How Are FERS and TSP Divided in a South Carolina Divorce?

Federal employees often have two of the most valuable assets in a marriage: a pension under the Federal Employees Retirement System (FERS) and a Thrift Savings Plan (TSP) account. Dividing them in a South Carolina divorce is not like dividing a bank account. The federal government will only pay a former spouse if the Family Court order meets the separate requirements that the Office of Personnel Management (OPM) and the TSP apply to their respective benefits. Our Charleston divorce lawyers recently handled a case involving the division of a FERS pension and a TSP account, and it is a good reminder that small drafting details can decide whether a spouse receives thousands of dollars in retirement and survivor benefits or nothing at all. In this article, we explain what FERS and the TSP are, how they are valued, how a court order acceptable for processing (COAP) and a retirement benefits court order (RBCO) work, why the former spouse survivor annuity is so important, and what to focus on whether your case is going to trial or heading toward settlement.

Quick Answer: In a South Carolina divorce, the portion of a FERS pension and a Thrift Savings Plan (TSP) account attributable to the marriage is generally marital property that the Family Court divides equitably. A FERS pension award to a former spouse requires a court order acceptable for processing (COAP) submitted to OPM, and a TSP account award requires a qualifying retirement benefits court order (RBCO) submitted to the TSP. To receive a FERS survivor annuity after the employee’s death, a former spouse generally needs an express award of that benefit; a separate express award may be needed for the FERS basic employee death benefit. The TSP has different rules for court-ordered account payments and death benefits.

What Is FERS?

FERS is the retirement system for most federal civilian employees hired after 1983, and its basic benefit is a lifetime pension that is often one of the largest marital assets in a federal employee’s divorce. It has three parts: a basic benefit (a traditional pension or annuity), Social Security, and the Thrift Savings Plan. In a divorce, the basic benefit and the TSP are the two pieces that usually need to be divided.

The FERS basic benefit is a defined benefit plan. Instead of an account balance, the employee earns a monthly annuity for life, calculated from years of creditable service and the average of the employee’s highest three consecutive years of basic pay, often called the high 3. For most employees, the annuity equals one percent of the high 3 for each year of service, and the multiplier increases to 1.1 percent for employees who separate at age 62 or older with at least 20 years of service and meet the statutory requirements. Special rules apply to law enforcement officers, firefighters, air traffic controllers, and certain other positions.

Some FERS retirees who retire before age 62 also receive a FERS annuity supplement, which is designed to approximate the Social Security benefit earned during federal service until the retiree reaches age 62. The supplement is not available to every retiree who retires before age 62. If the parties intend to divide it, a court order should address it expressly so there is no question about how it will be treated.

A FERS pension may also include military service the employee bought back by making a deposit, and unused sick leave added to creditable service at retirement. Both can affect the pension value and the marital share.

What Is the Thrift Savings Plan?

The Thrift Savings Plan is the federal government’s defined contribution retirement plan, similar to a 401(k). Employees contribute part of their pay, and FERS employees receive an automatic agency contribution of 1 percent of basic pay, plus matching contributions when they contribute, with total agency contributions reaching 5 percent of basic pay if they contribute at least 5 percent. The money is invested in the TSP funds and grows or declines with the market.

A TSP account can include traditional, pre-tax money and Roth money, and participants may borrow against their accounts. Those features matter in a divorce. An outstanding loan balance is included when the TSP calculates an award based on an account balance unless the court order provides otherwise, but payment cannot exceed the vested account balance minus any outstanding loan. The TSP pays a former spouse’s award proportionally from the traditional and Roth balances.

Unlike a FERS pension, the TSP has a current account balance shown on a statement. That makes it easier to value, but separating the marital and nonmarital portions can still be complicated.

Are FERS and TSP Benefits Marital Property in South Carolina?

Yes, in most cases. The portion of a FERS pension and a TSP account attributable to the marriage is generally marital property in South Carolina, while the portion earned before the marriage, or attributable to service or contributions after marital litigation began, is generally nonmarital, subject to tracing and applicable exceptions. South Carolina is an equitable distribution state, not a community property state. Under S.C. Code Section 20-3-630, marital property generally includes property acquired by either spouse during the marriage and owned as of the date marital litigation begins, subject to statutory exceptions, while property acquired before the marriage is generally nonmarital. The South Carolina Supreme Court held in Tiffault v. Tiffault, 303 S.C. 391, 401 S.E.2d 157 (1991), that vested military retirement benefits accrued during a marriage are marital property subject to equitable distribution.

That means the part of a FERS pension earned through federal service during the marriage is generally marital, and the part earned before the marriage, or attributable to service after marital litigation began, is generally not. The same principle applies to the TSP. Contributions made during the marriage and the growth on them are generally marital, while a premarital balance and its passive growth may be nonmarital if they can be traced.

Once the marital portion is identified, the Family Court divides it equitably based on the factors in S.C. Code Section 20-3-620. Equitable does not always mean equal. For a broader discussion, see our articles on marital vs. non-marital property in South Carolina and how property is divided in a South Carolina divorce.

How Do You Value a FERS Pension in a Divorce?

A FERS pension is usually valued in one of two ways: by dividing each future annuity payment using a marital-service fraction when the employee retires, or by having an actuary calculate the present value of the marital share so it can be offset with other property. If the order uses OPM’s defined “pro rata share,” check its service-period calculation against the intended marital-property cutoff. Because a FERS pension promises future monthly payments, it does not have a simple account balance.

The deferred distribution approach. The court awards the former spouse a share of each monthly annuity payment when the employee actually retires. The most common method is the coverture fraction. OPM defines “pro rata share” as one-half of a fraction whose numerator is the months of creditable federal civilian and military service performed during the marriage and whose denominator is the total months of such service through the day before retirement, as applicable to the annuity calculation. If the parties intend to use the date marital litigation began rather than the end of the marriage to calculate the marital share under South Carolina law, the order should state the applicable dates and formula clearly instead of relying solely on OPM’s term “pro rata share.” This approach shares the risk and the benefit of future events between both spouses, but it also means the former spouse waits, sometimes for many years, until the employee retires.

The present value or offset approach. An actuary calculates the present value of the marital portion of the pension today, accounting for the expected retirement date, life expectancy, interest rates, and cost-of-living adjustments. The employee keeps the entire pension, and the other spouse receives other property of equal value, such as a larger share of the home equity or the TSP. This approach gives both parties a clean break, but it depends heavily on assumptions, and it requires enough other assets to make the offset work.

The timing of the salary used in the calculation is also important. By default, a fraction or percentage award generally adjusts with changes in the employee’s annuity resulting from salary adjustments before retirement, even if the award is measured as of the divorce. If the parties or the court intend to exclude salary adjustments after a specified date, the order must say so specifically. Under OPM’s regulations, the order must either state the exact dollar amount or specifically instruct OPM not to apply salary adjustments after the specified date. Whether post-divorce raises should be shared is often a significant point of negotiation or argument.

Other questions affect the value as well, including whether military service was bought back with marital funds, whether unused sick leave should be included, and whether the former spouse should share in the FERS annuity supplement. Our article on how to divide a pension in a South Carolina divorce discusses these valuation methods more generally.

How Do You Value a TSP Account and Separate the Marital Portion?

A TSP account is valued from its statements as of the relevant dates, and the marital portion generally consists of contributions made during the marriage and the growth on them, excluding any premarital balance and its passive growth that can be traced. The real work is separating the marital portion from any nonmarital portion.

If the employee was already contributing to the TSP before the marriage, the balance on the date of marriage, along with the investment growth on that balance, may be nonmarital. To prove it, the employee generally needs a statement close to the date of marriage and enough account history to trace that money through the years. Loans, withdrawals, and changes in investment funds can make tracing difficult. If the premarital portion cannot be traced, the court may treat more of the account as marital.

Conversely, contributions made after marital litigation began are generally not marital, while market gains and losses on the marital portion between filing and division can be contested. The order dividing the account should address whether the former spouse’s share is credited with investment earnings or losses from the valuation date until payment, because the TSP will not credit investment earnings unless the order specifically provides for it.

Outstanding TSP loans also affect the value. The TSP includes any outstanding loan balance when it calculates an award based on the account balance unless the order provides otherwise, but it cannot pay more than the vested balance minus the outstanding loan. If one spouse borrowed from the TSP during the marriage, the parties should decide whether the loan was used for marital purposes and whether to include or exclude the loan balance from the amount being divided.

What Information Do You Need to Value Federal Retirement Benefits?

Whether you are preparing for trial or evaluating a settlement offer, you cannot fairly divide federal retirement benefits without good information. At a minimum, you should gather:

• The date of marriage and the date marital litigation began.
• The employee’s SF-50 Notifications of Personnel Action, which show the service computation date, hire date, grade, step, and retirement plan.
• Recent Leave and Earnings Statements showing basic pay, retirement contributions, and unused sick leave.
• An annuity estimate from the employing agency or OPM, if available, showing the expected annuity at various retirement dates.
• Records of any prior federal service, military service, and military deposits made to buy back service, including when and with what funds they were paid.
• TSP statements showing the balance on or near the date of marriage, the date marital litigation began, and the most recent statement, along with transaction history, contribution history, and loan records.
• Information about any refund of retirement contributions taken during a prior period of federal service and whether you repaid it.
• Current survivor benefit elections, TSP beneficiary designations, and Federal Employees’ Group Life Insurance (FEGLI) information.

In a contested case, you may need to obtain this information through discovery and present it through the employee’s testimony, agency records, or an expert witness such as an actuary or financial professional. In a settlement, the same records allow each side to test whether a proposed division is actually fair. The financial information should also match each party’s financial declaration.

What Is a Court Order Acceptable for Processing (COAP)?

A court order acceptable for processing, or COAP, is the order OPM requires before it will pay any part of a FERS annuity to a former spouse. The rules are found in 5 C.F.R. Part 838. A private-sector pension is typically divided with a qualified domestic relations order (QDRO), but federal pensions are not governed by ERISA, and OPM will not accept an order labeled a QDRO unless it meets Part 838 requirements.

OPM’s role is ministerial. Its regulations require specific, unambiguous instructions, and OPM will not supply missing provisions or interpret ambiguous language. That means the order must do the work. A COAP dividing a FERS annuity should, among other things:

• Identify the retirement system, such as FERS, and expressly state that the former spouse is entitled to a portion of the employee annuity.
• State the former spouse’s share as a fixed amount, a percentage or fraction, or a formula that OPM can compute from the order and its own files.
• Direct OPM to pay the former spouse directly. OPM strongly recommends this, although an order may also qualify if it is silent on who makes payment or directs the retiree to arrange for OPM to pay directly. An order that directs the retiree alone to pay the former spouse is generally not acceptable.
• Specify whether the share applies to the gross annuity, the net annuity, or the self-only annuity. If the order does not say, OPM generally applies a percentage, fraction, or formula to the gross annuity.
• Address cost-of-living adjustments. For percentage and fraction awards, OPM generally adds cost-of-living adjustments unless the order directs otherwise; for a fixed dollar award, it does not add them unless the order expressly says so.
• If OPM’s defined pro rata share is intended, use that term and state the date the marriage began; if a different marital-service cutoff is intended, state the dates and formula expressly.
• Address whether salary increases after the divorce are included, as discussed above.
• Address what happens if the employee leaves federal service and takes a refund of retirement contributions instead of an annuity. To give the former spouse a share of a refund, the order must expressly award a portion.
• Expressly address the FERS annuity supplement if it is to be divided, and separately award a former spouse survivor annuity if that protection is intended.

Timing matters too. OPM cannot pay a former spouse a share of the annuity until the employee’s annuity begins. The former spouse should nevertheless apply to OPM in writing promptly, with a certified copy of the order and the other required information, rather than waiting for the employee to retire. A qualifying order generally takes effect against annuity accruing on the first day of the second month after OPM receives it; OPM will not begin paying the former spouse until it receives the required application documents.

What Is a Retirement Benefits Court Order (RBCO)?

A retirement benefits court order, or RBCO, is the order used to divide a TSP account. The TSP rules are found in 5 U.S.C. Section 8435 and 5 C.F.R. Part 1653. Like OPM, the TSP is not covered by ERISA, and the QDRO rules that apply to private plans do not apply to the TSP.

To qualify, the order must expressly relate to the Thrift Savings Plan account. General references such as “federal benefits” do not sufficiently identify the TSP. The order must be written in terms appropriate to a defined contribution plan and, for an account payment, must award either a specific dollar amount or a stated percentage of the account. An order awarding a percentage should specify the date as of which it is calculated; otherwise, the TSP uses the order’s effective date. The rules also permit an order addressing a TSP survivor annuity. If the employee has both a civilian and a uniformed services TSP account, the order must identify which account to divide.

Several TSP rules should be addressed when the order is drafted:

• Earnings. The award is not credited with investment earnings or losses after the valuation date unless the order specifically provides for them.
• Loans. The TSP includes any outstanding loan balance in an award based on the account balance unless the order provides otherwise. Payment cannot exceed the vested account balance minus the outstanding loan; the order does not transfer the employee’s loan repayment obligation to the former spouse.
• Source of funds. Payment comes proportionally from the Traditional and Roth balances and from all TSP core funds. The order cannot direct the TSP to pay from a specific fund or balance type.
• Freeze. When the TSP receives a document that purports to be a qualifying order, it generally freezes the account against withdrawals and new loan disbursements while it processes the order; required minimum distributions may still be made. The freeze may remain in place if the order is rejected, subject to the regulatory rules for lifting it.
• One payment. For an account-balance award, the former spouse receives a single payment, not an ongoing account. The former spouse may elect an eligible rollover to an IRA or another eligible plan, or to his or her own TSP account if eligible.
• Taxes. The taxable portion of a payment to a spouse or former spouse is generally taxed to the payee unless properly rolled over. A qualifying court-ordered payment to an alternate payee is generally not subject to the additional 10 percent tax on early distributions. Federal income tax withholding depends on whether the payment is an eligible rollover distribution and how it is paid.
• Fee. The TSP charges the participant a $600 processing fee for each complete court order, including an order later found not to qualify. If a qualifying order expressly requires splitting the fee, the TSP deducts the payee’s share from the payment and credits it back to the participant’s account.

The RBCO should also include the information the TSP requires, including the participant’s account number or Social Security number and each payee’s name and last known mailing address. A spouse or former spouse payee’s Social Security number and state of legal residence are also required. Finally, remember that a divorce does not automatically change a TSP beneficiary designation. The employee should review and update the designation after the divorce, and the settlement agreement or order should address what is expected.

For a more general discussion of dividing 401(k) plans, IRAs, and other accounts, see our article on splitting retirement accounts in a South Carolina divorce.

How Do a COAP and an RBCO Compare?

A COAP and an RBCO are both court orders, but they divide different federal benefits and follow different federal rules. The key differences are:

What Is the FERS Former Spouse Survivor Annuity?

The former spouse survivor annuity is a monthly benefit paid to a former spouse after the federal retiree dies. It is one of the most important, and most overlooked, issues in dividing a FERS pension.

Here is why. A former spouse’s share of the retiree’s annuity ends when the retiree dies. If the former spouse has been receiving part of the monthly pension, that income stops at the retiree’s death unless the court has also awarded a former spouse survivor annuity.

Key rules include:

• It must be expressly awarded. The order must expressly award a former spouse survivor annuity, using terms such as “survivor annuity” or “death benefits,” or expressly direct the employee to elect one. Merely dividing the employee’s annuity does not award a survivor annuity.
• Maximum amount. For a FERS retiree, the total survivor annuity for current and former spouses generally cannot exceed 50 percent of the annuity used to calculate the survivor benefit. The order may award the maximum or a smaller amount; an order expressly awarding a survivor annuity without specifying its amount generally awards the maximum available amount.
• Cost. The survivor benefit is paid for by reducing the retiree’s annuity. For FERS, a full survivor annuity generally requires a 10 percent reduction; a smaller former spouse survivor award may result in a smaller reduction under the applicable rules. The reduction ordinarily comes from the retiree’s annuity, but an unequivocal order directing the former spouse to pay the cost can result in its deduction from the former spouse’s share of the employee annuity if that share is sufficient to cover the entire cost. Otherwise, collecting that cost from the former spouse is a matter between the parties.
• Deadlines. An order awarding or changing a former spouse survivor annuity generally must be issued before the employee retires or dies, unless it is the first order dividing marital property. A later amendment to a prior property-division order ordinarily cannot add or change the survivor award after retirement or death.
• Cost of living adjustments. OPM generally applies applicable cost of living adjustments to the former spouse survivor annuity; an order can expressly exclude certain adjustments, so its treatment of them should be clear.
• Remarriage. A former spouse’s entitlement to a survivor annuity generally ends if the former spouse remarries before age 55, unless the former spouse was married to the employee for at least 30 years.
• Eligibility. To qualify, the former spouse generally must have been married to the employee for at least nine months, and the employee must have had at least 18 months of creditable civilian service. The benefit payable also depends on the employee’s service and whether death occurs before or after retirement.

In litigation, the court decides whether to award a survivor annuity, how much, and who pays. In settlement, the survivor annuity is often a bargaining point, because it can reduce the retiree’s monthly income for life. But giving it up can leave the former spouse with no pension income at all if the retiree dies first. In our experience, discuss and decide the survivor annuity expressly in every case involving a FERS pension; never leave it to chance.

What Happens If the Employee Dies Before Retiring?

If a federal employee dies before retiring and the court order does not expressly award a former spouse survivor annuity or applicable basic employee death benefit, the former spouse generally receives no court-awarded survivor benefit from the FERS basic benefit.

This is where the absence of a survivor annuity award can be devastating. OPM can only pay a former spouse a share of the employee annuity while an annuity is payable; an order dividing that annuity alone does not give the former spouse a benefit after the employee’s death. If the federal employee dies while still working, before retirement, no retiree annuity exists to divide. A court order that divides only the employee annuity, with no former spouse survivor or death-benefit award, generally leaves the former spouse with no court-awarded survivor benefit from the FERS basic benefit, even if the marriage lasted decades and the former spouse was awarded half of the marital share.

A properly drafted order can protect against that risk. Under FERS, a court order may expressly award a former spouse survivor annuity and, separately, a portion of the basic employee death benefit if the employee dies in service and the benefit is payable. When an employee dies after at least 18 months of creditable civilian service, a basic employee death benefit may be payable; if the employee also had at least 10 years of service, a survivor annuity may be payable. The former spouse’s entitlement to either benefit depends on the governing eligibility rules and an express award in the order.

The same concern applies if the employee leaves federal service before retiring. The order should address what happens if the employee takes a refund of retirement contributions, dies after leaving service, or defers retirement. Some parties also address the risk of an early death with life insurance, such as a requirement to maintain Federal Employees’ Group Life Insurance or a private policy for the benefit of the former spouse. Any life insurance requirement must be drafted to satisfy the rules of the specific insurance program or policy, and you should monitor it after the divorce.

What Should You Focus On If Your Case Goes to Trial?

At trial, you should prove the key dates and values, ask the court to decide each term of the division, and provide proposed order language that OPM and the TSP can process.

If the division of federal retirement benefits is contested, the Family Court needs evidence and a clear request for the relief you want. In litigation, you should be prepared to:

• Prove the key dates, including the date of marriage, the date marital litigation began, and the employee’s creditable service before and during the marriage.
• Present the evidence needed to value the benefits, including annuity estimates, TSP statements, and tracing evidence for any claimed nonmarital portion.
• Decide whether to ask for a deferred division of the pension or a present value offset, and present expert testimony if a present value is needed.
• Ask the court to decide specific questions, such as whether the former spouse shares in post-divorce raises, whether the award applies to gross or net annuity, whether applicable cost-of-living adjustments are included, whether the annuity supplement is divided, and whether TSP investment earnings and losses are included.
• Ask the court to expressly include applicable cost-of-living adjustments in the former spouse’s share of the annuity and in any survivor annuity, especially if the employee-annuity award is stated as a fixed dollar amount.
• Request a former spouse survivor annuity, if appropriate, and ask the court to decide the amount and who bears the cost.
• Submit proposed COAP and RBCO language with your proposed order, so OPM and the TSP can implement the final decree. If you must enter separate orders later, seek entry promptly; merely reserving jurisdiction may not preserve the ability to add a survivor annuity after retirement or death.

A general statement in a divorce decree that a spouse receives “half of the federal retirement” may be insufficient, especially if it fails to distinguish the FERS annuity from the TSP account or leaves the award amount unclear. Because OPM and the TSP will not resolve ambiguous awards for the parties, the final order must be specific.

What Should You Focus On If You Are Settling?

In a settlement, OPM and the TSP must agree on every term, including the formula, cost-of-living adjustments, the survivor annuity, and TSP investment earnings and loans, and it should be written into the agreement and the proposed orders before anyone signs.

Many cases involving federal retirement benefits settle, often at mediation. A settlement gives the parties flexibility, but the agreement must be translated into orders that OPM and the TSP will accept. When negotiating, consider:

• Get the numbers first. Do not agree to a percentage until you know the proposed marital fraction, the estimated annuity, and the TSP balances as of the relevant dates.
• Be specific about the formula. State whether the award is OPM’s defined pro rata share, a different fraction, a fixed percentage, or a fixed dollar amount, and whether it applies to gross, net, or self-only annuity.
• Make sure to include cost-of-living adjustments. Eligible FERS annuities may receive cost-of-living adjustments under federal law, although many retirees do not receive them before age 62. If the former spouse’s share is not adjusted when the annuity receives an adjustment, inflation can erode its value. OPM generally applies applicable cost-of-living adjustments to percentage, fraction, and pro rata share awards unless the order says otherwise, but it will not add them to a fixed dollar award unless the order expressly includes them. The agreement and the COAP should expressly provide that the former spouse’s share, and any survivor annuity, include applicable cost-of-living adjustments.
• Decide the survivor annuity expressly. Agree on whether a former spouse survivor annuity will be awarded, how much, and who pays the cost. If the former spouse gives it up, make sure that decision is informed and intentional.
• Address pre-retirement death and refunds. Decide what happens if the employee dies in service, leaves federal service, or takes a refund of contributions.
• Consider offsets. Sometimes it makes sense for the employee to keep the entire pension while the other spouse receives more of the TSP, the home, or other assets. Base an offset on a reliable present value, not a guess.
• Address TSP details. Specify the valuation date, whether investment earnings and losses are included, how loans are treated, and who pays the TSP processing fee.
• Prepare the COAP and RBCO with the agreement. Ideally, draft and review the proposed orders before finalizing the agreement to avoid surprises when the orders are submitted.

The Family Court must approve the settlement agreement, and you must submit the resulting court orders to OPM and the TSP with the required information. The former spouse’s rights are not fully protected merely because the parties have agreed on a division; the orders must satisfy the separate federal processing requirements. If survivor protection is intended, do not assume that an order entered later can cure an omission in the first property-division order.

What Mistakes Should You Avoid?

Some of the most common and costly mistakes in dividing federal retirement benefits include:

• Using a private sector QDRO form for a FERS pension or TSP account without adapting it to the applicable federal requirements.
• Awarding “half of the retirement” without identifying the benefit and stating a share or formula OPM can compute.
• Awarding a present value of the pension in the COAP without stating the dollar amount.
• Failing to award a former spouse survivor annuity, or trying to add it through a later amendment after the employee has retired or died.
• Failing to address a refund of contributions or the employee’s death before retirement.
• Referring to “federal benefits” instead of the Thrift Savings Plan in an RBCO.
• Failing to address TSP investment earnings, losses, and loans.
• Waiting too long to send the COAP and RBCO to OPM and the TSP.
• Forgetting to update beneficiary designations after the divorce.

Some of these mistakes cannot be fixed after the fact. That is why it is important to get the orders right the first time.

How Can a Charleston Divorce Lawyer Help?

If you or your spouse is a federal employee, dividing a FERS pension and TSP account may be one of the most important financial issues in your divorce. The attorneys at Futeral & Nelson have represented clients in Family Court in Charleston, Berkeley, and Dorchester Counties since 2003. We can help you gather the information needed to value the benefits, evaluate settlement offers, present your case at trial, and make sure the COAP and RBCO protect your interests, including the former spouse survivor annuity. Call us at 843-284-5500 to speak with a Charleston divorce lawyer.

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