The federal government has two defined benefit plans, the Civil Service Retirement System (“CSRS”) and the Federal Employees Retirement System (“FERS”). Federal employees may participate in either CSRS or FERS, in addition to the Thrift Savings Plan (“TSP”), the federal government’s defined contribution plan. CSRS, FERS, and TSP are all exempt from ERISA; therefore, special attention is required when dividing these plans during a divorce. This post will provide a basic overview of the CSRS and FERS eligibility requirements, benefit formulas, annuity types, and the requirements for completing a court order acceptable for processing (“COAP”) to apportion the plan participant’s benefits. (For more information on TSP, see our post Dividing a Thrift Savings Plan Account in a Divorce).
An Overview of CSRS and FERS
Civil Service Retirement System
CSRS was established through the Civil Service Retirement Act and went into effect on August 1, 1920. CSRS participants contribute either 7%, 7.5%, or 8% of their basic pay into the plan because these employees do not contribute to social security retirement while employed with the federal government. Also, CSRS participants may contribute up to 10% of their basic pay into the plan as a voluntary contribution to receive a larger annuity in retirement.
The formula for calculating a CSRS annuity consists of a retirement multiplier x high-3 average salary x years of creditable service. The retirement multiplier adjusts based on an employee’s years of service as follows:
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first five years of service: 1.5% x high-3 average salary, plus
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second five years of service: 1.75% x high-3 average salary, plus
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all years of service over ten: 2% x high-3 average salary
An employee’s high-3 average salary is the average of their basic pay, excluding overtime, bonuses, or awards, over a consecutive three-year period. Years of creditable service under CSRS generally consist of:
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federal covered service where an employee’s pay is subject to CSRS deductions;
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federal service where an employee's pay is not subject to retirement deductions (e.g., temporary appointments); and
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service where a specific statute allows credit for the service based on employment with a specified entity, program, or appointment type.
A CSRS participant’s annuity typically will not exceed 80% of their high-3 average salary unless unused sick leave is credited to the employee or periodic cost-of-living adjustments occur.
Federal Employees Retirement System
The FERS plan went into effect on January 1, 1987. However, new federal civilian employees who were hired after December 31, 1983 are covered under FERS. FERS benefits are comprised of three parts 1) a basic plan benefit, 2) social security, and 3) TSP. This section will only focus on the basic benefit.
The basic formula for calculating a FERS annuity is 1% x high-3 average salary x years of creditable service. If a federal employee retires at age 62 with twenty years or more of creditable service, the formula adjusts to 1.1% x high-3 average salary x years of creditable service. An employee’s high-3 average salary under FERS is the same as it is under CSRS. Years of creditable service under FERS generally consist of:
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civilian service where contributions were made to an employee’s benefit,
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military service that is not being used toward military retirement pay (subject to deposit requirements), and
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leaves of absence attributable to receiving workers’ compensation or performing active military service with an honorable discharge.
Lastly, federal civilian employees’ benefits vest under both CSRS and FERS after completing five years of creditable civilian service.
Annuities and Employee Contributions under CSRS and FERS
There are three annuity options available for federal employees upon retiring or experiencing another qualifying event. All three of these annuities may be divided in a divorce.
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Self-only annuity. A self-only annuity is the largest annuity option available because the payments are not reduced to a retiree, and there will not be a survivor annuity payable to anyone. See 5 C.F.R. § 842.602.
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Gross annuity. The gross annuity is the amount of monthly annuity payable to a retiree after reducing the self-only annuity to provide survivor annuity benefits, if any, but before any other deduction. 5 C.F.R. § 838.103.
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Net annuity. A net annuity is the amount of monthly annuity payable to a retiree after deducting from the gross annuity any amounts for healthcare, life insurance, and Medicare premiums, in addition to taxes and monies payable to another person based on a COAP or child abuse judgment enforcement order. Id.
If a COAP is silent on the type of annuity it is dividing, Office of Personnel Management (“OPM”) will default to applying the division to a gross annuity. 5 C.F.R. § 838.625(c). In addition, any unused sick leave that a federal employee has may be used to increase the annuity calculation. Therefore, it is prudent to be aware of the marital portion of any unused sick leave if you are valuing a federal pension for offset purposes.
Employee Contributions
Unlike many private-sector pension plans, federal employees are permitted to make contributions to their pensions. Under CSRS, employees may make voluntary contributions to the plan to increase their final annuity amount, subject to the limits stated above. For every $100 of voluntary contributions made to CSRS, the annuity benefit will increase by $7 per year plus twenty cents for each full year over age 55 at the time of retirement. Federal employees covered under FERS are not permitted to make voluntary contributions; however, most employees contribute 0.8% of their basic pay to their FERS benefit.
Upon separating from service, federal employees may elect to receive a refund of their employee contributions instead of receiving an annuity, if eligible. Although, most annuity-eligible employees do not select this option because the value of their contributions are minimal compared to the value of their full self-only, gross, or net annuity. However, if an employee elects to receive a refund of their employee contributions, the contributions may be divisible or expressly barred from division by a COAP. 5 C.F.R. § 838.401(a).
COAP Requirements
There are several requirements that a court order must meet to be a valid COAP. First, the order must expressly divide the employee’s annuity by properly identifying the retirement system (e.g., “CSRS,” FERS,” “OPM,” or “Federal Government” benefits) and expressly state that the former spouse is entitled to a portion of the employee annuity or refund of employee contributions. 5 C.F.R. §§ 838.303(b), 838.502(a), 838.611(a).
Second, the order must direct the OPM to pay the former spouse a portion of an employee annuity or refund of employee contributions. 5 C.F.R. §§ 838.304(a), 838.502(a). These instructions can be accomplished by:
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expressly [directing] OPM to pay the former spouse directly;
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[directing] the retiree to arrange or to execute forms for OPM to pay the former spouse directly; or
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[being] silent concerning who is to pay the portion of the employee annuity awarded to the former spouse.
5 C.F.R. §§ 838.304(b), 838.502(b). However, OPM strongly recommends that any court order directed at employee annuity or refund of employee contributions expressly direct OPM to pay the former spouse directly. 5 C.F.R. §§ 838.304(d), 838.503(c).
Third, the order must provide sufficient instructions and information that OPM can compute the amount of the former spouse's monthly benefit using only the express language of the court order. 5 C.F.R. § 838.305(a). To provide sufficient instructions and information for OPM to compute the amount of the former spouse's share of the employee annuity or refund of employee contributions, the court order must state the former spouse's share as:
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a fixed amount;
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a percentage or a fraction of the employee annuity; or
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a formula that does not contain any variables whose values are not readily ascertainable from the face of the court order directed at employee annuity or normal OPM files.
5 C.F.R. §§ 838.305(b)(1), 838.504(b).
Remember, CSRS and FERS are defined benefit plans. Therefore, if a proposed COAP uses language such as “contributions,” “deductions,” “deposits,” or “retirement accounts,” instead of addressing the proper annuity type, OPM will interpret this language to apply to the refund of employee contributions, not the division of an employee annuity. 5 C.F.R. § 838.612(b)(2).
Once a judicial officer has signed the court order, the former spouse must submit a written application for benefits to OPM. The application can be submitted personally or through a representative, and no special form is required. 5 C.F.R. § 838.221(a).
The application letter must be accompanied by:
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a certified copy of the court order acceptable for processing that is directed at employee annuity;
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a certification from the former spouse or the former spouse's representative that the court order is currently in force and has not been amended, superseded, or set aside;
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information sufficient for OPM to identify the employee or retiree, such as his or her full name, CSRS or FERS claim number, date of birth, and social security number;
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the current mailing address of the former spouse; and
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if the employee has not retired under CSRS or FERS or died, the mailing address of the employee.
5 C.F.R. § 838.221(b).
Applications for benefits should be sent to OPM’s Court Ordered Benefits Branch by mail at PO Box 17, Washington, DC 20044.
Hopefully, this post gave you a healthy initial overview of the CSRS and FERS retirement systems while adding insights into how to divide these plans in a divorce successfully. The next CSRS/FERS post will address topics such as death and survivorship, disability, and more default actions that OPM will take upon receipt and evaluation of a proposed COAP.
Sources:
Opm.gov
United States Office of Personnel Management, A Handbook for Attorneys on Court-ordered Retirement, Health Benefits and Life Insurance (1997).
United States Office of Personnel Management, Civil Service Retirement System (1997).
United States Office of Personnel Management, Court-Order Benefits for Former Spouses (2014).
United States Office of Personnel Management, Federal Employees Retirement System: An Overview of Your Benefits (1998).
United States Office of Personnel Management, Refunds Under the Civil Service Retirement System (1997).