Dividing military retirement benefits.
By Rick Johnson
I recently had an opportunity to review an article related to the division of military retirement benefits in connection with divorce case. The author took issue with the traditional methods of awarding military retired pay to former spouses. It seems that the trial court in the case ordered that the former spouse was entitled to a portion of the service member’s disposable retired pay (DRP). Since military retirement benefits are payable to both a military retiree and a former spouse (pursuant to a qualifying court order under Section 1408 of Title 10 of the U. S. Code) only after the retirement of the service member, the court ordered that the benefits were to be divided based on 50% of the retirement benefits at the time of retirement multiplied by a marital fraction, the numerator of which was to be the number of months the parties were married during which the service member was in the military and the denominator of which was to be the number of months the service member was in the military at the date of retirement. At first glance there appears to be nothing amiss about this formula or method of dividing military benefits. In fact, this is the traditional manner in which military retirement benefits are divided throughout the states.
The case involved a master chief, who enlisted in the U. S. Navy at the tender age of 18 and married at 20 when he was a seaman (pay grade E-3). He was divorced some 10 years later when he was at pay grade E-6. He retired as an E-9 with 25 years of service. When the chief retired, his active duty base pay was $3,293.40 per month and his retired pay was $2,058.38 per month ($3,293.40 X 2.5% multiplier X 25 years). His former spouse’s benefits equaled $411.68 per month ($2,058.38 X 10 yr./25 yr. X 50%).
However, had the court awarded the former spouse retirement benefits based on the “accrued benefit” at the date of divorce, the former spouse’s benefit would have been $224.37. Why was that? The chief’s active duty base pay at the date of divorce was $1,794.90. Correspondingly, his “accrued” retired pay would have been $448.73 ($1,794.90 X 2.5% X 10 yr.), 50% of which would be $224.39. As it turns out the former spouse received, at retirement, over 90% of the retirement benefit that had accrued during the marriage.
How did this take place? Quite simply, because the award by the court was based on DRP at retirement, after continued years of service and promotions, not at the date of divorce.
Military retirement benefits are in the nature of a defined benefit plan, i.e., an annuity paid over the life of the participant. However, military retirement benefits are uniquely different from qualified plans sponsored by private employers. Under qualified plans there is a formula so that retirement benefits can be determined at any time. In addition, there is a normal retirement age associated with qualified defined benefit plans. Retirement benefits commenced prior to the plan’s normal retirement age can be adjusted using the plan’s actuarial factors. Not so with military retirement benefits. The monthly benefit can only be determined at retirement because that is the only time when the pay grade and years of service will be known.
Family courts, familiar with dividing qualified plans, often do not know or understand the unique differences between qualified plans and military retirement systems. For that matter, most family law attorneys do not recognize these differences either, or the inequity they may create. The courts, as the article pointed out, see military retirement benefits as the “square peg” in the “round hole” of property division. The court’s solution is to base the division on the benefits to be received at retirement adjusted by a marital fraction.
There is a legitimate reason for basing the division of military retirement benefits at the time of retirement. Military retirement benefits are subject to adjustment for inflation by the addition of cost of living allowances (COLAs), a very important and valuable component of military retired pay. However, a former spouse’s entitlement to COLAs is allowable only if the former spouse’s entitlement to the service member’s retired pay is stated or can be stated as a percentage of the retirement benefits at retirement. If the former spouse’s entitlement is stated as a fixed dollar amount, which results when benefits are calculated as of an interim date, the entitlement to COLAs is lost.
The inequity of the division of military retired pay in the traditional manner employed by courts was not envisioned by the Uniformed Services Former Spouses’ Protection Act (USFSPA). The principal purpose of the USFSPA was to divide military retired pay as a marital asset as ordered by the state courts (with some limitations) and to provide for direct payment by the paying agents for the Uniformed Services to the former spouses. The USFSPA preceded the Retirement Equity Act of 1984 (REA), which is codified in the Internal Revenue Code as Section 414(p). REA addressed only qualified plans under Section 401 and some 403(b) plans. It would have been helpful if some of the provisions of REA had made their way into the USFSPA, such as allowing distribution of a former spouse’s assigned benefit at the service member’s “earliest retirement date” and providing for interim calculations of benefits. These attributes would serve to lessen the confusion and resulting inequities in dividing military retirement benefits. It is not likely that there will be any material changes of this nature to the USFSPA in the near future.
Historically, it appears that both the courts and family law attorneys have missed the point. There is a way to both “freeze” the benefits of a former spouse at the date of divorce and state them as a percentage of benefits at the date of retirement. In order to accomplish this, factors for continued years of service and promotions must be included in the formula for division. How is this accomplished? Consider the following:
The intent of the court’s award is to provide a benefit to a former spouse equal to 50% of the service member’s retired pay at the date of divorce. However, most state laws provide that former spouses cannot share in any post-divorce increases in salary earned by the participant. The Court’s intent can be accomplished using the following formula:
- Number of months service
- Member and former spouse were married during which the Active duty base pay for service member was in the U. S. service member at the Military at the date of divorce X date of divorce X 50% X DRP
- Number of months the service Active duty base pay for member was in the U. S. Military member at date of retirement at the date of retirement
The service member is an O-3, with 15 years of service at the date of divorce. He had been in the military 3 years prior to his date of marriage. He divorced after serving 15 years. His active duty base pay on the date of his divorce was $3,654.00. He continued in the military until he had served 30 years at which time he was an O-6 and his active duty base pay was $6,694.00. His “accrued retired pay” as of the date of divorce was $1,370.00 (see the table), 50% of which would be $548.00, the former spouse’s entitlement at the service member date of retirement.
Employing the typical formula utilized by family courts, the former spouse’s benefit at retirement would be $1,004.00 or 73% of the “accrued retired pay at the date of divorce. However, by employing the formula outlined above, the former spouse’s entitlement would be $548.00, the same as the “accrued retired pay” calculated above. This results because of the inclusion of the pay grade fraction. This fraction operates to freeze the former spouse’s entitlement at the benefit accrued as of the date of divorce based on the paygrade at the date of divorce. The traditional formulas do not incorporate this factor. Now the former spouse’s benefit can be stated as a percentage and is eligible for COLAs. This formula provides for eligibility for COLAs which are added after the date of retirement only. The formula can be modified slightly to provide the former spouse with COLAs which occur while the service member is still on active duty, which is permissible in some jurisdictions.
It appears that this method has always been available for consideration as a means of dividing military retired pay. However, it also appears that courts and family law attorneys may have simply overlooked the effectiveness and fairness of utilizing it. Divorce is adversarial by nature. Fairness is certainly in the eye of the beholder. To the family law attorneys who happen upon this article, use all of the skills available to you, but do not blame the system for any perceived inequity. Fairness is available. You just have to look for it. To the judges who happen upon this article, just because you divided military benefits one way in the past, does not mean you have to continue to do it the same way in the future. The author of the aforementioned article was correct in his perception that the division by that court was not fair. It wasn’t.
By the way, a similar formula can be used to divide federal retirement system benefits, but that’s another topic.
Problem solved. Next…
Rick Johnson operates QDRO Services, LLC in The Woodlands, Texas. The company was formed in early 1996 for the purpose of assisting attorneys and their clients with the division of retirement benefits and a QDRO solution when it is necessary.