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States Can No Longer Decide How To Divide Military Retired Pay

Posted by Corey F. Schechter | Apr 19, 2017 | 0 Comments

Contributing Author: Dianne L. Schechter, Paralegal

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 date of divorce. Despite the fact that more than forty states employ the “time rule” to divide a defined benefit plan, all states – as of December 23, 2016, the date the law was enacted – will have to use this new method for dividing a military pension.

The new rule applies to those still serving – the servicemember (SM) who goes through divorce and property division while still on active duty 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 also applies to those in the National Guard and Reserves who are not yet receiving retired pay. It has no impact on those who obtain a divorce and property division after retirement.

The new military pension division rule is a “rewrite” of the terms for military pension division found in the Uniformed Services Former Spouses' Protection Act, or USFSPA (10 U.S.C. § 1408). 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 parties' divorce.  This is so even though the servicemember 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.

“Frozen benefit division” is known as a hypothetical clause at the retired pay centers.  It is the most difficult to draft of the pension division clauses available. Over 90% of the hypothetical orders the military receives now are ambiguously written and consequently rejected. Attorneys who do not regularly practice military family law do not understand military pension division or the nature of military retired pay. This legislative change will geometrically compound the problem.

Since few lawyers know how to write such an order this means the cost of military divorce will go up once again, with rivers of rejection letters flowing back to attorneys who submit their pension orders to the retired pay center in the hope of approval.

Most courts already give consideration to how the efforts of the SM and the spouse during the marriage should be apportioned in regard to future promotions. The time rule is based on the “marital foundation theory,” which recognizes that the individual's final retired pay is based on a foundation of marital effort (e.g., a servicemember would never have attained the rank of sergeant major, with 30 years of service, if it hadn't been for the efforts expended during the marriage up to the rank of sergeant first class over 20 years, when the parties divorced). That's one reason why a large majority of states have adopted the time rule for dividing every type of pension – it provides the fairest approach to division of this asset, whether the pension is state or federal, private or public. And it accounts for the postponement of the benefit (i.e., the spouse's inability to obtain immediate payments in most states) by allowing for the growth in the pension over time.

That approach goes out the window under this new NDAA 17 rule. The share of the former spouse (FS) is artificially fixed and frozen.

States were not given a decent amount of time to write up, propose, and enact laws consistent with the “new rule.” Counsel for the FS will need to alert the court to this problem and show that a warped formula will occur if the denominator of the marital fraction is not revised, to avoid imposition of a double discount on the FS.

Here's how the double discount works: First of all, the benefit to be divided with the FS is frozen at the rank, years of service and retired pay base at the date of divorce. In addition, since state laws have not been rewritten to revise the “marital fraction,” the fraction will still be calculated in 90% of the states based on years of marital pension service divided by total pension service years (marital service years ÷ total service years), rather than years of marital pension service years divided by service years up to the date of the divorce.

It is essential to stop the clock for the denominator at divorce since the benefit is also fixed at that date. Anything else would doubly dilute the pension benefit granted to the spouse.

The new law is effective and binding on the states upon enactment (i.e., 12/23/2016). Although the method of dividing pensions, as well as the date of valuation and classification of marital or community property, has always been a matter of state law, that will change in the military case. Since no time has been allowed for state legislatures to adjust to the change and rewrite state laws, lawyers will need to make adjustments “on the fly” to deal with military pension division cases which are presently on the docket or which come to trial before the state legislature can act.

Another caveat is that the final rules have yet to be published. Until there are revisions to Volume 7B, Chapter 29 of the Department of Defense Financial Management Regulation, no one will be completely sure how the division of uniformed services retired pay shakes out. At present, the rules are being circulated to all branches of the uniformed services for editing, comments and revisions. The only information presently available from DFAS is a “Notice of Statutory Change” and a sample order.

This interim guidance makes it clear that DFAS has settled on the “date of divorce” as the target for when the High Three must be fixed. Under 10 U.S.C. § 1408 (a)(2), “court order" means a final decree of divorce, dissolution, annulment, or legal separation issued by a court, or a court ordered, ratified, or approved property settlement incident to such a decree (including a final decree modifying the terms of a previously issued decree of divorce, dissolution, annulment, or legal separation, or a court ordered, ratified, or approved property settlement incident to such previously issued decree). DFAS removed everything from this sentence except “final decree of divorce, dissolution, annulment, or legal separation issued by a court” and used that to specify the High Three date (i.e., the average of the highest three years of continuous compensation before the specified division date). Regardless of what potential pension benefit is earned later in the servicemember's career, it is the High Three as of the date of divorce which DFAS interprets as being “the time of the order” as specified in Section 641 of NDAA 17.

Be sure to understand the law and the cases, consult an expert in your state and contact a specialist in military pension division whenever possible.  Butterfield Schechter LLP is well versed in preparing military division orders every year and can help you successfully navigate through this new revision.  Contact us today if you are a service member or former spouse of a service member to determine if you are affected by this new law.

About the Author

Corey F. Schechter

Corey Schechter practices in the areas of Employee Benefits, Employee Stock Ownership Plans, Pension and Profit Sharing Plans, ERISA, ERISA Litigation, Business Law, Qualified Domestic Relations Orders (QDROs), and Employment and Labor Law.

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