If you are married to a federal civilian or military employee, it is critical that you learn as much as you can about the federal pension plans in which your spouse participates. Beyond doubt, such knowledge is incumbent upon someone considering a dissolution of marriage. Indeed, as far as federal pensions: what is included goes, what you do not know might come back to haunt you.
The following paragraphs briefly describe the FERS retirement benefits and present seven facts about these types of federal retirement plans.
What is FERS?
Congress passed the Federal Employees Retirement System Act in 1986 (FERS). FERS provides participants in the FERS retirement plan benefits from three sources:
- The Basic Benefit
- Social Security
- Thrift Savings Plan (TSP)
The federal employer deducts the appropriate contributions to the Social Security program and the Basic Benefit from the employee’s pay each payroll period. After the person retires, FERS pays an annuity every month for the rest of the participant’s life.
What Kinds of Pensions Does the FERS Basic Benefit Provide?
There are four ways to receive the FERS Basic Benefit:
- Immediate — an immediate pension begins within 30 days after termination from employment if the employee is age 62 with 5 years of service, 60 with 20 years of service, MRA with 30 years or MRA with 10 years of service. If the employee retires with at least 10 but less than 30 years of service, the benefit reduces by 5% for each year under age 62 (unless the person is 60 with 20 years of service). The minimum retirement age (MRA) for each participant depends on the year the person was born.
- Early — Any age with 25 years of service or age 50 with 20 years of service.
- Deferred — A person who leaves federal employment before becoming eligible for an immediate pension is eligible for a deferred pension if the person is age 62 with five years of service, or has an MRA with 30 years or MRA with 10 years of service. For a person with at least 10 years of service but less than 30 years, the benefit reduces by 5% for each year under age 62 (unless the person is age 60 with 20 years of service).
- Disability — Eligibility for a disability pension occurs at any age with 18 months of service provided that the person became disabled due to injury or disease while working in a position covered by FERS and is unable to provide “useful and efficient service in the position”. The agency must also certify that it has considered the person for “any current position in the agency at the same pay grade/level, within the same commuting area” for which the person may be suitable “for reassignment”.
Please note: A person who leaves federal employment before meeting the eligibility requirements for a pension may request that FERS return their contributions in a lump sum. Alternatively, such a participant may take the Social Security and the TSP sources to the next job. A person who leaves federal employment with five years of service may wait until retirement age to apply for a deferred pension.
What Is a Thrift Savings Plan?
The third piece of the FERS retirement benefit is the Thrift Savings Plan (TSP). The TSP is a defined contribution plan, just as many retirement plans popular in the private sector are defined contribution plans.
A defined contribution plan is a retirement plan to which the employer, employees, or both, make contributions to an individual account set up on behalf of each employee. The contributions plus the earnings over time accumulated in the individual account make up the retirement benefit.
The term Thrift Savings Plan may be new to you, but you already know the concept. You can think of the FERS TSP as a 401(k) plan solely for federal employees and military personnel. Just like a 401(k) for private sector employees, contributions to a traditional TSP are not taxed until they are distributed (referred to as tax-deferred). Upon retirement, employees also may roll over the TSP contributions and earnings to a Roth IRA for more tax-deferred treatment.
Thrift Savings Plan participants can choose from six investment options. The investment options are:
- Government Securities Investment Fund
- Fixed Income Index Investment Fund
- Common Stock Index Investment Fund
- Small-Capitalization Index Investment Fund
- International Stock Index Investment Fund
- Life-cycle investment funds
The Federal Retirement Thrift Investment Board (FRTIB) administers the TSP. The FRTIB is an independent government agency that the law recognizes as the fiduciary responsible for managing the TSP prudently and in the best interest of participants and beneficiaries.
How Do Federal Employees Contribute to the Thrift Savings Plan?
Employees contribute to their traditional TSP through automatic payroll deductions and, depending upon the agency they work for, the agency makes contributions to the Plan on their behalf. In addition, new federal employees may also roll over 401(k) contributions and IRA contributions to the TSP. Rollovers also work in the opposite direction if the employees leave federal employment to work in the private sector.
A second type of TSP is known as a Roth TSP. A Roth TSP allows federal employees to make after-tax contributions. When they retire, participants in the Roth TSP pay no taxes upon distribution as long as the distribution is a qualified distribution.
Are Employees Allowed Beneficiaries to the TSP?
Yes. The surviving spouse of a civilian or military employee who participated in the TSP is entitled to have a beneficiary individual account in their name if the balance in the employee’s account is $200 or more.
Beneficiaries cannot make contributions, borrow funds, or transfer money into the beneficiary participant account. They do, however, have the same tax-deferred treatment on the balance in the account and have investment options if they stay in the TSP.
Naturally, the IRS has rules about taking required minimum distributions at certain ages, but otherwise the beneficiary does not have to withdraw the money until they need it. Even if the couple divorces, the TSP will pay the death benefit to the named surviving beneficiary.
What Are the TSP Withdrawal Options for Beneficiaries?
A designated beneficiary may withdraw funds in one of the following ways, or a combination thereof:
- Single withdrawals of $1,000 or more
- Installments (either fixed number of installments or payments based on life expectancy)
- Annuities from a third-party vendor ($3,500 minimum)
In certain circumstances, beneficiaries may transfer funds to an IRA or eligible employer’s plan.
What Happens to the TSP in Divorce?
If a couple divorces, FERS Basic Benefits are divided through something called a Court Order Acceptable for Processing (COAP) which is reviewed and approved by the Office of Personnel Management (OPM). The division of benefits is done on a shared benefit basis. This means that the divorced spouse must wait until the FERS participant retires to receive their former spouse annuity benefit payments. The COAP also assigns the surviving spouse a share of the FERS death benefit in the event that the participant dies before retirement.
The division of the TSP, on the other hand, requires a Retirement Benefits Court Order (RBCO) which is filed with the court and then submitted to the Office of Thrift Supervision. The RBCO may only assign a specific dollar amount or a percentage of the TSP to the former spouse as of a specific date.
Taking the Next Step
To learn more about TSPs, you may enjoy the July 2021 article from fedsmith.com entitled “How to Make the Most of Your TSP.”
To talk more about FERS, TSPs, or to inquire about how we can help you prepare an RBCO or a COAP, please contact us today to speak with one of our experienced attorneys. Make us your resource for all your legal questions.
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