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FEDERAL THRIFT SAVINGS PLAN - DOMESTIC RELATIONS ORDER GUIDE

Recent revisions to the Federal Retirement Thrift Investment Board’s Guidelines have resulted in significant changes to the language for Orders and payment procedures relating to the Federal Thrift Savings Plan (TSP). This Practice Aid relied in part on:

  • 5 U.S.C. 8435(c)
  • 5 U.S.C. 8467
  • 5 C.F.R. part 1653, subpart A
  • TSPBK11

TSP Participation.

Thrift Savings Plan: optional for employee’s hired prior to January 1, 1984 (CSRS).
Thrift Savings Plan: mandatory for employee’s hired after December 31, 1983 (FERS).
Military member’s: eligible to participate in the Thrift Savings Plan, effective October 9, 2001*.
*You may find the Military’s TSP referenced as “UNISERV”. This was the initial designation. At this time most references will be to “TSP”. Further note, for both Military and CSRS participants, at this time there is no government matching of participant contributions.

The TSP maintains separate accounts for civilian and uniformed service participants. The practitioner should be alert to participants having more than one type of TSP account. Your Order and legal processes must clearly identify each account. The terms “civilian,” or “uniformed services,” are suggested to properly identify the applicable TSP account.

The Federal Thrift Savings Plan (TSP) is a defined contribution plan that offers to Federal and Military participants the same type of savings and tax benefits that many private corporations offer their employees under “401(k)” plans. However, unlike many private plans the TSP does not review drafts of Court Orders. Hence, it is suggested that you exercise a high level of care in the preparation of your Order. The proper name for this Order is:
Retirement Benefits Court Order(RBCO)

Do not use the term: Court Order Acceptable for Processing (COAP) which is applicable to Federal Employee’s Defined Benefit Plans or Qualified Domestic Relations Order which is applicable to ERISA plans.

To negotiate and prepare an RBCO assigning all or a portion of this entitlement to a Former Spouse, it is necessary for each practitioner to have knowledge of the current worth of the participant’s Federal Thrift Saving Plan (TSP) balance. To obtain this information when it is not readily available, you may fax your data request to:

1-866-817-5023

The suggested format for this facsimile is as follows.

Participant’s full name
Participant’s TSP account number (if unknown, use his or her SSN)
Indicate the name and address of the person requesting this information
Describe this person’s relationship to the participant
State information needed (participant’s account balances as of xx-xx-xxxx)
State the purpose for which the information is being requested
Note: A subpoena is not required of OPM to provide this information.

FREEZING THE TSP BENEFIT.
At the beginning of a matter involving a TSP participant, in order to prevent a participant from diluting the worth of his or her TSP prior to the TSP Legal Processing Unit’s receipt of a Retirement Benefits Court Order, the prudent attorney will insulate the Former Spouse’s interest in this plan from dilution by the participant. Surely, most participants would not deliberately seek to reduce the probable interest of their soon to be Former Spouse, nevertheless, this Practice Aid strongly suggests that as a precaution the attorney representing the Former Spouse routinely place a “Freeze” on the participant’s entire TSP account. This “Freeze” court order prevents a participant’s withdrawing funds from his or her TSP account during a divorce action. The TSP acts quickly on such orders. As soon as possible after receiving a “Freeze” court order that is issued in an action for divorce, annulment, or legal separation, the TSP will “freeze” a participant’s account provided:

the court order names the “Thrift Savings Plan”
and further provides that

the participant may not obtain a TSP loan or withdrawal; or
the court order purports to divide a participant’s TSP account.
Once a participant’s account is frozen, no new loans or withdrawals are permitted from the account until the action is resolved. However, all other account activity is permitted, including investment decisions and payments on existing loans.

TSP Drafting Guidelines
Query:
What is the maximum amount that can be Assigned to a Former Spouse (for Federal Plans please avoid use of the term “alternate payee”)?

Answer:
A court order may require the TSP to pay up to a participant’s total vested account balance to a Former Spouse.

Query:
What is the significance of an outstanding loan at the time the Former Spouse’s share of the TSP is being calculated?

Answer:
A TSP loan may or may not affect an account balance for purposes of calculating a court-ordered award to a Former Spouse. For purposes of computing a Former Spouse’s entitlement, the dollar amount of an outstanding TSP loan is included in the account balance, unless your court order specifically provides otherwise. Therefore, your court order need not mention a TSP loan unless the outstanding loan amount should be excluded from the award calculation.

For Example:
Member Balance: $75,000.00
Outstanding Loan: $25,000.00

Absent clear direction to the contrary the TSP computation of the worth of the participant’s account will indicate:
Balance for Calculation Purposes: $100,000.00

Insufficient Funds In TSP to Comply with RBCO
Attorneys representing Former Spouses will observe that when the actual amount in the TSP at the time the Order is accepted is less than the amount awarded in the RBCO, the TSP’s Legal Processing Unit will pay the total vested amount then available. There will be no comment of a payment shortfall. The TSP will, however, accept a subsequent order, when sufficient funds are known to be available. However, to effect this “second order”, a new (not an amended) Order is required.

Failure to Properly Identify the TSP Results in Rejection of Your RBCO.
Be certain that your Order clearly states that it is applicable to the “Thrift Saving Plan”. It is strongly suggested that your Order specifically reference “Thrift Savings Plan.” The following terms will not be successful in assigning a TSP benefit to a Former Spouse:

“all retirement benefits,”
“Government benefits,”
“Federal retirement benefits,”
“Thrift Savings,”
“Thrift Savings Account”
Stating the Award to a Former Spouse.
When a court order requires a payment from a TSP account, it must clearly describe the Former Spouse’s entitlement. It can only award a specified dollar amount or a fraction or a percentage of the participant’s account as of a specific past or current date.

ALERT:
It is useful for the drafting attorney to understand that neither interest nor earnings will be paid on the amount of the award to a Former Spouse unless your court order specifically provides for recognition of interest or earnings. When properly instructed, the TSP will calculate earnings based on the type of TSP funds the participant was invested in, the number of shares the participant had in each fund, and the share price of those TSP funds up to two days prior to disbursement.

Language for Assignment to Former Spouse.
You may award a Former Spouse a percentage or fraction of a TSP account as of a specific day.

Caution: If a court order awards a percentage or fraction of a TSP account and fails to specify a date for calculating the award to the Former Spouse, then his or her entitlement will be established as of the effective date of the order.

Fixed Dollar - Specific Sum Award.
Your RBCO may award a Former Spouse a fixed dollar amount.

Caution # 1. If your Order states a Fixed Dollar Amount, that is the precise amount that will be paid to the Former Spouse. There will be no adjustment for earnings or losses.

Caution # 2. If your Order describes the Former Spouse’s award as a fixed dollar amount and as a percentage or fraction of the account, the Former Spouse’s award is the specified dollar amount. This rule is observed, even if the percentage or fraction, when applied against the account balance, yields a different amount.

Form of Payment From TSP to Former Spouse.
TSP payments to a Former Spouse are made by U.S. Treasury check directly to a Former Spouse or by electronic funds transfer (EFT) to the Former Spouse’s designated financial institution. The payment to the Former Spouse is made pro rata from all TSP investments in which the participant is invested:
based on the balance in each fund on the date payment is made; and
from all contribution sources (i.e., from employee contributions
and employing agency or service contributions.

Caution.
Practitioners will note that the TSP will make only one disbursement to the Former Spouse under a court order or legal process. The TSP will not make a series of payments even if the order or process requires it, or even if the participant’s account balance is insufficient at the time of payment for the TSP to satisfy the payee’s entire entitlement. However, as indicated above the TSP will honor a second order.

Caution: Death Benefits - Beneficiary Designations.
The participant’s designated beneficiary will receive the death benefits payable from a participant account even if he or she divorces. The Designation of Beneficiary Form TSP-3, on file with the TSP controls who gets the participant’s death benefits. Federal law requires TSP to pay the beneficiary designated on the TSP-3 form. This is true for all circumstances. If a participant designated his or her spouse as beneficiary, then the TSP account must be paid to the spouse designated on the TSP's Designation of Beneficiary form, even if the participant is separated or divorced from that spouse or has remarried. This is true even if the spouse on the TSP-3 surrendered all rights to the participant’s TSP account upon divorce. Consequently, upon divorce it is the duty of the attorney representing the participant to confirm that a new Designation of Beneficiary form, that cancels or changes the beneficiary designation to other than the Former Spouse has been made. It is further suggested that counsel retain a copy of the revised TSP-3 in his or her file.

Transfers to IRA’s Permitted.
All or part of a payment to a current or former spouse under a court order or legal process may be transferred to a traditional IRA, an eligible employer plan, or a Roth IRA. A Former Spouses requesting the TSP to transfer the payment to:

an IRA,
an eligible employer plan (including a Former Spouse’s TSP),
a Roth IRA
is required to use the proper TSP forms to request such a transfer. Attorneys will note that the appropriate forms are provided to the Former Spouse along with the TSP decision letter. Attorneys are cautioned that the TSP will not accept transfer forms provided by financial institutions. Moreover, a Former Spouse’s failure to timely submit TSP forms results in federal income tax withholding.

Tax Treatment of Distributions From TSP.
If an RBCO names a spouse or Former Spouse as a payee, then any portion of the award distributed as a cash payment will be treated as taxable income to the Former Spouse. If the intent of the parties is to award a payment for child support arrears that distribution is taxable to the participant. To avoid confusion, the payee must be identified in the court order as the dependent child or as a state child support enforcement agency. To avoid an unanticipated federal income tax liability be certain to clearly designate each payee(s) in your RBCO.

ALIMONY & CHILD SUPPORT ARREARAGES
Query:
Can a Participant’s Thrift Savings Plan account be assigned for Child Support or Alimony Arrearages?

Answer:
Yes. Based on a properly crafted RBCO all or a portion of the participant’s account may be assigned to a Former Spouse. There is no limit to the number of RBCO’s that can be filed against the participant. This is a most useful tool against FERS participants who are required by law to contribute to this plan, assuring an ongoing supply of funds from this plan.

Troyan, Inc., conducts seminars for family bar associations and groups of family practitioners (at least 20 attendees). The content of each seminar is structured to your stated preferences. The duration of seminars varies from two hours to a full day depending on your topic preferences.