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May 28, 2019 Military

Military Pensions and Divorce - Review of Recent Changes

By Steven P. Shewmaker

Over the past two years, there have been several changes in military divorce.  These changes have been the fodder for much conversation and much confusion.  This article seeks to assist the family law practitioner with understanding those changes are and how to deal with them.

Recent changes in military divorce include a new Blended Retirement System and the new "Frozen Benefit Rule."

Recent changes in military divorce include a new Blended Retirement System and the new "Frozen Benefit Rule."

Credit: Martinns via GettyImages

Congress says "If it ain't broke, let's fix it!" 
The Military's new Blended Retirement System.<\/u>

For many years, critics claimed that the old military retirement system was too expensive to maintain. Today, the cost of the military retirement system exceeds 111 billion dollars annually.  Military retirement funding and other military spending was and continues to be a significant and growing portion of the U.S. annual budget.

Also, as a cliff vesting plan, the service member must serve a full 20 years to receive any<\/u> retirement.  It is estimated that only 17% of all enlisted service members and only 49% of all officers serve long enough to qualify for retirement.  Most leave voluntarily before 20 years. Others are not promoted and administratively discharged.  Still, others may be administratively separated for misconduct or they may be criminally prosecuted by the military and lose all retirement benefits.  One of the old plan's major criticisms was that over 80% of all who serve the country--including thousands who actually serve in combat--leave the military without any retirement benefit.  Consequently, critics called the old military retirement system an impediment to attracting competitive recruits; they also pointed out that the mediocre mid-career service members are motivated to remain in service under the old plan.

As a result of these and other criticisms, many members of Congress considered the old retirement program too costly and antiquated.  Ultimately, in the 2013 NDAA, Congress established the "Military Compensation & Retirement Modernization Commission" to review the current system, consider some of these criticisms, and recommend changes.  On January 29, 2015, the Commission released its final report, recommending an overhaul to the military retirement plan, including establishing an enhanced defined contribution plan.  In the 2016 NDAA, Congress adopted many of the Commission's proposals.

The 2016 NDAA amended the military retirement plan and launched the Blended Retirement System on January 1, 2018.  Similar to the transition from the old Civil Service Retirement System (CSRS) to the Federal Employee Retirement System (FERS) in 1987, there is a phase in period.  We are currently in the phase in period.  Under the plan, there are three distinct categories of service members:

  1. Those serving on (and before) December 31, 2017 with more than 12 years of service at that time (or 4,320 retirement points for a reserve component service member);
  2. Those serving on (and before) December 31, 2017 with less than 12 years of service at that time (or less than 4,320 retirement points for a reserve component service member); and
  3. Those who join on or after January 1, 2018.
  4. <\/ol>

    Those in the first category (> 12 years of service on December 31, 2017) will remain under the old retirement system, without exception.  Those in the second category (< 12 years of service) have the choice to opt into the new system or remain under the old system.  Those in the third category may not choose; they will only be eligible for the new retirement system.

    This is a standard "grandfather" plan established for the sake of equity. Congress estimated that those with more than 12 years of service by January 1, 2018 are strongly vested in the old retirement system and should not be disturbed.  Those with less than 12 years of service may do better under either system depending upon how much service they have, how much (if any) "continuation pay" they receive (see below), and how much they desire to remain in the military.

    This new blended retirement system includes:

    1. An enhanced Thrift Savings Plan (TSP),
    2. A reduced defined benefit plan,
    3. A mid-service "continuation" bonus, and
    4. An option to receive an immediate partial lump-sum payment against the defined benefit upon retirement.
    5. <\/ol>

      First, a TSP account will be established for all new service members and those service members opting into the blended retirement system.  After the service member's first 60 days of service, the Government will automatically begin contributing 1% of the service member's base pay into this account every month.  The Government will match, dollar-for-dollar, the service member's contributions up to 3% of base pay.  If a service member contributes above 3%, the Government will contribute $0.50 towards every dollar the service member contributes above 3%, up to 5%. Therefore, if the service member makes a 5% contribution, the Government will match it (with a 5% maximum contribution). These contributions continue until the service member leaves service, retires, or reaches 26 years of service.  The TSP becomes the service member's property after two years of service.  These contributions are invested under the direction of the TSP Board in a variety of U.S. Government securities and stock index funds.

      Second, the military's cliff vesting pension remains intact.  However, the 2.5% multiplier that couples with the service member's total years of service to create the retirement multiplier, is reduced to 2%<\/u> in exchange for the Government's TSP contribution.  Since the 2.5% constant had the practical effect of yielding a retirement of 50% of the service member's base pay in retirement over a 20-year career, the lower constant yields 40% of the service member's base pay in retirement.

      Third, for those service members who achieve 12 years of service on or after January 1, 2018, the Blended Retirement System requires that the active duty service member be paid not less than 2.5 times their monthly base pay (and the Reserve/National Guard service member receive not less than 0.5 times the monthly base pay of an active duty service member of equivalent rank and years of service).  At the discretion of the Secretary of the particular service, the active duty service member may also be paid as much as 13 times the monthly base pay (and the Reserve/ National Guard member may be paid as much as 6 times the monthly base pay of his active duty equivalent). The ultimate size and timing of such continuation bonuses are left up to the respective service secretaries in order to "shape" the force.

      Finally, the blended retirement system allows retirees who are entitled to begin receiving retirement to receive an immediate "lump sum" payments against the defined benefit portion of their pension.  The plan allows for a retiree to receive either 25% or 50% of the annuity in a discounted present value lump-sum payment. The retiree receives the remainder of the annuity each month, and the annuity returns to the full annuity amount upon the retiree's 67th<\/sup> birthday.

The Frozen Benefit Rule - While Former Spouses Were Sleeping<\/u>

Another change that has impacted military divorce is the new "Frozen Benefit Rule."  Prior to the passage of the National Defense Authorization Act (NDAA) for 2017, state courts had discretion on which of the above methods to use to divide a military pension. However, the NDAA for 2017, which was signed into law on December 23, 2016, requires the use of a hypothetical division to divide a military pension of a service member who is still serving.  This applies to all divorces or legal separations after December 23, 2016.

As legislatures are wont to do, the law is not clear.  The new law does not say "courts shall use the hypothetical method of division" rather the law limits the military retired pay subject to property division as "the amount of basic pay payable to the member for the member's pay grade and years of service at the time of the court order."  Clear as mud, right?  This effectively caps the former spouse's portion at the current pay grade and years of service the service member has at the time of the divorce. This is commonly referred to as the "frozen benefit rule."

For all divorces occurring after December 23, 2016 and where the service member is still serving, the MPDO must include the service member's "high 36" and years of creditable service (or points for a reserve component) at the time of the divorce.  Further, the pay centers require that the court order dividing the military retired pay include the service members "high-36" and months (or points) of creditable service at the time of the divorce.

For an active duty service member serving at the time of the divorce, the language for division would read:

"The former spouse is awarded ___ percent of the disposable military retired pay the member would have received had the member retired on (date of divorce) with a retired pay base of (high-36) and with _____ points of creditable service.<\/blockquote>
The service member had a high-36 of $x,xxx.xx and xx months of creditable service on the date of the divorce."<\/blockquote>

In order to calculate the service member's "high-36," the attorney is going to need to know the service member's rank, pay entry base date (PEBD - date of entry into military 
service), and date of rank.  From there, the attorney can calculate the high-36.  

As compared to the time rule formula, the hypothetical or the frozen benefit rule, reduces the former spouse's share of the military pension because the former spouse does not get the benefit of any future pay increases, promotions, and credit for additional years of service.  When DFAS or the Coast Guard pay center calculate the former spouse's portion under the frozen benefit rule, the former spouse's portion is calculated based on the variables provided in the MPDO and then applies only the cost of living adjustments on military retired pay from the divorce until the receipt of military retired pay.

Howell v. Howell - The Death of Indemnification<\/u>

Service members waive a portion of their military retired pay in order to receive VA disability compensation.  For permanent disabilities incurred during and a result of military service, retirees may waive all or part of their military retired pay in two primary ways--through receipt of a military disability retired pay under Title 10 of the U.S. Code or through receipt of Veterans Disability benefits under Title 38 of the U.S. Code.

Because 10 USCS § 1408 (the USFSPA) only allows state courts jurisdiction to equitably divide military retired pay incident to divorce or separation, any waiver of military retired pay for equivalent amounts paid as disability compensation are beyond the state court's authority to divide incident to divorce or separation.  Naturally, a former spouse may be caught off guard as a result of such waiver.

Military disability retired pay is paid by the Department of Defense to service members who are disabled and have at least twenty years of creditable service for retirement or who are rated as at least 30% disabled. Military disability retired pay is calculated as the portion of the service member's retired base pay equivalent to the service member's disability rating (e.g. a 40% disability rating applied to a retired base pay of $2,000.00 would be $800.00). Now, if the service member would receive regular retired pay of a greater amount, the service member will receive the greater amount; however, the amount of disability retired pay will not be subject to income tax.

Veterans Administration (VA) disability benefits are paid by the Department of Veterans Affairs to service members who may be less severely disabled than those eligible for military disability retired pay or whose service related disabilities emerged after retirement. VA disability benefits are calculated under the same disability percentages as military disability retired pay (a VA disability scale). A service member who receives a military pension shall waive a portion of that pension equivalent to the VA disability benefits received from the VA (e.g. A service member who receives $2,000.00 in military retired pay and who is eligible to receive $500.00 VA disability payment shall waive $500.00 of the $2,000.00 retired pay.) Any amounts received from the VA are not subject to income tax.

The service member has incentive to waive all or part of her military retired pay because the amounts waived for equivalent disability payments are tax free, thus increasing the recipient's net income. Of course, such a waiver also can reduce the former spouse's portion of the retired pay.

Many former spouses have had their portion of the military retired pay reduced without any notice or warning when the retired service member has received VA disability pay and waived a portion of their retired pay, post-divorce. This is sometimes referred to as a "post-divorce re-characterization of military retired pay." This has resulted in former spouses taking the retired service member back to court post-divorce in typically contempt action.  Prior to May 2017, states were divided in their responses to this situation. Some states held that the trial court cannot order the service member to make direct payments to the former spouse in the event that the service member waives a portion of his or her retired pay for VA disability post divorce. These states have held that the U.S. Supreme Court decision in Mansell v. Mansell prohibits the division of VA disability benefits and therefore any indemnification clause is prohibited by Mansell. Other states have held that the retired service member must indemnify the former spouse for the reduction in the former spouse's portion of retired pay based on the service member's waiver.  These states have ordered indemnification of the former spouse's portion of the military retired pay, holding that the service member's unilateral waiver takes property away from the former spouse without due process.

RIP Indemnification.  The United States Supreme Court resolved these differences of opinions between the states on VA indemnification clause in the case of Howell v. Howell which came out in May 2017. In Howell v. Howell, the parties were divorced in Arizona in 1991.  The trial court ordered that Ms. Howell would receive 50% of her husband's military retired pay.  Mr. Howell retired from the Air Force in 1992, shortly after the divorce.  Thirteen years after the divorce, Mr. Howell received a 20% VA disability rating for his shoulder.  He then began receiving approximately $250.00 in VA disability compensation, and in order to do so, waived $250.00 of his military retired pay.  This had the effect of reducing Ms. Howell's portion of the military retired pay without any notice.  Ms. Howell petitioned the trial court in Arizona to enforce the original order and order Mr. Howell to pay her the difference directly.  The trial court approved and ordered Mr. Howell to pay her directly, and the Arizona Supreme Court upheld.  The issue was then brought before the U.S. Supreme Court. The U.S. Supreme Court held that, in line with the Court's decision in Mansell v. Mansell, the Court could not order the service member to indemnify the former spouse for funds that the former spouse loses when the service member waives military retired pay for VA disability compensation.

Former spouse proponents have viewed this as a major set back for former spouses, especially coming on the heels of the frozen benefit rule.  Based on this new ruling from the U.S. Supreme Court, courts cannot order a service member to indemnify a former spouse in the event that he or she waives military retired pay for VA disability compensation. And, when read in conjunction with Mansell v. Mansell<\/u>, the Parties also cannot agree to an indemnification clause.  Former spouse advocates view this as a taking of the former spouse's property with no notice or due process for the former spouse.


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    Steven P. Shewmaker

    Esq., Atlanta, GA

    Shewmaker & Shewmaker, LLC