By Brian Mullen, Partner

Recent Change in Calculation of Military Retirement Benefits

Effective December 23, 2016 there has been a sea change in the Uniformed Services Former Spouses’ Protection Act (USFSPA), 10 U.S.Code. It was a sudden and surprise change not discussed or argued, simply presented to the President for signature.

The National Defense Authorization Act for Fiscal Year 2017 (NDAA 17) contained a major revision of how military pension division orders are written and will operate. Instead of allowing the states to decide how to divide military retired pay and what formula or methodology to use, Congress imposed a single uniform method of pension division on all the states, a hypothetical scenario in which the military member retires on the day that the pension division order is filed.

Essentially, the military retirement benefits are frozen in time as of the date of separation so the former spouse is awarded that amount that would have been awarded to her had the military member retired on the date of separation.   Despite the fact that California applies the “Time Rule” or Brown Rule in the case of division of military retirement, to divide a defined benefit plan, California will have to use this new method for dividing a military pension.

The Time Rule vs. The Frozen Benefit Rule

When the Time Rule Formula is utilized, the community property interest in retirement benefits is determined by a fraction whose numerator is the employee’s length of service from the date of marriage through the date of separation, and whose denominator is the employee’s total length of service at retirement.

As a simplified example, if a spouse was married for 10 years during which time she worked for the same employer and accrued retirement benefits, but then retired after 20 total years of service with said employer, the community property interest in the retirement benefits would be 10/20 or 50%.  The remaining 50% would be the employee’s separate property.  Further, the community interest is divided equally between the parties, so the non-employee spouse would receive 25% of the total retirement benefits, and the employee spouse would receive 75% of the total retirement benefits.

The Frozen Benefit Rule is a “rewrite” of the terms for military pension division found in the USFSPA. The rewrite requires that the military retired pay to be divided will be that attributable to the rank and years of service of the military member at the time of the order dividing retired pay. This is so even though he or she may rise in rank and years of service afterwards, resulting in a larger pension to be divided, which would then be discounted by using the “marital fraction” to apply pension division to only the benefit which was acquired during the marriage. The only adjustment will be cost-of-living adjustments that occur under 10 U.S.C. § 1401a (b) between the time of the court order and the time of retirement.

The NDAA 17 rewrite makes no exceptions for the parties’ agreement to vary from the new federal rule. Everyone must do it one way, regardless of what the husband and wife decide they want the settlement to say.

Consider this example:

• Husband and Wife agree to divide the husband’s retired pay exactly according to the frozen benefit rule. At the time, Husband is a major in the Marine Corps with over 16 years of service. Their settlement language tracks the new statute by stating that the disposable retired pay to be divided by court order is that of Husband, based on his years of service and rank at the time of the court order, that is, “major over 16.”
• They write up the separation agreement or marital settlement document. Both sign it, and they have their signatures notarized.
• They do not, however get divorced immediately.  Five years pass before one of them files. By that time Husband is a lieutenant colonel over 20, not a “major over 16.”
• When the divorce is granted, with the settlement incorporated into it, it is submitted to the retired pay center. And the center rejects it, since the rank and years of service at the time of the court order is not “major over 16” but “lieutenant colonel over 20.” The latter is what must be divided, not the agreed terms.

In order to prepare proper military retired pay apportionment orders, the preparer must know the service member’s date of separation, rank, pay grade, highest 3 years of salary and the years and months of service during the marriage.  Getting that information is not easy.  If one must send a subpoena, the subpoena must be signed by the judge, not the clerk.  The benefits are frozen at the greatly reduced amount.

Now in a Judgment involving a military retired pay division, it is important to include a provision that the military member, by his/her signature on the judgment, consents to the release of information reasonably necessary to enable the preparer of the order to divide the benefit, or words to that effect.

The new rule doesn’t apply to everyone. Its primary impact will be on the servicemember (SM) who goes through property division while still serving in the uniformed services (Army, Navy, Air Force, Marine Corps and Coast Guard, plus the commissioned corps of the Public Health Service and the National Oceanic and Atmospheric Administration). It will also apply to those who are in the National Guard and Reserves and are still drilling. It has no impact on those who obtain a divorce and property division after retirement.

Feel free to contact our office for more information.