Dividing Military Retirement Benefits in Divorce

by

Timothy C. Voit, Financial Analyst & Todd K. Voit PhD., Economist

While valuing pensions benefits, specifically those that only pay a monthly retirement benefit, is common, and whereby the value is offset by other marital assets so that the pension holder can retain their pension, often this is not practical and the pension must be divided by a court order.  A court order instructing the retirement plan to pay a non-participant spouse payments directly.  The Military Retirement Pay, similar to the federal government and the railroad, does not accept, nor recognize, qualified domestic relations orders (QDRO's) to divide retirement benefits and pay. However, the federal government retirement plans, i.e. Civil Service Retirement System (CSRS) and the Federal Employee Retirement System (FERS), will accept Court Orders Acceptable for Processing (COAPs), while the Military and Railroad will accept general court orders which may include divorce judgments, settlement agreements, or a supplemental court order dividing retirement benefits. Each Order above has substantial inequities as compared to a QDRO, typically used in dividing private sector retirement plans.  These QDRO like orders offer nothing short of a pile of red tape to an attorney drafting Orders of this type.

The military bases the retirement benefit by the member's years of service, rank and/or pay grade, multiplied by 2.5%.  Full time active military personnel can receive retirement benefits after attaining 20 years of service, at any age, while Reservist, and National guard, must wait until their age 60 to start receiving benefits (monthly benefits), and too must have 20 years of service to be fully vested.  The military has, what is referred to, as a 20 year cliff vesting schedule, in that should the member leave the military prior to attaining 20 yers of service, no benefits will be paid.  There are exceptions to this rule should the military close a base, or as part of downsizing, may offer an early out say with only 15 years of service.  A common occurrence in the 90s.  

Before discussing the specifics of court ordered division benefits regarding the military, a few special note of interest must be made.  Retirement plans in the United States, since their conception, are no different than a savings account.  The reason been is that the premise of qualified retirement plans is to receive cash or a deferred arrangement, referred o a CODA.  This means that monies contributed by or on behalf of a member, r anyone else with a company retirement plans, has monies diverted to a pension fund rather than taking the same money as income.  Income that otherwise would have gone into the family household.  This is why pensions are viewed as marital assets.  The retirement or pension benefits are in effect monies that would have otherwise gone into the family household but instead went into a fund, or account, that can only be in one person's name.  All to often, a spouse, having forfeited heir own career to follow their spouse to wherever the member was stationed, does not have, or could not have, accumulated heir own retirement benefits.  Therefore, it is important to view this and any other retirement account as joint property, and try at least to secure their interest.  Again, pensions in general, since they are cash flows in the future, can be either valued, with the spouse receiving one-half of the value in other marital assets, or paid directly by the military when the member spouse actually retires (commences benefits).  Following are some important points to keep in mind when dividing military retirement benefits.

The division of military benefits is governed under the Uniformed Services Former Spouses' Protection Act (USFSPA) under Title 10 U.S.C. Section 1408. While the Act is a method of enforcement of federal law, the question of divisibility is a state law issue. The Act provides several benefits to former spouses including direct payment of retirement benefits to a former spouse of a retiree, provided: 1) the amount of the award does not exceed 50% of the Member's disposable retired pay; 2) the length of marriage and years of creditable service over-lap for at least a 10 year period; and 3) the court has jurisdiction over the Participant/Member as the court cannot treat military retired pay as property without such jurisdiction.

With regard to jurisdiction, many believe it is the "home of record", which by definition is the state in which the Participant/Member has applied to enter the service or re-enlist. In fact, it is the state of domicile which has jurisdiction. The state of domicile is defined as the "fixed home" of the military member, the place to which he/she would return if told to "go home". However, if your state is not the Member's domicile, it does not mean that your state's court cannot divide a Participant/Member's pension rights. It is permissible to divide the pension based upon the consent of the Military member to the court's exercise of jurisdiction over the pension.

Important to note is that, unlike a QDRO, the Participant is referred to as a "Member "and not Participant. The term Alternate Payee may be acceptable, however, it is probably best to refer to the Alternate Payee as a "Non-Member Former Spouse".

The Act only allows for a division of "disposable retired pay". Disposable retired pay is the total monthly retired pay to which a Member is entitled less amounts: owed to the U.S. Government for previous overpayments or recoupments, deductions from retired pay due to a court martial, deductions for group life or health insurance premiums, and most importantly, disability pay benefits.

Close attention should be paid to the latter of the four deductions. Disability pay is not treated as "retired pay" and in some instances, is not divisible by state courts. Again, disability pay is not retirement pay and therefore, should the Member receive disability pay in lieu of retired pay, the non-member ex-spouse may not receive anything. This is a crucial point as disability pay in lieu of retired pay is very common. As an example, a military personnel member may be eligible for $2,000 per month in retired pay benefits. It might be determined that he, or she, has a 20% disability from slipping on the basketball court and injuring his knee during a weekend retreat. As a result, the Member would receive $2,000 per month, however, $1,600 would be retired pay subject to taxes and property division while $400 is disability pay and exempt from income taxes and possibly property division.

The final divorce decree should include language that specifically deals with disability pay in lieu of retired pay, as well as including such language in the Military Order. It has been our experience that the Military will accept a Military Order to divide benefits even if it is flawed. They will exercise discretion based upon their interpretation of the Order and portion of the Order that appears to violate the USFSPA. Assuming the Defense Finance and Accounting Center will reject direct payment of disability pay to a former spouse, the Marital Settlement Agreement can require the member spouse to pay directly to the former spouse an amount equal in all respects to the amount agreed upon at the time of divorce. If the Defense Finance and Accounting Center (DFAS) rejects the direct payment, the Member would then be required to make the obligatory payments out of his/her assets, income, or both.

Keep in mind, both "active" and "reservist" pensions can be divided. However, active personnel can retire at any age after they have completed 20 years of creditable service. In valuing military pensions, reservist retirement pay is based not only on rank, but accumulated points as well, with benefits payable at age 60.

Several important points to consider when one, or both, parties to a divorce have military retirement benefits. First, for a non-member spouse to be eligible for survivor benefits, the Military Order (MO) must be receive by the DFAS within one year after the divorce. In other words, if you as an attorney are drafting the Order, and you fail to submit the Order within a year after the divorce, that non-member spouse will lose their eligibility for the Surviving Spouse Benefits. Further, the MO will not be accepted by the DFAS if the court stamp, or seal, is more than 90 days old. If the Order isn't completed, or received, by DFAS within the 90 days of the divorce, a copy of the divorce decree with a more recent stamp will have to be obtained.

A comment on Variable Separation Pay. Since the Military is experiencing some downsizing, those members with less than twenty years of service may be released, however, Variable Separation Pay is considered by the Military as severance pay and not retirement pay. Therefore, similar to disability benefits, it would not be divisible unless the court in your jurisdiction determines it is marital property. The Uniform Services Former Spouses' Protection Act (USFSPA), does not apply to Variable Separation Pay but only to retired pay.

A full and complete explanation cannot be covered within the scope of this article, however, watch for future articles to explain more about military retirement pay. © Voit Econometrics Group, Inc.