Delivered on: Thursday, October 17, 2024

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3 Ways a Court Order Wrecks Your Federal Pension

What you (and your current spouse) should know before you retire—and how to mitigate the impact moving forward.

• FEDERAL PENSION: How your ‘take-home’ pay may change while you are still living in retirement
• SURVIVOR BENEFITS: How much your former spouse gets when you die—and how much it will cost you
• CURRENT SPOUSE: How your current/future spouse’s benefits may be reduced or eliminated
• TIMELINE: How having a court order affects how long it will take OPM to process your retirement application

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Prefer to read instead? A transcript of this webinar is below:

Welcome to today’s FedImpact webinar on Three Ways a Court Order Wrecks Your Federal Pension. Sometimes I have to be the bearer of bad news, and today’s webinar will certainly be one of those days.

And so with respect to your federal pension, if you do have a qualifying court order, you’ve got a former spouse who is entitled to some of your federal pension, today’s webinar is designed to help you better understand the types of things that courts can award and what those calculations look like so that you can be better prepared when you step into retirement from federal service.

I’m Chris Kowalik, the founder of ProFeds. We do retirement workshops, podcasts, webinars, articles, all sorts of crazy stuff for feds. And our job is to help you get the very most out of your government benefits and advocate for yourself so that you know you have done everything possible to get the very best retirement when that time comes. Today’s session is a rather unpopular one if I can just be really honest.

3 Ways a Court Order Wrecks Your Federal Pension

Nobody wants to come to a webinar to learn how their benefits are going to get wrecked, but it’s important to me that you and your current spouse, if you happen to be remarried, that you know what to expect before you retire. And anything you can do to mitigate the impact moving forward and sometimes simply knowing how these benefits work and how court orders will affect them will help you to at least have peace of mind that you know what you’re getting yourself into.

Agenda

For today’s agenda, we’re going to be focused primarily on the federal pension and specifically how your take home pay may change while you’re still living in retirement, again, based on that court order and what was awarded. Next, we’ll talk about survivor benefits, so how much your former spouse gets when you die and how much it’s going to cost you while you’re still living, again, depending on the wording in your court order will help us get to the bottom of that.

And then next, a current spouse, so how your current or your future spouse’s benefits may be reduced or eliminated based on the court order granting benefits to a former spouse. This is a scenario where we need to have eyes wide open to know exactly what’s coming down the track so that we are nice and prepared and we take any additional steps around that to mitigate those consequences. And then lastly here, the timeline, how having a court order affects how long it will take the Office of Personnel Management to process your retirement application.

What this webinar will NOT cover

We are not attorneys. We are not giving legal advice. This is not a how to guide to craft your court order if you’re in the middle of a divorce. I just want you to be aware of how these things work. For most of you, you have a court order that was probably finalized many, many years ago. You are hoping to just close that chapter of your life. And here you are about ready to step in retirement and it’s going to rear its ugly head and we have to be willing to face those consequences.

I have good news and bad news for you today. The good news is you don’t have a choice. The bad news is you don’t have a choice, right? This just is what it is, and our session today is going to be better understanding how the court order affects you while you’re living and in retirement if you were to pass how it’s going to affect both your former spouse and your current spouse.

Court Ordered Benefits for Former Spouse

When we think about court ordered benefits for a former spouse, we know that a court can award a wide variety of benefits to a former spouse. The most common of those benefits that are awarded are a portion of the Thrift Savings Plan, a portion of a person’s normal paycheck while that fed is still working, a portion of the CSRS or FERS pension while that fed is retired, and then survivor benefit, so that is protecting a portion of that pension in the event that you should die.

We’re going to really be focusing on the last two, the ones that are highlighted here. The reason being is if there was a portion of the TSP that was awarded, it has probably already left your TSP account at the time of the divorce. Most of the time a former spouse doesn’t want to leave that money in your account for you to do with it as you wish. And so that’s already gone.

Then a normal paycheck deduction, think of alimony or something similar to that where you’re being forced to pay a portion of your current check over to a former spouse, you’re already doing that if that is the court order. And so that’s already happening in your life and I don’t feel compelled to try to explain how that’s working for you. You already know how it’s working for you.

But the two pieces of these court orders that you might not be experiencing yet if you’re still working, that is the portion of your pension while you are retired and a portion of your pension in the event that you die, that’s paid through the benefit of the Survivor Benefit Program. Those are what we’re going to be focusing on today.

Language in the Court Order

It’s important to understand the language of the court order. That court order can award a portion of your benefits both while you’re living and after you die to that former spouse. But how they do that we’re going to start to pick apart in today’s session. That order may contain language about how the former spouse will receive those payments directly from the Office of Personnel Management, or perhaps it’s paid to you and then you pay the former spouse their share.

Most attorneys at least these days are writing court orders to where the Office of Personnel Management pays your former spouse’s portion directly to them so that there is no future contact that’s required. It’s way easier that way. It will probably make you a little less upset because you’re not seeing that money and then turning around and giving it to someone else. The court might also specify who’s responsible for the tax on the payments and any cost of the benefits that the court is awarding.

Just because the benefit is awarded doesn’t mean it’s free. Someone’s likely going to pay for it and the court may specify in the order who does. Oftentimes they don’t specify it all, which unfortunately means that the default is that you are paying for it. Very important that the language in these orders is correct. But unfortunately, for those of you who already have a court order that has been filed, that is a done deal. The only way is to go back to the court and get them to reword things, which can be quite difficult.

The Formula for Determining the Marital Share

Let’s talk about the formula that the courts typically use for determining what they call the marital share. The order itself must make clear to the Office of Personnel Management which formula they’re using to calculate the marital share, the portion of the benefit that belongs to the former spouse. The most common formula is the Bangs formula, which determines how much of your pension was earned during the period that you were married, so the overlapping period of time.

We’re going to start by identifying the number of months that you were in a federal or a military position while you were married. And I put military in here because if you had military service and you have used that service and included it in your CSRS or FERS pension by way of making a deposit for it, then that time will count in this calculation as well. Of course, if you don’t have any military service, if your military pension was completely separate from your FERS pension, if you retired from the military, that will be treated separately.

But in the event your military services included in your federal pension, your CSRS or FERS pension, it will be included in this formula. The next is the total number of months that you are in that federal or military position. Same concept with the military stuff that I just mentioned. So we’re looking at while you were married how many months were you in that military or federal position and then total, because we’re going to derive a percentage from this.

With the Bangs formula, the marital share is the number of months that you were married while you were a federal employee divided by the number of months total that you served through the federal government. Again, this is only counting that time that’s included in your CSRS or FERS pension. We’re going to multiply that number by 50%, so that is your former spouse’s share, their marital share, and we’re going to multiply that by the pension amount that you have.

And that would be the amount that the former spouse receives. We’re going to use a case study to show you some numbers around this formula so that it comes to life here for you. But this is by and large the formula that we see 95% of the time. Sometimes courts use other types of formulas, but this is very common. The precedence is set that the Bangs formula holds up.

Today’s Example: Julie & Darren

Let’s take Julie as an example. Julie is a FERS employee. She’s going to be retiring at the age of 60. By the time she retires, she has 30 years of total service, which ends up being 360 months. That will be important here in a moment. Her high-3 at the time that she retires is $100,000, which puts her pension at $30,000 per year.

Her and Darren were married for 25 years, but only 23 of those overlapped. Her federal service and her marriage, only 276 months were overlapping. And so that number is what we’re going to use in the calculation to determine how much of Julie’s pension Darren is going to receive.

Julie & Darren’s Court Order

Let’s take a look at the court order, at least the highlights of it. The court order awards Darren the following things. The marital share, so his portion of Julie’s pension that will be paid on a monthly basis while Julie is living. It will be paid directly to Darren by the Office of Personnel Management.

Next step is the marital share of Julie’s Survivor Benefit. This would be payable monthly starting when Julie dies. This assumes, of course, that Julie dies before Darren does. But in the event that that happens, that benefit will be paid directly to Darren by the Office of Personnel Management. And while living, unfortunately, the court determined that it was Julie’s responsibility to pay for this premium for this coverage. And so you’ll see those figures here in just a moment.

Julie’s Federal Pension (While She’s Still Living)

Let’s focus on the federal pension. Again, this is while Julie’s living that we’re going to be looking at this. Julie’s pension, in order to determine what Darren’s share of that is, we’re going to use the Bangs formula.

We would take those 276 months that they were both married and that she was in a federal position, and we’re going to divide that by 360 months, which is the total number of months of service that she has when she retires from federal service. We’re going to multiply that by 50% and multiply that by the pension amount of $30,000. So that comes out to $11,500 per year that Darren will receive once Julie retires. So when she retires, she’s going to get $18,500 a year and Darren will get the remainder of the $11,500.

Your Federal Pension (When You Die)

Let’s switch gears and talk about survivor benefits for a former spouse. So survivor benefits are elected typically at the time that someone retires, but they don’t get paid out until that fed dies. Unfortunately, we have to talk about these things whether they’re popular or not. Let’s jump into what this looks like for a former spouse. Survivor benefits are a way to leave a portion of your federal pension to a former or a current spouse.

Of course, in this particular section that we’re going to be talking about right now, we’re going to be looking at the former spouse. For a former spouse, there’s an involuntary decision about survivor benefits, so that’s a court order, and then a voluntary election that’s possible to be made. I don’t know that I’ve ever met anyone who’s voluntarily given more money to a former spouse. Maybe that’s you. Who knows?

But today we’re going to be really focused on that involuntary election where the court is dictating how much is going to be given. We also want to look through the lens of a current spouse. We’re going to dig into the current spouse’s scenario a little bit more here in just a moment, but that, of course, is a voluntary election that’s made at the time of retirement.

A former spouse (by Court Order)

If we think of that involuntary election for a former spouse, so this is a court order, that court order must explicitly grant that former spouse any or all of the Survivor Benefit Plan. If there is no language that exists in the court order, there is no benefit provided by OPM. It’s not a default or anything like that. If your attorneys, if you as two parties, if the court intended for OPM to pay a survivor benefit in the event that you die, it has to be named in the court order or else it doesn’t exist.

Another important factor that I’ll put in here, it doesn’t apply in this particular scenario, but unless the two of you were married to each other for at least 30 years, if your former spouse remarries prior to the age of 55, the benefits that the court awarded to them get forfeited and they would revert to a current spouse, one, if you have one, and two, if you made the right decisions when you elected the survivor benefit on your retirement application.

We’re going to talk more about that here in just a moment. But it’s super important to understand the rules that surround a former spouse and making certain that you know when and when they don’t receive benefits.

Julie’s Federal Pension (When She Dies)

For Julie’s federal pension when she dies. Again, this is survivor benefits. For that former spouse, for Darren, to receive his portion, we first have to figure out what that portion is.

In his case, we take 276 months that their marriage overlapped Julie’s federal service, and we’re going to divide that by the total number of months that Julie had in her federal career, which was 360. That’s 30 years, 360 months. We’re going to multiply that by 50% and multiply that number by the $30,000 pension that she’s going to be getting each year. When we do that math, that comes up with that pension that Darren will receive of $11,500 per year.

When Julie dies, Darren continues to receive $11,500 a year through the Survivor Benefit Plan. What this means if you recognize this $11,500 number, it was the same number that was used to determine what portion of her pension while she was living she had to give up to Darren.

I want you to understand that a survivor benefit calculation that’s using the Bangs formula on both sides, meaning the portion of the pension that the former spouse gets while the fed is still living and the portion of the pension that the former spouse gets in the event that the fed dies is the same.

Darren is going to be paid the same amount regardless if Julie is still living or has already died. But here’s the kicker. While living, the court order has mandated that Julie pay the cost of the survivor benefit, which in this case is $2,300 per year. She gets her $18,000 or so in her pension, but from that she has to pay $2,300 to have this benefit in place.

Some court orders do it this way. Some require the person receiving the benefit, in this case, Darren, to pay the dollar amount. In this case, the $2,300. And oftentimes the courts have them split the cost, so they each pay half. You’re going to have to look at your court order to determine what that looks like for you.

Your Federal Pension (Survivor Benefits for your CURRENT spouse)

Next up, we’re going to talk about a current spouse and how things shake out for them in the event that you have a former spouse in the mix. For FERS employees, the very most that can be to a current spouse and/or a former spouse combined is half of your pension. Period. You can slice it and dice it however you want, but no more than half can be awarded through this benefit. And it’s not really an award. The court would be an award.

The benefit itself is elected, but that is the most that can be elected through the Survivor Benefit Plan. I want you to realize the former spouse is first in line for benefits that were awarded by the court. If the court awarded the entire benefit to a former spouse, they’re going to get it all and your current spouse is going to get nothing.

For your current spouse, if there is something left over that the court did not award to a former spouse, your current spouse will be entitled to the remaining amount of the maximum allowable limit. But of course, your current spouse could elect something less if they choose to, and we’re going to show you how that works.

Survivor Benefits in Retirement: Julie is now remarried

Here’s the deal, Julie and Darren are no longer a thing, but now Julie’s got Mike. They’re married. And her question is, what can I do to protect Mike if I die? How is Julie supposed to complete the paperwork? And what happens if Darren dies before Mike does? Let’s see how this works.

Survivor Benefits Elections at Retirement

What we first have to look at is what the paperwork looks like in the retirement application. If you’re a FERS employee, we’re going to be looking at the SF-3107. You’re going to go to Section D, and this is where you’re making an election for a current spouse. You have three choices. You can either protect half of the pension, 25% of the pension, or 0% of the pension.

That’s it. Those are your three choices if you’re FERS. CSRS, it’s more complicated and way more options. But the vast majority of you on this call are not under the CSRS program, I’m not going to muddy the water by talking about that piece.

But these are the choices that you have for a current spouse. But if we have a former spouse in the mix, this gets messy pretty quickly. I want to show you how it works.

Julie’s Survivor Benefit Election

When it comes time for Julie to make an election of the survivor benefit, she’s going to be looking to the retirement application. And for her current spouse, she’s going to need to elect what benefits she wants him to get. What does she want Mike to get as if Darren was not getting anything?

We know that Darren is getting something because we’ve already taken a peek at the numbers, but let’s pretend for a moment that he’s not. What would she want Mike to get of her pension? We’re going to show you how this works with some numbers here in a moment.

For her former spouse, for Darren, she will not elect any survivor benefit for Darren because the court order, those payments are going to happen automatically. Any reference that you see on the retirement application for a former spouse is for a voluntary election only. Do not fill out this section with your former spouse if you have a court order. The court order is going to trump anything you do on this document.

What we don’t want to see happen is you make an election for a former spouse that was already in play, at least a portion of the benefit, and then you’ve got the court ordered benefit that’s there as well. You’re doubling up on the benefit that your former spouse is potentially getting.

Assuming you don’t want to give any extra money to a former spouse, do not include them at all on your retirement application. You’re going to submit a divorce decree and all of that along with your retirement application so OPM knows that there is a former spouse out there who’s entitled to benefits, but you do not want to make a voluntary election for a former spouse. Here’s our example.

Survivor Benefits in Retirement

We have Julie and Darren. Julie’s pension is $30,000 per year and the maximum allowed survivor benefit is $15,000 per year.

I’m just reminding you what is in play here. I know we’re talking about Mike, the current spouse, but we need to remember what is going on with Darren. If the max allowable amount is $15,000 and Darren, the former spouse, already has $11,500 of it, what happens to Mike?

If “full” SBP is elected

Let’s take a look at what this looks like if a full survivor benefit is elected on the retirement application. Again, Julie is wanting to protect the maximum amount for Mike pretending Darren doesn’t exist, but the most that Julie can protect is half of her pension.

The max allowable is $15,000 per year. But we know that Darren already got the $11,500 by the court order. That means that Mike can receive $3,500 per year. And to top it off, Julie is going to pay $3,000 a year for the survivor benefit coverage. That’s not the same number that we saw before. You saw a lower number of the $2,300. The reason it’s $3,000 is because she’s electing the full benefit for Mike. That $2,300 was for Darren’s portion. The other $700 is for Mike’s portion.

In the event that Darren dies before Mike does, Mike’s benefit will pop up to the full $15,000 that was elected. It’s just that Darren is first in line and he’s going to get his portion first and then Mike gets whatever’s left over. And boy is this a fun conversation to have with people when they’re just discovering this. Remove all the sharp objects from the room. It’s never fun.

If “partial” SBP is elected

Remember this is to protect 25% of the $30,000 a year pension. The max allowable in the partial survivor benefit is $7,500. But wait a minute, Darren was awarded $11,500 by the court. And guess what? That’s what Darren’s going to get. But that means that Mike, as long as Darren’s around, Mike is going to get nothing.

Julie’s going to pay $2,300 a year for that benefit for Darren. And if Darren dies before Mike, Mike will begin receiving that full $7,500 for the remainder of his lifetime. A lot of things have to happen in the right order for all of this to work, but it can be pretty overwhelming.

It’ll make more sense to you when you start to plug in your own numbers here, but this is an awful lot to think about. In the event that Julie elects no survivor benefit at all on her retirement paperwork, we know the max allowable at that point will be zero.

But we know Darren’s going to get the amount awarded by the court order, which was the $11,500. Mike will get $0. Julie’s going to pay the full fee for the survivor benefit coverage at the $2,300. That is Darren’s portion of the survivor benefit. And here’s the deal, if Darren dies before Mike, Mike will continue to receive nothing for the remainder of his lifetime.

There’s a lot of decisions and we don’t know how this is all going to shake out in real life. It can be a little bit overwhelming to try to process what we’re supposed to do with the Survivor Benefit Plan in light of a court order being in place.

Some Final Thoughts

I’ve given you the treetop version of this. Not to get too legalese and complicated here, but I want to give you some final thoughts.

I mentioned this earlier, but you will submit a copy of your court order with your retirement paperwork. This means that your retirement package is going to get in a long line. It’s going to have to be reviewed by the attorney group at OPM who will look to make certain that this is a valid court order, that nothing was modified in it or anything like that. Your package is just going to take longer to process there.

And keep in mind, there are very real financial consequences to these court orders, but you didn’t know what your life was going to look like or how your service was going to look if you were going to get remarried. You didn’t know those things when you got divorced. If you did, maybe that’s the reason you got divorced. I don’t know. I’m not here to judge. But the idea that that is all behind you unfortunately is not reality.

It will very much be with you for the remainder of your lifetime through the financial consequences that are playing out in your pension, either while you’re living or for that of your current spouse. You may not be as worried about what your former spouse is getting other than it is sand in your britches here a little bit. But for your current spouse, that’s what most people are concerned about.

Knowing that your former spouse is first in line for benefits may very well leave your current spouse with less than what you need or perhaps nothing. I want to give a little bit of context here. For those of you who may not be as familiar with the Survivor Benefit Plan, I’ve touched on the parts that are connected to the court order aspect of things.

But if you want to deeper dive into the strategy of the Survivor Benefit Plan, how it works, what the advantages and disadvantages of it are, I want you to go watch the webinar that we did on that specific topic. I don’t talk about court orders in there. I mean, I do very, very briefly, but not like we did today. But go to FedImpact.com/webinar-SBP-strategy and you’ll be able to watch that entire webinar.

And if you have a bright idea that you think you’re going to try to leave your pension to your kids or someone other than a spouse, please watch the webinar that we did in August at FedImpact.com/webinar-SBP-kids. Those are just some short links to get you right over there, and you’re going to probably be unpleasantly surprised at what is available to be able to leave your pension to anyone other than a spouse.

But I want to make sure that those resources are available to you so that if you’re concerned about how that’s all going to work, that you have these resources to be able to go and educate yourself so that you feel really prepared stepping into retirement.

Wrap-Up and Next Steps

You guys know, our job here is to help you to retire with confidence. We have workshops all over the country. We’re even in some overseas locations.

Please make some time for yourself to attend one of these workshops to start these wheels in motion to get prepared for retirement, not just on SBP and your pension and all of that, but all of the aspects of your federal benefits to get that right before you make the decision to retire.

These workshops are in-person training sessions. There is no cost for you to attend. These are sponsored sessions and so the fee’s already been paid. You are able to attend. It’s a full-day session. You can be nice and engaged, fully present in that day, not being interrupted by anything else. Just take a day for yourself. We’re going to cover all of the federal benefits and the decisions that are going to be made.

And here’s my favorite part, there’s some one-on-one help that’s available following the workshop so that you can start to get into the nitty-gritty of how all these things work for you. You can see all of the details, the locations, the dates, all that good stuff at FedImpact.com/Attend.

I want to thank you for joining us today. I know that this is not the most ideal topic to be talking about with court orders, but hopefully you feel more prepared and aware of how these court orders unfortunately are going to affect you while you’re living in retirement and potentially your current spouse.

You can find a workshop local to you at FedImpact.com/Attend. And to attend that next webinar, go to FedImpact.com/Webinar. Thank you all so much. We’ll see you next time.

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