Recent Changes to Military Retirement Allocation in Divorce

By Mary Ann Burmester, Esquire

Major changes occurred recently to how military retirement benefits get allocated upon divorce.  

Hello to the “Frozen Benefit Rule” and Good-bye to the “Time Rule”

Before 2017, the typical way to divide a pension upon divorce in the majority of states, including New Mexico, was to use what’s called the “time rule”.  The “time rule” means that the final retired pay of the employee, at the time pension payments begin, is used, and the former spouse receives a presumptive 50% share multiplied by the “marital fraction”.  The formula looks like this:

# of months of contribution during marriage x ½ = each spouse’s share of pension Total # months of contribution

For example, if a couple is married for 15 years, and the husband worked for the same company for a few years before marriage and after divorce for a total of 25 years, then the ex-wife’s share of the pension is (15 ÷ 25) x ½ = 30% of his total retired pay.  In dollars, if the husband expects his pension to be $2,700 per month, then wife’s community share would be $810 per month.

The formula to determine the marital share of military retirement benefits changed nationwide.  Individual states, including New Mexico, can no longer use the “time rule” in military divorces.  On 12/23/2016, President Obama signed the National Defense Authorization Act for Fiscal Year 2017.  Buried in this Act is a provision that applies to the division of military retired pay when the service member is serving, i.e., on active duty.  While the new law makes no change to the 50% share and does not alter the marital fraction, it does require that only the “frozen benefit” may be divided (when the service member is still serving as of the date of the court order).  Instead of looking at the total number of years of contribution (the denominator in the fraction), the judge “freezes” and divides the retired pay as if the service member retired on the date the court order dividing the pension as community property is entered.   

Using the example above, if the parties divorced after 15 years when the husband had 20 years in the military, the “frozen benefit” formula would be (15 ÷ 20) x ½ = 37.5% as wife’s share.  You have to determine what husband’s monthly retirement payment would hypothetically be if he retired right at 20 years, even if he serves five more years and gets promoted several more times.  Perhaps at 20 years, his monthly payment would only be $1,700.  Then wife’s share would be $1,700 x 37.5% = $637.50, which is $172.50 less per month than under the “time rule”.  This is a major loss of income to the ex-wife.

No More Indemnification for VA Disability Payments

Unlike military retired pay, VA disability payments are not community property and cannot be allocated between spouses in a divorce.   If a veteran gets VA disability, those payments reduce the amount he gets in pension dollars.  The ex-spouse cannot stop the veteran from electing disability payments (assuming he qualifies for disability) even though it would reduce the amount she gets as her share of the retirement pay.  Until 2017, the courts in New Mexico could order the veteran to make up the shortfall to the ex-spouse resulting from electing VA disability using an indemnification (reimbursement) theory.  In March 2017, the U.S. Supreme Court ruled in Howell v. Howell that indemnification can no longer be used to compensate the ex-spouse for getting less money on her retirement share as a result of VA disability.

This has a huge impact on ex-spouses who expected to get a certain amount of retirement each month and then it suddenly gets reduced or cut off completely in the event of 100% VA disability, with no recourse.

Good-bye Pension and Hello “Blended Retirement System”

On 1/1/2018, massive changes to military retirement went into effect.  Congress passed legislation to implement a “Blended Retirement System” [BRS] that combines a “defined contribution” (like a 401k) component with a “defined benefit” (like a pension) program.  

The new BRS applies to all persons who enter military service after 1/1/2018.  For those who entered service before 12/31/2017, they will have a choice: to opt-in to the new system or to remain “grand-fathered” in the current military retirement system.  

For service members who already have a divorce decree or court-ordered property settlement providing a percentage of retired pay to a former spouse, the choice to opt-in to the new BRS will directly impact the amount of retired pay the former spouse receives.

For service members or spouses who file for divorce in cases where the service member is eligible to opt-in to the BRS, they will need to include provisions in the settlement agreements or orders following a trial that address how this choice affects the distribution of the community property share of the service member’s military retired pay.

Conclusion

Consult with or hire a military retirement expert early in the divorce case, not after settlement discussion is well under way.  If you have to go to trial, hire a military retirement expert to educate the judge because these recent changes to military retirement in divorce are not well-understood by many lawyers or judges who handle family law case.

Winter 2018

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