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October 24, 2022 Feature

The Military Blended Retirement System: What Every Servicemember and Lawyer Must Know

Marshal S. Willick

Since the first Continental Congress, the United States has provided pensions to career military members. During the past 50 years, Congress has repeatedly sought to reduce the cost of military retirement benefits. The calculation went from a percentage of the highest grade held at retirement to a “high 3” calculation similar to that used for federal civil service workers. Service members were offered early retirements and baited with cash pay outs that permanently reduced their future retirement benefits. Each of these was a quick fix that did reduce the overall liability of the federal government to members, but in the end only proved to hurt the service members.

A major change in the actual total pension benefits payable was passed in 2016 and became effective in 2018. Named the “Blended Retirement” plan, it was the biggest restructuring of military retired pay in decades. Beginning in 2017, current members who had fewer than 12 total years of service when the new plan became effective were able to switch over to the new system or remain in the system that covered them since they joined. It became mandatory for members entering service on or after January 1, 2018.

Under the “Blended Retirement” system, there are four components to military retired pay: a Defined Benefit, a Defined Contribution, Continuation Pay, and Elective Lump Sum of the Defined Benefit.

Defined Benefit

This is similar to the current pension that is paid to a retired member. However, the retired pay multiplier was reduced from 2.5% to 2% times number of years of service. A member retiring at 20 years receives 40% of the high 3 base pay where retiring at 30 years yields 60% of the high 3 base pay, etc.

Retired pay could be paid in different forms: by constant pension payments, or by lump sum (with a choice of 25% or 50% of the value of the total retired pay, detailed below) followed by smaller pension until full social security retirement. The lump sum option can be paid out over four years to lessen the tax impacts.

Defined Contribution

The Thrift Savings Plan (TSP) is no longer a voluntary option. The military contributes a sum equal to 1% of base pay to each member’s TSP account no matter whether the member contributes. The government will match contributions made by the member on top of the guaranteed 1% up to a maximum of 5%. The government will contribute 1% of the member’s base pay automatically. The matching is as follows: 1% is matched 1%; 2% is matched 2%; 3% is matched 3%; 4% is matched 3.5%; 5% is matched 4%. The benefits become fully vested once a member has served at least 2 years. This was considered the “shining star” of the new system as it guarantees that every service member gets some retirement no matter how long they serve. Any money contributed by the member is fully vested upon contribution. There is a two-year service commitment to vest in any contributions made by the government.

Continuation Pay

To encourage qualified members to remain in the service, “continuation pay” will be offered to all members. Each branch will determine exactly when to offer the “continuation pay” sometime between the 8- and 12-year point of service. For active-duty members, the payment will be a sum equal to something between 2.5 months of base pay and 13 months of base pay. This will be determined by a number of factors by each service including the need for that member’s specialty. Reserve personnel are also eligible for this benefit, but in a sum equal to between .5 months base pay and 6 months base pay. Acceptance of continuation pay incurs a further three-year service obligation. The payment can be taken as a single lump sum or in four annual payments.

Elective Lump Sum Distribution of Defined Benefit Plan

Members who serve 20 or more years can voluntarily elect to take a lump sum payment of retired pay. Members who elect to take the lump sum may choose to take 25% or 50% of the discounted present value of their defined retirement benefit that would be due to them prior to becoming fully eligible for Social Security. This could be a huge malpractice trap for attorneys. If the unilateral decision is allowed to be made by the member without input, compensation, or sharing, the former spouse’s share could be further eroded by reducing the benefit payable for the life of the member.

After achieving full social security age, the retirement benefit will be restored to the amount they would have received had they not taken the lump sum payment. Reservists are also eligible for this benefit but will not be able to receive the lump sum until they achieve 60 years of age. Some reservists are eligible to receive their retired pay earlier than age 60 based on deployments while serving.

Members leaving the military before completing 20 years keep the money in their TSP fund and can move their TSP funds to another 401(k) retirement plan or to an IRA after they leave the military. Members who contribute at least 5% of their base pay to the TSP will have those sums matched by the government and therefore doubled. This includes the 1% guaranteed government contribution plus 4% matching for contributing 5% of base pay. A member doing so for 20 years could have several hundred thousand dollars saved towards retirement. The TSP has significant tax advantages and low administrative costs.

Coping with the Blended Retirement System

Every servicemember and lawyer that deals with retirement division in divorce needs to understand the different options afforded the member as this will affect the benefit payable to the former spouse.

Every military order should explicitly deal with all four components, including providing explicitly for spousal sharing in the possible lump-sum payout. Counsel for spouses will have to use the state court remedies used for analogous obligations to enforce payment to former spouses if the payment can’t be made by DFAS.

The continuation pay should also be explicitly addressed. The conceptual difficulty is that the continuation pay has been explicitly made a component of the altered benefits and lowering of the retired pay that was previously divided with the spouse, but it contains an obligation for future service.

At this writing, there is no consensus as to how to deal with this substituted portion of the exchange for traditional defined benefit plan benefits.

One school of thought looks to the requirement of future service and considers that it is a reward for future service, and therefore belongs entirely to the member if that future service occurs after divorce from a spouse.

This analysis presumes that the “prior service performed” is not graded or evaluated but could consider “some” spousal interest in the continuation pay if in practice there is some evaluation of past “merit” a factor in who gets the offer. Given the contingency of future service as a condition of keeping the money, this analysis analogizes stock options awarded for future continued services. See, e.g., Chehab v. Hamilton-Chehab, 45 So. 3d 533, 536 (Fla. DCA 2010) (applying a “coverture fraction” for future stock options comparing the marriage term and vesting period); Davidson v. Davidson, 254 Neb. 656, 578 N.W.2d 848 (1998) (restricted stock, granted to encourage husband to remain with employer in the future, was part marital and part separate property, based upon an allocation formula).

Complicating the analysis is that only those who “opted in” to the new system formally waived a portion of retired pay otherwise payable, for which members compensating the spouse for that choice seems most straightforward.

The contrary analysis notes that since other components of total retired pay were lowered when this benefit was put into place, it logically must be considered a substitute benefit, so spouses should be entitled to a portion of it as they were entitled to the benefit that this component replaced, as it is a quid pro quo of giving up one form of retirement in exchange for another. Proponents of this analysis propose mathematically allocating the continuation pay between the prior and future service, effectively giving the former spouse a portion of the pay despite it being contingent on future service.

As is true with most major changes to government plans, the “how to” is yet to be decided and challenges in court are quite likely.

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Marshal S. Willick is the principal of the Willick Law Group, an A/V-rated Las Vegas family law firm.