Federal Employee Retirement System
(Summary of the FERS Benefits)
FEDERAL EMPLOYEE RETIREMENT SYSTEM (some of the SPECIAL election RULES for the "FERS" benefit)
Special category federal employees (SCEs) such as Law Enforcement Officers, Firefighters, CBP Officers, Air Traffic Controllers, Law Enforcement Rangers, USFWS Officers, and other employment positions which have a G59 salary, have different rules regarding their retirement plans compared to regular Code K federal employees. An excellent guide for this treacherous landscape is the the Fersguide (www.fersguide.com). A link to this website is provided in the button below. This guide was created by Dan Jamison and it is religiously updated annually with changes in the rules and regulations. Dan is regarded as a expert in understanding federal retirement benefits for SCEs and regular federal employees. He does not offer financial planning services. There is lot of scary stuff to think about when it comes to crossing this field full of land mines. For example, in order for the spouse of a deceased federal employee to receive a spousal benefit surviving annuity (SBSA), the federal employee must have had at least ten (10) years of creditable service. If the employee dies before the ten (10) year mark is reached, then no monthly annuity benefit is available to the surviving spouse. HOWEVER, if a federal employee had at least 18 months of Federal Employee Retirement Service (FERS), and if such employee had federal employee's health benefits program (FEHBP) insurance as "Self and Family" or "Self Plus Spouse" on the day such employee died, then the surviving spouse of such employee will have the FEHBP coverage so long as there was a benefit payable due to such death such as the FERS Basic Employee Death Benefit. But beware, if the deceased employee was carrying FEHBP coverage as "Self-Only" or "Self-Plus-One" (for coverage for a child), then the surviving spouse will not have any FEHBP coverage on the death of the federal employee. Additionally, a SBSA benefit is elected when an employee retires. If an employee forgets to make the election when he/she retires, then he/she will have up to 18 months from the date of retirement to fix the missed election. When an employee makes the election at retirement or within 18 months, he/she is presented with three options: (1) no SBSA election (this option requires notarized consent by the spouse agreeing to waive this benefit - also if the spouse signs waiving the benefit then such spouse is also waiving the FEHBP benefit identified below); (2) 5% pretax reduction in federal employee's annuity amount which amounts to the surviving spouse being eligible to receive 25% of the federal employee's unreduced annuity amount (this option also requires notarized consent by the spouse); and (3) 10% pretax reduction in federal employee's annuity amount which amounts to the surviving spouse being eligible to receive 50% of the federal employee's unreduced annuity amount (this option does not require the spouse to sign agreeing to it). Also, if an employee is not married when he/she retires but marries at a later date, such employee may still make an SBSA election for his/her new spouse. HOWEVER, this election must be made within two years of the date of marriage. It cannot be made after the two years has expired. Additionally, if an employee remarries at any time (pre or post-retirement) and if such employee's former spouse was awarded in a divorce action a full survivor annuity, such employee should still elect a surviving annuity for his/her current spouse despite the award to the former spouse. This is because such an election would enable the current spouse to receive benefit coverage from the federal employee's health benefits program (FEHBP) in the event the federal employee predeceased his/her former spouse. Finally, a minor child will receive a FERS benefit until age 22 if the child is a full-time student. However, any benefits paid out by the SSA for the benefit of such child will reduce the FERS benefit dollar for dollar. No other individual may receive annuity benefits and/or FEHBP benefits from the FERS. I could go on and on regarding the "ifs" and "buts" in this system but I think the Fersguide is the best resource for this information. If you would like to have an analysis done of your situation please feel free to contact our office for a free consultation regarding the same.
FEDERAL EMPLOYEE RETIREMENT SYSTEM (the good, the bad, and the ugly REGARDING THE THRIFT SAVINGS PLAN RETIREMENT BENEFIT)
In addition to the federal employee retirement system annuity benefit, when a federal employee retires, such an employee has multiple choices to make in regards to the payout of his/her Thrift Savings Plan (TSP). This is the plan you may leave to others as named beneficiaries. You just have to make sure you fill out Form TSP-3 correctly. If you have filled out this form and then forget to change it later on when your life circumstances changes, such as obtaining a divorce, then the beneficiaries of your estate may have a very nasty surprise in store for them when you die. For example, if you had named your prior spouse as beneficiary on Form TSP-3, then obtained a divorce in which such former spouse was awarded a court ordered share of your TSP and in fact received such share, and then you never got around to changing Form TSP-3, then on your death your ex-spouse will receive the remaining balance in your TSP because such spouse is the named beneficiary on such plan. This will be the result even though you were divorced from such spouse. The TSP pays out to whomever is named as the beneficiary on the Form TSP-3. This result is different from a 401(k) subject to federal ERISA requirements which states even if you have named your children as primary beneficiaries of such a plan, your spouse will jump into first place as primary beneficiary of your 401(k) unless such spouse signs a waiver agreeing not to be the primary beneficiary. If you do not file a Form TSP-3 on your thift savings plan, then the default beneficiaries would first be your surviving spouse, second your children, per stirpes, third your parents, fourth the executor of your estate, or if no probate administration is opened then your heirs-at-law according to the state in which you lived at the time of your death. HOWEVER, please make note that you have more choices for beneficiary designations then just your spouse, descendants, executor or heirs. You may actually name a trust as the beneficiary of your TSP. This is very beneficial because if you wish to leave your retirement plans to your children, it is much better to aim such a plan to an asset protection testamentary trust created for the benefit of such child. In such a trust each child may serve as sole trustee of his/her own trust. Also, the trust will have additional protections of keeping the assets in such trust as separate property for the benefit of such child, protecting such assets from a child's personal judgment creditors (i.e. bankruptcy courts have ruled that retirement plans going to non-spouse beneficiaries are not protected from creditors) and continuing such assets in trust for the benefit of such child's living descendants. This type of trust is the best gift you may give a child or any other individual because a spendthrift trust created by an individual and funded by that individual for the benefit of a third party enjoys a very high level of asset protection planning. Much higher than the creation of entities which protect assets from creditors. The reason I stress the need to aim a retirement plan to a trust created for the benefit of a child is due to two main issues in regards to retirement plans which are distributed outright to non-spouse beneficiaries: (1) if the child lives in a community property state, then all income and dividends earned inside such plan will be considered as community property subject to division on divorce. If the income and dividends are rolled into more investments then the plan itself will slowly change its character from separate property to a community property asset; and (2)as indicated above, federal bankruptcy courts have issued rulings stating retirement plans going to non-spouse beneficiaries were not protected from creditors. If the plan is aimed to an asset protection trust for the benefit of the child then the separate property issue, and the protection against creditor issue, is resolved. Further, retirement plans paid to the trustee of the testamentary trust(s) created in your Last Will and Testament, or in your Revocable Living Trust, should be paid out over the life expectancy of the oldest beneficiary in such trust(s) due to the fact we have language in our estate planning documents which allow a stretch over the life expectancy of the oldest identified beneficiary because the portion of the trust receiving such retirement plan is subject to special rules and limits to make sure there will be no individual beneficiary older than the oldest identified beneficiary in the trust nor will there be a charity and/or other unauthorized entity named as a beneficiary at the end of the trust. These limitations help ensure the plan is paid out over the designated beneficiary's life expectancy. If you would like to receive more information regarding this type of retirement plan or other plans, please feel free to schedule a free consultation with one of the attorneys in the firm.