Divorce Financial Planning is a must for most Federal Employees going through the divorce process. Faced with similar divorce financial and tax issues that others experience, these employees have multiple employee benefits that require special research, analysis, and timely execution of divorce-related documents.
Health and Life Insurance
Continuing or needing to apply for FEHBP coverage can be an essential need of the Government Employee spouse.
The Fed’s Temporary Continuation of Coverage (TCC) is similar to that of COBRA in the Private Sector and provides benefits to a former spouse up to 36 months after the divorce. The former spouse must pay both the employee’s and government’s share of the Plan’s premium plus an administrative charge of 2% of the total premium.
There is also a Spouse Equity provision that enables a former spouse to maintain their coverage beyond the 36-month window if he or she meets certain criteria. This is extremely important for those who may have insurability or other issues that would make coverage unlikely or impractical under the circumstances. The former spouse must apply within 60 days after the final divorce with a written notice that he or she wants to continue FEHBP coverage under the spouse equity provision. He or she may also elect to enroll for self-only coverage, or the Government-employed spouse can elect family coverage for qualifying family members. The cost of coverage is the same as under TCC without the 2% administration charge.
Under Federal Employees Group Life Insurance (FEGLI), a Federal current or former employee, or annuitant may assign life insurance to a former spouse. The assignment would guarantee ongoing financial protection for the former spouse and/or children with confidence that no changes could be made to the policy by the employee/annuitant former spouse.
Long-term Care Insurance
Federal employees have access to a very good long term care program and coverage is available to the employee and spouse. Since the policy is portable, i.e. it would remain in force for the former spouse, spouses should consider the purchase of this insurance prior to the divorce. This would provide the former spouse with coverage at a lower premium that he or she could obtain in the private sector.
CSRS/FERS Pension and TSP
The Federal Employee’s retirement plans are oft times the most valuable assets that are contested for in the divorce process. The CSRS and FERS programs are Defined Benefit Plans (DFP) and the TSP is a Defined Contribution Plan (DCP). DFP do not have any stated present day value and participants receive only an annual Statement of Benefits from their employer that shows projected monthly benefits at different retirement ages. The value of DCPs are determined daily and are available on line or through monthly or quarterly statements. Any portion of the retirement plans that were earned from the date of marriage to the date of divorce (or other cut-off date) is considered Marital Property and subject to division by the courts. Most importantly, no matter what the settlement agreement says, both of these plans can only be divided by a Court Order, which is in the form mandated by OPM and the TSP.
Details on how to protect your federal pension in divorce can be found in our Whitepaper. The most important issues that surround the retirement plans and where Federal Employees need guidance on are:
- Determination of the values of both plans
- The necessity of a formal pension plan
- Which method of splitting pensions is right for you, Offset or “If, As, When?”
- How to obtain an “apples to apples” trade for a pension
- Does it make financial sense to give up the right to a pension plan for another asset?
- When should and who should complete the Court Order?
- What is the cost of survivor benefits and who should bear those costs?
Divorce and Rental Properties
Many of my Federal Employee clients have diversified their investments over the years to rental properties. Prior to 2009, it was commonplace to take advantage of the capital gains exclusion for homes by having either spouse move into the rental for two years thereby transforming the rental into home. The $250,000/$500,000 exclusion was then available on both personal residences when later sold. Now the exclusion is prorated between rental use and personal residence use after January 1, 2009. For example, let’s say that John had a rental property in use from January 1, 2009 to December 31, 2013. He moves into the rental on January 1, 2014 and sells the property on January 1, 2016. John has owned the property for seven years. It has been his personal residence for two of those years. His capital gain exclusion has now been decreased from $250,000 to $71,428 (2/7 times $250,000). This change in the law will produce a tax surprise for those who have not been properly advised.
Most times, divorce creates significant financial issues for both spouses and legal counsel may not be enough. Consulting with or bringing a Certified Divorce Financial Analyst (CDFA™) on board with your divorce team can produce savings and/or prevent financial disaster in the long term.
John Faggio is a CPA, CFP®, and a Certified Divorce Financial Analyst™. Faggio Financial provides comprehensive divorce financial analysis and planning, pension valuation, and forensic services.
Email or call John today at 410-988-7333 for an initial, flat-fee consultation or a quote to provide the services that can put you on the right path to a positive outcome in your divorce.