Federal retirement expert, Chris Kowalik, discusses some important considerations on one of the biggest decisions federal employees nearing retirement have to make: the spousal survivor benefits plan.
Key takeaways:
- 7 tips on how to get the most out of the spousal survivor benefits decision
- How this program works over the long-term in retirement
- Why a spouse might choose to protect something less than the “full” benefit
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Scott: Hello, and welcome to this episode of FedImpact: Candid Insights on Your Federal Retirement. I’m Scott Thompson with myfederalretirement.com. I’m here today with Chris Kowalik of ProFeds, home of the Federal Retirement Impact Workshop. In today’s episode, we’re going to be taking a look at the Survivor Benefit Plan and how it works in retirement. Welcome, Chris.
Chris: Thanks, Scott. This topic of the Spousal Survivor Benefit Plan draws out so many questions in our live workshops, both from employees and their spouses. There are some really interesting things that happen with this program that most federal employees don’t understand, which is why I knew this would be the perfect topic to cover today. I also want to tell all of our listeners today to stay tuned all the way through this podcast because I’m going to share seven tips on how to get the most out of this giant decision that they need to make at retirement.
Scott: Okay. Well, excellent. We always love your tips, Chris. Now, like so many of the topics we’ve covered together in these podcasts, this is a pretty substantial and important topic. So that all of our listeners can follow along with these concepts, would you mind giving us a brief description of what the Survivor Benefit Plan is and, generally, how it works?
Scott: Oh, okay. Now, for a program that appears to be fairly straightforward, I suspect that there’s a lot of complexity in the choices available and how retirees choose the program that’s right for them. Is that a fair statement?
Chris: Yeah, very much so. This election is one of the most important decisions a federal employee has to make as they approach that retirement window. On a side note for all of our listeners, this decision is made on the application for retirement, so this tells the government what protection is in place for the pension once that person steps into retirement. That’s the moment in time that this is decided. It is absolutely critical that federal employees understand how this program works. They need to understand some consequences that will happen based on the choices that are made and, certainly, how this program operates over a long period of time. Like all of the topics that we cover in these podcasts, of course, we can’t possibly cover every single aspect for every single employee out there. Today, we’ll be talking about some of the highlights of this program and how it works for most people.
Scott: Okay. I’m glad you pointed that out, Chris. These topics do get really complicated, and it’s sometimes difficult to cover all of the intricacies for the millions of federal workers and retirees that are out there today. Chris, what would you say would be the first thing that federal employees listening need to understand about this program?
Chris: Well, first and foremost, the Survivor Benefit Plan allows for the protection of a federal pension for one of two types of people. It’s either a spouse or a former spouse with a court order. That’s it. For all of our listeners, if you don’t have a spouse or a former spouse, there is nobody who can get your pension under this program, period. Now, there’s another program called the Insurable Interest Survivor Benefit that may allow a retiree to leave a different type of ongoing payment to someone other than a spouse or a former spouse, but we’ll talk about that program and all the oddities that comes along with that in a future podcast. The insurable interest option comes with a lot of downsides to it, and it’s not a very attractive program for most people. We’ll take a deep dive into that in an upcoming episode, and so stay tuned to that.
Scott: Okay. I bet this surprises most people who come through your training. Would you say that most employees are under the assumption that they can leave their pension to whomever they wish?
Chris: Yeah. Unfortunately, we hear that a lot. This information kind of takes the winds out of their sails when they realize that that’s not really how it works. The reality of how this program really functions is not what they’ve had in their head for all these years. Now that we know that only two kinds of people who can benefit from this program are spouse and a former spouse, let’s dig in to both of those categories to see how this really works.
Scott: Okay. Why don’t we start with the current spouse then?
Chris: Yeah. A current spouse is entitled to a full survivor benefit. Entitled is a very, very important word in this description. In other words, a current spouse is automatically set to receive the highest possible level of protection of the pension that the government will allow. This is the default. If a current spouse wishes to take an amount of protection less than what they’re entitled to, they must provide their notarized consent to do so. Now, that notarization happens directly on the application for retirement. In reality, this keeps and employee from making that decision without consulting their spouse first.
Scott: Okay. Well, and I’m sure there’s a good reason, but why would somebody select something less than what they’re entitled to?
Chris: Yeah. That is an excellent question. I always get some funny faces in the classroom when I share how this program works. On the surface, it would seem crazy to not take the full protection available. Once our listeners get a better understanding of how this program works and how it’s structured, it might become a little bit more obvious to them why a spouse might choose to protect something less than the full benefit. Everyone listening, sit tight. We’ll see that here in just a few minutes.
Scott: Okay. Well, I can tell that’s not the first time you’ve received that question, Chris.
Chris: Right.
Scott: Well, let’s pivot our discussion to talk about former spouses and what role they might play with the Survivor Benefit Plan.
Chris: Yeah. There are two ways that a former spouse could receive protection of the pension under the Survivor Benefit Plan. The first way is that the federal employee almost-retiree could voluntarily elect for this protection for a former spouse. Now, while most people don’t want to voluntarily give something to a former spouse, the most common reason for this is because the couple has children who would indirectly benefit from the pension continuing to be paid to a former spouse.
Now, I want to make a special note here. Whenever I have somebody that approaches me with this idea, this strategy of protecting their pension for a former spouse in the hopes that their children end up getting some benefit, I would strongly argue that there are other ways to be able to protect an income for surviving children that would be much more flexible and cost-effective than what’s available in the government Survivor Benefit Plan. The reality is, is that while most people hope that their children will benefit from their pension, they in no way want a former spouse to benefit from the pension. A very big difference, and there’s more than one way to skin a cat here.
Scott: Okay. Well, I can see where that could get a little tricky.
Chris: Right.
Scott: That is the first way that a former spouse could benefit from the Survivor Benefit Plan. What is the second way?
Chris: Yeah. The most common way that a former spouse receives this benefit is by court order. If they have a qualifying court order like a divorce decree that explicitly grants them any or all of the Survivor Benefit Plan, then the Office of Personnel Management will honor that decree. If we have any of our listeners out there today who have a former spouse, I highly encourage them to carefully review their divorce decree for language pertaining to the survivor benefit. If there is no language that explicitly grants the Survivor Benefit Plan to the former spouse, then no benefit will be provided by the Office of Personnel Management. In addition to that, the former spouse cannot come back today and demand the survivor benefit to be awarded. It had to have been in the original divorce decree that likely happened many, many years ago. If it didn’t make it into that original decree, it’s considered waived permanently.
Scott: Well, I bet we have a lot of listeners scrambling to find their divorce decrees right now.
Chris: Right, right.
Scott: Well, before we move on to some of the meat of this material, are there any other notes that you’d like to add about a former spouse?
Chris: Yeah. The last point that I’ll make regarding a former spouse is that they are first in line for benefits. What I mean by this is, if the entire Survivor Benefit Plan was awarded to a former spouse, a current spouse is entitled to nothing. I mean there’s only so much benefit that can be awarded, and if it all went to the former spouse, then there’s nothing left for the current spouse to receive.
Scott: Well, that might come as quite a blow to some of our listeners who, at the time of their divorce, didn’t realize what they were giving up and how it may affect their future spouse.
Chris: Yeah. You’re absolutely right. In the heat of a divorce and all the negotiations, oftentimes we find that not a lot of thought went into the long-term effect of this decision. They thought it was kind of a throw-away offer in negotiations between attorneys. Now, if it was a judge that awarded this benefit, there isn’t an awful lot that we could have done about it, but if this was a voluntary part of a negotiation between attorneys or between the two parties, it’s something that should be given very, very serious consideration before it is put into the divorce decree, simply because it has a very long-lasting effect on retirees.
Scott: Okay. Well, since it is not fun to talk about former spouses, let’s assume we have a current spouse. Could you walk us through how the Survivor Benefit Plan works for both CSRS and FERS retirees?
Chris: Yeah, of course. Like I mentioned before, roughly half of the pension can be protected under the Survivor Benefit Plan. To get a little bit more detailed, CSRS retirees can protect up to 55% of their pension. If they do that, it’ll cost them just under 10% of their pension check to provide this protection for their spouse. That’s for CSRS. For FERS retirees, they can protect up to 50% of their pension, and it will cost them exactly 10% of their pension while the retiree is still living. That’s the cost to providing an ongoing benefit for their surviving spouse. Regardless if a retiree in under the CSRS or the FERS program, in order to protect the pension for a surviving spouse, the retiree must give up some portion of the pension while they’re living.
Scott: Okay. Now, aside from protecting the pension, does this decision on the survivor benefit affect any other benefits?
Chris: Yes. In fact, the decision to take or not take the Survivor Benefit Plan is connected to one of the most important benefits that federal employees carry into retirement, and that is FEHB, so here we’re talking about the health benefits program. Here’s how it works. If a federal retiree wants their spouse to be able to keep access to the FEHB program after the retiree dies, they must elect at least the minimum survivor benefit. Otherwise, if they say, “No thanks,” to the Survivor Benefit Plan, upon the death of the retiree, the spouse loses access to the Federal Employee Health Benefits program immediately.
Now, the way to ensure that a spouse can continue to keep FEHB after the retiree dies is to ensure that they are named as a survivor annuitant. Here’s the good news. The numbers we mentioned earlier are the full survivor benefit amounts, the most that could be protected. In order to protect the FEHB for the spouse, the minimum must be selected. That’s the least amount that could be protected. The numbers are very different between CSRS and FERS. For CSRS employees, the minimum that can be protected is 55% of $22. Weird number, right? I mean who would think that that’s how that works? What that does is it provides $1 a month in a pension check to a surviving spouse, which makes them a survivor annuitant. They are receiving a check from OPM, which makes them an eligible family member for FEHB. It’s an odd number, but it puts the check in the box that they get to keep health insurance. That’s for CSRS. For FERS employees, the minimum is much more substantial. It’s 25% of the pension. So remember, the most that could be protected was 50% of the pension. The least that can be protected is 25% of the pension. As long as that minimum is selected, at least that amount, the spouse will be able to keep FEHB once the retiree dies.
Scott: Okay. Well, what a strange connection between two benefits that are seemingly unconnected.
Chris: Yeah. Unfortunately, this is one of those things that, when employees and their spouses don’t understand how this all works, really poor decision can be made without understanding the lifelong consequences.
Scott: Right. When an employee is preparing to retire and they make their survivor benefit election, are those numbers locked in for the rest of their lives?
Chris: Ooh, another great question. The percentages themselves that I mentioned will stay the same for a retiree’s lifetime, assuming the spouse is still living. We’ll talk about that here in a moment. However, the pension itself will be subject to cost-of-living adjustments, meaning that every time a retiree receives an increase to their pension, meaning a cost-of-living adjustment, their pension goes up and so does the benefit waiting for their spouse upon the retiree’s death. It’s either 50 or, if we take the max, it’s 50 or 55% of the pension, but it’s 50 or 55% of a number that keeps going up, which is great. All in all, it means that the benefit waiting for a spouse under this program will continue to go up the longer a retiree lives. That’s the good news.
The bad news is that the cost also increases in tandem. While the roughly 10% of the pension that the retiree gives up to have this protection in place stays the same, it’s 10% of an ever-increasing pension amount. The point that I really want to drive home here is that retirees are not locking in a specific dollar amount for the cost to have this benefit in place. The dollar amount to have the survivor benefit in place will continue to go up every time the retiree receives a cost-of-living adjustment.
Scott: Well, that’s a really great distinction, and I appreciate you making that so clear to our listeners today, Chris. Now, I’m curious, can someone change their mind on their election?
Chris: Yeah. There is a window that a retiree could change their mind on the level of protection that their spouse has under this program. Really, it’s the spouse that gets to change their mind. It’s not the employee or retiree. Remember, the spouse is in charge of this decision. Let me share with you what that window looks like. The window when a change is permissible begins at the time that OPM finalizes the retirement claim and runs for 18 months. Now, on a side note, let me share with our listeners that OPM is currently under a 9 to 12-month backlog of processing retirement claims, so for this 18-month window, it does not include the 9 to 12-month period where OPM is processing the claim. The clock starts once OPM finalizes the claim, and runs for 18 months after that. Now, during that 18-month window, a retiree who originally declined the survivor benefit could elect to now have it, and someone who originally elected to have it could choose to decline it. It can go either direction. Either get it because you didn’t have it or decide you don’t want it and drop it. There are even some choices in between which offer different levels of protection that could be elected during that 18-month window as well.
Now, a really important point that I want to make is that, once that 18-month window has passed, this is an irrevocable decision. If five years pass and the retiree has decided they no longer need or want this protection, they can’t drop it. It’s set in stone at that point, again, assuming that the spouse continues to live.
Scott: Okay. If a spouse were to die, what would happen then?
Chris: Well, if a spouse were to pass away, the retiree would stop paying the premiums from that point forward, but everything that has already been paid into the program is lost.
Scott: Okay. What happens if someone divorces in retirement?
Chris: Yeah. It’s going to entirely depend on the divorce decree and what is awarded by a court what happens next. If that divorce decree says the survivor benefit continues, then it continues. If it makes no mention or specifically states that no benefit is awarded to the former spouse, then it will stop. Just like with a spouse that passes away, everything that was already paid up to that point of divorce, there are no refunds.
Scott: Okay. Now, what if the opposite happens, and someone gets married or remarried in retirement. Can they elect their new spouse to receive the plan?
Chris: Yes, they certainly can. Now, there’s a pretty big catch with this, so let me give you an example. Let’s say that when someone retires, they are not married. Five years pass and now they get married at that point. Maybe it’s a marriage or a remarriage, whatever it looks like for them, and they want to add their new spouse onto the plan. They are permitted to do so, and they will begin paying premiums from that point forward. They also have pay the back premium from the time of the marriage all the way back to the time they originally retired. So just because someone can do something doesn’t necessarily mean that they should or, at least, not without some hefty consequences that they might face.
Scott: Yeah. Well, you obviously have a lot to say about the Survivor Benefit Plan. I can tell by just the way you talk about it that it kind of gets you fired up. Well, can you give us your top tips on this plan and give employees some ways to make the most of it?
Chris: Yeah. I’ve got seven things that I think are really important for everyone to consider with respect to the Survivor Benefit Plan. The first is that you don’t have to qualify for the Survivor Benefit Plan. If we have any of our listeners out there that may feel like health-wise they’re not in the best situation, the good news is with the survivor benefit is it doesn’t matter what your health is like. You automatically can get that plan. Again, if that’s the scenario that some of our listeners find themselves in, this is a great backup that people out in the private sector don’t really have.
The next point that I want to make, so point number two is understand how this program functions and how to get your money’s worth out of it. If we start paying for this benefit when we retire, and we stop paying for this benefit when we die, and our spouse gets a benefit for the duration of their lifetime, the best way to get your money’s worth, as the federal retiree, is for you to die quickly in retirement and for your spouse to live for a really long time. But nobody every wants that to happen. I ask regularly in our workshops if anybody want it to happen that way, and nobody does. Every once in while we have some ornery spouses in the classes that raise their hands, but nobody want to get their money’s worth, because it means that the timeline of retirement is not advantageous to them. We want everyone to live a long time in retirement. Unfortunately, if you do that, you pay a lot into a program that maybe your spouse doesn’t get an awful lot or anything from. That’s point number two.
Point number three is a really important one, and I hope that all of our listeners are really going to drop what they’re doing and listen to this. We know that the government program is willing to protect roughly half of the pension of the retiree for the surviving spouse. We know that that’s how this works. We looked at some of those numbers earlier. Here’s the challenge. If I sat down with those spouses and I asked the question, “If John or if Mary were to die in retirement, what percentage of their retirement check do you think you’ll need to keep your household running?” they are probably not going to say half. They’re probably going to say all of it. Now, all of it might be a stretch. Maybe 80, 90%, depends on what the bills look like, how many rounds of golf John plays or how much time at the casino Mary has, whatever the thing is. The reality is, is the most that the government is willing to protect is not normally what the couple actually wants to protect. We need to be clear on the dollar amount that we really need to protect over a long period of time.
Tip number four is recognizing when there is a good price point in a product. Now, because we’re in the audio format, sometimes it’s difficult to talk about a lot of numbers without some visuals to back it up, but I will share with all of our CSRS employees that there is a good price point for the initial part of the coverage that you can protect. That same thing does not hold true under FERS. For CSRS, for the first $3,600 of benefit that is protected for the spouse, so 55% of 3,600, that amount comes to the retiree at a very low cost. It’s 90 bucks a year that you’re having to pay to give your spouse a pretty considerable amount of money every month if you were to die. I share that because there are some good parts of the Survivor Benefit Plan. Even though it’s not a terribly flexible plan, there are some good parts in it that won’t break the bank.
Point number five, it’s consider life insurance to protect the income stream. Now, on the surface, the Survivor Benefit Plan does not really look like life insurance because we think of a life insurance policy … If someone has a policy in place and they die, their beneficiaries receive all of the money up front in lump sum. They receive one big check. Well, we know that’s not how the Survivor Benefit Plan works. The spouse is going to continue to get monthly pension checks. On the surface, it doesn’t look like life insurance, but the Survivor Benefit Plan is covering one of the most useful parts of life insurance, which is to protect a continued income stream for a survivor or, in the life insurance world, we call that a beneficiary. Really important to recognize that life insurance is another way to replicate the protection of the income stream. The way this happens is we essentially do some backwards math and say, “What lump-sum dollar amount needs to be in place that, upon my death, could be used to generate an income stream of X number of dollars?” whatever the monthly dollar amount is that the spouse needs. It needs to be large enough that we won’t run out of money. That’s the basic concept behind the life insurance and using that type of product to replicate the income stream that the Survivor Benefit Plan was going to utilize or was going to provide.
Tip number six is get the best of both worlds. I am not a fan of throwing the baby out with the bathwater and assuming that just because a program on the surface doesn’t look real flexible, it doesn’t have a lot of perks, there’s not a lot of great price points in it, that it’s all bad. I don’t believe that in any scenario. If we can isolate the good parts of the Survivor Benefit Plan … For instance, there are some good price points, like we said, on the CSRS side and on both the CSRS and the FERS programs. One of the great advantages to taking at least part of the survivor benefit is that your spouse continues to get health insurance after you die. That’s a pretty good selling point. If we can isolate the minimum number that we need to protect under the survivor benefit and then look out to the private sector and say, “How can we maximize the other part that we need?” we can get the best of both worlds, the best of what the government program has to offer and the best of what the private sector has to offer.
That leads me right into my seventh and final tip, which is don’t wait until you retire to make this decision. I see so many folks that come into our retirement workshops. They’re stepping into retirement in the next couple of months, and because of their health, because of their age, it has now finally struck them that they may have a hard time obtaining life insurance. What ends up happening is they get stuck in programs like the survivor benefit because they don’t have any other options available to them.
This is a big decision for federal employees nearing that retirement window. I hope that our discussion today has helped employees to at least get the gears turning on how to protect the income stream for a surviving spouse and how to protect the federal employee’s health benefits program for the spouse after the retiree passes away. We want all of our listeners to be their very own best advocate in making this decision and, of course, ensure that the ultimate decision that they make best serves their family, whether that’s with the government program, or a private product, or some sort of combination of both.
Scott: Okay, Chris. Well, that was a lot of great tips, and I appreciate you giving them to our listeners today. It’s always a pleasure to be joined by Chris Kowalik of ProFeds. We invite you to stay tuned to the FedImpact podcast to get straight answers and candid insights on your federal retirement.
