Division of Defined Benefit Plans … what a happy subject … NOT.
But be that as it may, it’s a subject that has to be dealt with often when divorce comes into the picture, especially when pension plans are involved.
And most important, certainly for my readers who are retired (or set to retire) under one of the two largest Defined Benefit retirement plans in the USA .. the Federal CSRS (Civil Service Retirement System) or FERS (Federal Employee Retirement System).
(For background information on these plans, employer contributions, employee retirement contributions, differences from defined contribution plans, eligibility, years of service calculations, etc, you can refer to my CSRS FERS What’s the Difference post)
Defined Benefit Plans — Why The Time Rule?
Recently I received a question from a reader who is under the CSRS and divorced. he is not yet retired,but does have a COAP (Court Order Acceptable for Processing) in place with the OPM (Office of Personnel Management) which grants his ex-wife a share of his future CSRS retirement benefits.
Like many (including quite a few lawyers I have know), he was unsure of how the language in the court order was going to determine his ex-wife’s actual share … particularly, since he is not yet retired, how could that share even be determined?
Defined Benefit Plans — Practical Application of the Brown Formula
Here’s the question:
I have been divorced since March 2003 and employed by the Federal Govt since 1986 I will retire in December 2013. The COAP says that my former spouse receives 50 percent of the retirement benefit from May 1986 to March 2003. how in the world do I figure out how much of the annuity that she gets? I know how to figure my benefit but how do i calculate the years for the 50 percent benefit? Thanks
And my response:
…. Welcome to the “Time Rule” club. I’m a member myself. The calculations for your ex-wife’s share should work out like this.
Your retirement annuity is, of course, based on all your service from May 1986 until December 2013. The court has ordered that she receive a 50% share of the time you were married and a Federal employee.
here’s the language that typically describes how OPM handles this:
Half of the fraction whose numerator is the number of months of Federal
creditable civilian and military service that the employee performed during the marriage
and whose denominator is the total number of months of Federal civilian and military
service performed by the employee
So your ex is owed 50% x Months married/Months employed.
We already know that the court has ordered she share in the months from May 1986 to March 2003. That’s roughly 202 months.
You were employed from may 1986 until (projected) December 2013 or roughly 331 months.
This gives us 50% (0.5) times 202/331 which equals 30.51% as her share.
OPM will then order DFAS (or whichever other agency actually pays you) to pay her 30.51% of your monthly annuity and send you the remaining 69.49% to you. Hope this helps.
Defined Benefit Plans — Rationale
When dividing the community property interest in defined benefit plans, the Court most often uses the so-called “Time Rule” or “Brown Formula”.
Basically, the court uses a formula for the apportionment between divorcing spouses of the future defined benefit plan retirement benefits.
A percentage is determined based on the ratio between the time that a member spouse was enrolled in a defined benefit plan during the marriage and the total time that the person was enrolled in the plan.
This accounts (in what is typically the most fair and easily defines way) for the contribution of both the employed spouse and the non-employed spouse to the “community”, in “earning” the pension benefits.
The formula is used because often times the member spouse is not yet retired and thus after separation will still be gaining separate property time in the plan, changing the percentage of the total benefit payment the non-member spouse would receive when the plan goes into pay status.
For an excellent discussion of the California Court’s use of the time rule, see In re Marriage of Judd (1977) 68 Cal.App.3d 515, 137 Cal.Rptr. 318.
In applying the formula to a pension annuity, the Court in Judd “simply” boiled the rule down as follows:
“The most effective method of [dividing the community property portion of a pension] would be to determine the community interest to be that fraction of retirement assets, the numerator of which represents the length of service during the marriage but before the separation, and the denominator of which represents the total length of service by the employee-spouse. Such disposition would comport with what we have termed the ‘time rule.’”
It may be easier to the formula written out as follows:
1/2 x (Member’s system credit accumulated from date of marriage / members total system service credit at time benefits become payable) x (Member’s benefit at time benefits become payable) = (Non-member spouse’s share of system benefits)
Division of Defined benefit Plans — Examples
Let’s look at a few simplified Defined benefits plans divorce division case studies to illustrate the point.
Case 1 John and Mary: John is a Federal employee who worked under the CSRS for 30 years. He married Mary during at the end of his 28th year of service, then retired at 30 years and sadly, got divorced in that same year. Mary feels that John’s pension is “half hers”, while John, of course, feels the pension is virtually all his, since he “earned” almost all of it while not married to Mary.
Obviously, to most casual observers, Mary certainly shouldn’t be entitled to half John’s person, regardless of the question of them being in a Community Property state or not.
But an unbiased observer also must conclude that Mary is entitled to something for their year of marriage … or at least there’s some argument for Mary being entitled to something.
Well the Time Rule or “Brown Formula” will give the basis for an “equitable distribution of Jo=hn’s benefitsm even in this extreme case.
Mary is due 50% of the pension, multiplied by the fraction Time in marriage while earning the pension benefits divided by total time in service earning those benefits. so we get .5 (fifty percent) times 12 (months they were married and ‘earning the pension together) / 360 (the months John work under the plan until retirement, or 30 years). (or .5*0.0333333333333333 which equals 0.0166666666666667) .
In other words, Mary is provisionally entitled to about 1.7% of John’s pension (annuity) payments. If John’s annual annuity was, for example, $40,000, Mary’s monthly share (before taxes) would be about $56. Hardly a large sum, but considering the payment will continue at least for her life or John’s ;life, probably well worth filling out the paperwork (COAP) for.
Case 2 Dick and Jane: Dick is a Federal employee with 30 years service who has coincidentally filed for divorce from his wife of 15 years, Jane. Let’s assume their separation date coincides with the date of Dick’s retirement from federal service.
Using our same formula, Jane’s share of Dick’s defined benefit plan retirement annuity is:
.5 times 180 (the couple’s months of marriage under the defined benefit plan) / 360 (Dick’s total define benefit plan months of service. Or:
.5 x 180/350 = .25 (25% of Dick’s defined benefit plan annuity). If we assume Dick received an annual annuity of $40,000 also, Jane’s share will come up to $833 a month.
Case 3 Myra and Moe: Myra is a long-term federal employee, under the CSRS defined benefit plan, having served 30 years. All that time she has been married to Moe. Assume they also get divorced at Myra’s 30 year point, but we don’t yet know when Myra will decide to retire.
If she retired at the same time she and Moe separated, the calculation for Moe’s share would be very simple:
.5 times 360 (months married) divided by 360 (months of Myra’s defined benefit plan service … which of course works out to a 50% share for each plan participant.
But the much more typical scenario, and the one the courts typically have in mind then they order the “Time Rule” to be used is to answer a more open-ended question.
Given that Myra and Moe would split Myra’s pension equally if the time married and time in service was equal, what happens when Myra continues to work after retirement?
The Brown Formula still works well. Consider that Myra might work 10 more years.
If she did, Moe’s calculation upon Myra’s retirement date would look something like:
.5 x 360 (months of marriage under the defined benefits plan) / 480 (Myra’s years of service under the CSRS defined benefits plan). Moe would then get a percentage of 37.5%, his share dropping because of the greater number of years Myra worked on without being married to Moe.
A side issue to keep in mind is, in a case like Myra ands Moe, when Myra worked on for those additional years, her defined benefit plan annuity would increase at the time of her retirement. This partially offsets the fact that the non-emplyee spouse’s share goes down, percentage-wise, the longer the employed spouse continues to accrue benefits.
So what else would you like to know about the “Time Rule” or the Brown Formula” for the division of Defined Benefit Plans?