The CSRS Coverage Gap
By: Mark Altschuler
Why the Survivor Benefit is Necessary in a CSRS COAP
A Federal QDRO type order under the Civil Service Retirement System (CSRS) is called a COAP, short for "Court Order Available for Processing." Since this is a shared interest order, not a separate interest payable for the life of the Alternate Payee (called Former Spouse in a COAP), a survivor annuity is required in the COAP in order to preserve benefits for the Former Spouse in the case of the death of the Participant (called Employee in a COAP). In the CSRS the Former Spouse Survivor Annuity is payable "at the death of the Employee, whether such death occurs while an employee or retiree."
No Survivor Benefit if the Employee Terminates before Retirement
What happens if the employee terminates service for CSRS, and then dies before retiring - before retirement benefits commence? Section 8341(h)(1) of Title 5, U.S.C. states that the survivor annuity is payable to a "former spouse of a deceased employee, Member, annuitant, or former Member who was separated from the service with title to a deferred annuity under section 8338(b) of this title..."
This means that if an employee terminates service before retirement and then dies before retirement, the survivor annuity is not payable. The exception is a Member who was separated from service with title to a deferred annuity. Under 8331(2) of Title 5, U.S.C., a "Member" is defined as a Member of Congress, with some defined exceptions. This makes sense, since Members of Congress are subject to re-election and many do not serve until retirement age, leaving Congress with a deferred annuity, instead. However, for regular Civil Service Employees who terminate service before retirement age and then die before retirement, the survivor annuity is not payable to a former spouse.
This regulation was tested in the Hubbard case. William Hubbard, a CSRS employee, was employed with the Department of the Interior from 1967 until his resignation in 1986. With less than 20 years service he was eligible for retirement at age 62. He and Betty Hubbard divorced on January 19, 1996, and on June 9, 1997 the General Court of Justice, District Court Division, Wake County, North Carolina issued a COAP awarding the former spouse a Former Spouse Survivor Annuity equal to 50% of the employee's gross monthly annuity. Mr. Hubbard died on July 28, 1998, at age 53. Betty Hubbard applied for a survivor annuity on September 8, 1998, and by letter dated November 12, 1998, the Office of Personnel Management (OPM) informed her she was not eligible for a survivor annuity since Mr. Hubbard was neither an active employee nor a retired annuitant. Betty Hubbard appealed, and on November 23, 1999, OPM issued its final ruling confirming the initial finding.
Betty Hubbard appealed this decision in Federal Court, basing her claim for a survivor annuity on the language stated above in 8341(h)(1), that the survivor annuity is payable to a "former spouse of a deceased employee, Member, annuitant, or former Member..." The United States Court of Appeals found that "Member" means a Member or former Member of Congress, and "this provision does not, however, afford former spouses of former employees similar treatment."
One remedy is the Lump Sum Benefit, which is the balance of retirement contributions made by the employee. This is payable by order of precedence, as follows:
Therefore, naming the former spouse as the lump sum beneficiary in the COAP will designate the former spouse as beneficiary for the Lump Sum Benefit and offer at least some protection if this gap of termination and death before retirement occurs.
Why Life Insurance is the Best Remedy
Another solution to this "gap" period is life insurance. While the first choice would appear to be the Federal Employees' Group Life Insurance (FEGLI), FEGLI only covers employees and annuitants, not separated employees. Private insurance provides a remedy. Fortunately, the replacement life insurance would only have to be in effect for the period from termination until retirement, as opposed to survivor annuity replacement insurance which has to be in effect for the life of the retiree. An actuary can prepare a table of year by year term life insurance that replaces the present value of the survivor annuity on an annual basis, during the gap period. This is the solution of choice if such a gap occurs in a CSRS COAP situation. Hubbard v. Office of Personnel Management, 247 F.3d 1236 (2001).