New legislation, Supreme Court decisions and the military’s move toward a blended retirement system in lieu of the old “20 years or nothing” pension has brought significant changes to military retirement, particularly when it comes to the division of military pensions in divorce. Here’s your guide to navigating these changes.
National Defense Authorization Act (NDAA) of 2017
Military members, military administrative personnel, spouses and attorneys alike are finding themselves in a state of confusion as letters from the Defense Finance and Accounting Service (DFAS) are showing up on their doorsteps and rejecting applications for retirement division. The letters demand additional information from military members and require revisions to previously entered court orders concerning the dissolution of marriage.
This is the result of the slow-spreading news: the National Defense Authorization Act (NDAA) of 2017 amended the Uniformed Services Former Spouses’ Protection Act (USFSPA), 10 USC §1408, in a big way.
Historically, Colorado has divided military pensions using the Time Rule Formula, which has been controversial because, under this rule, the ex-spouse continued to benefit from the rank and time-in-service pay increases of the military member long after the couple divorced.
Here’s an example: a couple divorces while the military member spouse is a Captain in the Army with four years of service. All four years were while the couple were married. At that time, the member’s annual basic pay was $64,778. The same military member rises to the rank of Colonel and retires at 20 years of service with a basic pay of $120,654. The Colonel will receive 50 percent of his average base pay per month or a disposable retired pay of $5,027.25. Under the Time Rule Formula, the spousal benefit would be $502.72 per month.
However, under the NDAA amendment, spouses are no longer allowed to benefit from the rank and time-in-service pay increases that occur after a couple gets divorced. The amendment, in essence, freezes the military member’s base pay at the time of divorce and uses it to calculate the spouse’s benefit, rather than calculating an entitlement based strictly upon retired pay.
So, using the same example scenario, but this time applying what is being called the Freeze Time Formula, the monthly spousal benefit would only be $271.47, which is a $231.25 reduction in the monthly spousal benefit. Spouses do, however continue to benefit from cost-of-living adjustments between the date of the divorce decree and the date of retirement.
What it all means: Military personnel no longer need to worry about an ex-spouse benefiting from career advancements that happen long after a divorce. On the other hand, non-military spouses will no longer be able to rely on a military pension as a tool for equitable division of property.
Supreme Court Decision in Howell v. Howell
On May 15, 2017, the Supreme Court ruled unanimously in Howell v. Howell that a state court cannot offset the loss of a divorced spouse’s portion of a veteran’s retirement benefits when that veteran waives retirement pay in favor of disability pay.
A veteran who qualifies for a disability rating may elect to waive a portion of his or her retirement in order to collect nontaxable disability payments instead. This waiver results in a reduction of the retirement check and can reduce a spousal benefit stemming from a separation agreement.
For example, husband is receiving 50 percent of veteran wife’s pension check of $1,000 per month, or $500. Wife applies for disability and qualifies for a 60 percent disability rating. Wife elects to waive a portion of her retirement benefit to receive a non-taxable disability payment equivalent to 60 percent of her monthly pension check ($600), leaving only $400 of retirement pay. Husband’s spousal benefit is now reduced to $200 per month.
In Howell, the Supreme Court held that state courts cannot subsequently increase the amount that a divorced spouse – the husband in the scenario above – receives from military retirement pay in order to compensate him for a loss caused by the veteran spouse’s – the wife in the scenario above – waiver of a share of retirement pay to receive nontaxable disability benefits instead.
What it all means: Veterans can now elect to collect nontaxable disability without fear of being forced to find an additional source of money with which to compensate an ex-spouse.
U.S. Armed Forces Blended Retirement System
The NDAA transformed the military’s traditional “20 years of service or nothing” pension into a new blended retirement system. Anyone who enters the military as of Jan. 1, 2018, will be automatically enrolled in the new retirement. Military members with less than 12 years of service as of Dec. 31, 2017, will have the option to opt in to the new U.S. Armed Forces Blended Retirement system, or remain under the legacy pension.
The military’s legacy 20-year pension is a defined benefit plan where retirement pay is computed by multiplying 2.5 percent times years of service times retired base pay. Members who do not complete 20 years of service do not receive a pension. Only 19 percent of military members qualify for this retirement benefit.
Under the new blended retirement system, retirement pay would be calculated at 2 percent times the number of years of service times retired base pay, but also includes automatic matching contributions to a military member’s Thrift Savings Plan (TSP).
The TSP operates very much like an employer 401(k) plan. Even if a military member opts not to contribute money to his or her own TSP, the Department of Defense contributes an automatic 1 percent of the member’s basic pay, and will match any member’s additional contributions up to 4 percent. After two complete years of service, the TSP becomes fully vested. Members who leave after two years but before 20 years still receive some sort of retirement benefit for their service.
What it all means: When selecting a family law attorney to handle a divorce where one spouse is a member of the military, make sure he/she understands the difference between the two retirement systems; this will be critical when it comes to properly calculating the value of the military pension and any spousal benefit.
If you have questions about the information in this article, the family law attorneys at Robinson & Henry, P.C. can help answer them. Call today to schedule a consultation.
Like this article? Sign up to receive our monthly newsletter and get articles like this one, plus information about upcoming events and free giveaways delivered straight to your mailbox.