxes are deducted. There are limits to how much employees can contribute each year, with the cap being set at 10% of the employee’s basic pay each pay period up to the IRS limit, which is $17,500 for 2014.
Agency Contributions: An employee’s agency makes Agency Automatic Contributions of 1% of an employee’s basic pay each pay period. These contributions are not deducted from the employee’s salary and are made regardless of whether or not the employee contributes their own money. If an employee makes their own contributions, their agency will match the contributions up to 5% of an employee’s basic pay each pay period. The first 3% of employee contributions are matched dollar for dollar, and the remaining contributions are matched fifty cents on the dollar. Should an employee elect to contribute beyond the 5%, there will be no agency matching, however, the employee still enjoys the benefits of tax-deferred earnings.
Withdrawal of TSP Funds: An employee who leaves the federal government may receive their TSP benefit in one of three ways: as a lifetime annuity, lump-sum payment or series of monthly payments. Should an employee decide to take a withdrawal from their TSP account before age 59 and a half, they would incur an early withdrawal penalty, as well as having to pay the regular income tax rate on the money withdrawn. However, if an employee is over age 55 when they leave their agency or retire, the early withdrawal penalty does not take place.
Division of TSP in Virginia Divorce: As is the case with the Basic Benefit Plan, Virginia courts are authorized by Virginia Code Section 20-107.3 to divide an employee’s TSP in a divorce, but must do so in accordance with federal requirements. Specifically, division of an employee’s TSP account must be done pursuant to a retirement benefits court order entered by a court with jurisdiction to enter the order. The retirement benefits court order can be a final decree of divorce (or annulment), including one that incorporates a property settlement agreement entered into by the parties. Alternatively, the court may enter a separate order dividing the federal employee’s TSP.
The retirement benefits court order will award the employee’s spouse a portion of the TSP account, stated as a percentage, fraction or fixed sum. Again, Virginia courts will typically award the spouse 50% of the “marital share” of the TSP plan—the marital share in this case being the contributions made during the marriage, prior to the final separation of the parties, plus any earnings or losses on those contributions.
SOCIAL SECURITY
The third portion of FERS is Social Security. Virginia courts have no authority to divide an employee’s Social Security benefits in a divorce. However, as explained in Social Security Benefits and Divorce, where a couple was married 10 or more years and then divorce, each party will be paid the greater of his/her own Social Security benefit or a spousal benefit. Spousal benefits generally are equal to 50% of the primary wage earner’s benefit. Please note that this has no impact on the primary wage earner’s benefit.
CONCLUSION
Contemplating divorce while also trying to plan for one’s financial future and retirement involves many factors. Representation by an experienced attorney is essential if you want to ensure that your marital assets, including retirement benefits, are divided in a manner that will provide you with a secure future.
The attorneys at Livesay & Myers, P.C. have years of experience with the division of federal retirement benefits in Virginia divorce. From our five convenient office locations, we represent clients across Northern Virginia. Contact us to schedule a consultation today.