As professionals working with people in crisis, many thoughts routinely scare us awake in the middle of the night – did I remember to mention this, did I think of that, what did I miss? With all that is happening in the news today – Ebola, Charlottesville, terrorism - these fears might actually be a little reassuring in their ordinariness. Nevertheless, two new sources of worry recently brought Hallowe’en frights to me a bit early this year. The first came by way of David Goldberg on his always topical listserv, followed by a presentation from Pat Dragga, both of whom are well informed family law attorneys. They highlighted the new federal government’s Office of Personnel Management (OPM) regulations on “phased retirement” for some federal employees who might be retiring, and how these changes might affect our divorcing clients. The second came by way of discussions with accounting professionals in my international cases, and involves the unusual tax treatment of some foreign nationals when divorcing. Rather than scare you, I hope that bringing awareness of these two issues might instead offer some reassurance.
“Phased Retirement” is a new program from OPM that allows certain eligible federal government employees to continue working on a part-time basis while also receiving a partial annuity and still accruing additional service credit toward their final annuity. The idea is that these employees will spend 20 percent of their time mentoring other employees, thus transferring their institutional knowledge within their agency. Upon full retirement, the employee will receive a “composite annuity.” The part of the annuity used to pay the employee during the phased retirement period, and prior to final retirement, stops growing, whereas the other part continues to grow. The phased retirement regulations apply to both FERS and CSRS employees, and can be found at https://www.federalregister.gov/articles/2014/08/08/2014-18681/phased-retirement.
The good news about phased retirement (aside from the governmental interest in promoting the continuity of institutional knowledge) is that the regulations address Court Orders Acceptable for Processing (“COAP”) rather comprehensively. They even address how wording in a COAP prepared before the new regulations would apply to an employee electing phased retirement, including any survivor benefit provisions. The bad news is that some Marital Settlement Agreements may use wording and terms inconsistent with the concept of “phased retirement,” for example, termination of alimony upon retirement. Even in such situations, the definitions offered by the OPM regulations, including that “retirement” means a retirement other than a “phased retirement,” likely will be helpful.
Less reassurance is available for counsel and parties where one of the divorcing spouses is considered a ‘non-resident alien’ (“NRA”) for federal income tax purposes. This is different from the same term when used in the immigration context. A person who is a NRA for tax purposes cannot benefit from the tax-free treatment of asset transfers upon divorce, and mandatory tax withholding requirements may apply to the transferring spouse, including on alimony where certain countries are involved. The penalties on the U.S. citizen spouse who fails to make the mandatory tax withholdings can be severe. And many foreign citizen international organization employees or their spouses, even those with a “G-4” visa, meet the definition of an NRA for tax purposes.
This is an extremely technical and fact-specific area, however, so careful consideration and timely consultation with knowledgeable tax advisors is essential. For those of you working frequently with international organization employees or other foreign nationals, watch for announcements of an upcoming all-day symposium on international family law issues sponsored by the Bar Association of Montgomery County (BAMC) and scheduled for Friday, January 30, 2015, at the Universities at Shady Grove. These tax issues, and many others, will be addressed in detail as part of that symposium.
Now that you know about these lurking dangers, and where to get more information about them, sleep tight!