Dividing Your Military Retirement

Division of Military Retired Pay in Arizona Divorce

Dividing Military Retirement Pay in Divorce in ArizonaIn Arizona divorce law, the marital portion of both vested and non-vested pensions are divisible community assets. Those marital assets include military retired pay that was earned by the service member during the marriage. As will become clear, it matters very much whether the military spouse is active duty or already receiving retired pay at the time the divorce commences.

Might the service member’s legal strategy include resisting division of military retired pay? Quite possibly. Such tactics include challenging the court’s jurisdiction over the pension, forum shopping for a more favorable venue, alleging the marital pension claim was not timely filed, claiming the other spouse waived any marital interest in the pension, and electing disability pay in lieu of longevity retired pay. To overcome obstacles like these and obtain the best possible outcome in the divorce, the other spouse also needs a solid legal strategy. Consult a family law attorney with Stewart Law Group who has meaningful experience with military divorce trials and appeals.

Military Pensions as Divisible Community Property

Military pensions are a type of deferred compensation. This simply means a portion of the service member’s pay is set aside to be paid at a future date by the federal government as employer. In addition to military retired pay and Thrift Savings Plan, both of which are qualified plans, a spouse might also have non-military deferred compensation from other employment in the form of 401(k) or 403(b) plans, IRAs, bonus plans, stock options, and profit-sharing plans. The Arizona Divorce Handbook, by attorney Scott David Stewart, has an entire chapter devoted to property division in non-military pension division.

Whether earned while in the military or as a civilian employee, any deferred compensation categorized as community property is subject to division in the parties’ divorce. ARS § 25-318. Calculating military retired pay in advance of division, though, is a different kettle of fish. Let’s start with the basics.

Basic Military Retirement Plans

Members of the Armed Forces benefit from a unified retirement system. All things being equal, the plan participant’s rank and years of creditable service determine how much retired pay, but branch of service does not. Typically, military spouses become eligible for retirement after a minimum of 20 years active duty service. For members of the National Guard and Reserves, active duty means annual training and actual mobilization. (For retirement purposes, weekend drills are inactive duty training and not creditable service.)

Four basic military retired plans are possible:
1. Final Pay formula (DIEMS* before September 8, 1986):
Example: To calculate the amount of retired pay using the final pay formula take 2.5% times years of creditable service times final basic pay at the time of retirement. A cost of living adjustment (COLA) is applied to retired pay each year to protect the retiree against inflation. [*DIEMS is the Date of Initial Entry to Military Service.]

2. High-36 Month Average formula (DIEMS between September 8, 1980 and July 31, 1986):
Example: To calculate retired pay using the high-36 month average formula take 2.5% times years of creditable service times average highest 36 months pay (typically the most recent 36 months pay). Again, COLA is applied each year to retired pay.

3. REDUX Retirement System formula (an election for those with a DIEMS on or after August 1, 1986):
If the service member does not elect the REDUX option, then the previous high-36 formula should apply. Alternatively, if the REDUX retirement option is chosen, then he or she agrees to a minimum of 20 years active duty. Then mid-career, the service member receives a $30,000.00 Career Status Bonus (CSB). See 37 USC § 322(a).

Example: To calculate REDUX retired pay take 40% of the average highest 3 years basic pay when the service member has completed 20 years of creditable service. For each year over 20 years, the service member then gets a 3.5% increase per year of service up to 30 years creditable service. (COLA is handled differently.) At retirement age of 62, the retirement benefit is adjusted by the Department of Defense (DoD) in two ways. First, retired pay is increased to match what it would have been under the high-36 formula and, second, COLA is reset. This is so the REDUX retiree gets the same monthly payments a similarly situated high-36 retiree would get.

4. Disability Retirement Plan, the fourth possibility, is addressed later in this discussion.
The service member’s pension is either longevity retired pay based upon length of service or military disability retired pay because he or she was either determined unfit for continued service or later became disabled for reasons of service. The first three formulas described above are used to calculate longevity retired pay. Determining the date of initial entry into military service is essential to accurately assess the marital portion of a military pension. But there’s more.

Calculating Retired Pay for National Guard and Reserve

Spouses in the National Guard and Reserve (or Reserve Component) calculate their military retired pay differently still. To receive retired pay, the service member completes an application with the Guard or Reserve and must:
• Be at least 60 years old;
• Have at least 20 years of qualifying service; and
• Have at least six years of qualifying service while a member of the Active Reserve.

Before retired pay can be calculated, the spouses need to know how many points the service member has acquired (by obtaining a points statement) and when he or she initially entered service. Be mindful that this service member must have at least 20 years of creditable service to obtain retired pay.

Example 1: When the service member entered service before September 8, 1989, take the years of equivalent service times 2.5%. The resulting percentage is applied to the base pay in effect on the date retired pay starts.

Example 2: When the service member entered service on or after September 8, 1989, take the years of equivalent service times 2.5%, same as above. But to determine retired pay, the retirement percentage gets applied to the high-36 month average of basic pay effective at age 60. National Guard and Reserve are sent the 20-year letter as Notification of Eligibility for Retired Pay at Age 60.
Importantly, a reserve component entitled to retired pay from the Fleet Reserve or Fleet Marine Corps Reserve will have a different retirement plan. Other considerations involve retired Reserves and discharge from the Reserves before the age of 60. Talk to a lawyer.

Marital Component of Military Retired Pay

Arizona Military Member DivorceBe prepared to prove when the military plan was funded. Any spouse’s retirement plan – military or civilian – could be funded before the marriage, after the marriage, or both before and after. Each retirement asset must be analyzed independently to determine its marital property component, if any. In Arizona law, the marital portion is a community asset to be divided equally between the spouses. Frequently, spouses are assisted by their attorneys in negotiating agreeable settlement terms for dividing the community property estate.

Consider an example: Both spouses have non-military retirement accounts from post-marital employment. Under the property settlement terms of their separation agreement, the wife shall keep 100% of her $50,000.00 IRA that was wholly funded with her earnings during their marriage. Husband’s $500,000.00 401(k), funded with his wages before and after the marriage, shall be divided 60/40 with the wife receiving 40% ($200,000.00). As mentioned in more detail below, such an agreement may not be permissible with military pension division where the spouse entered into service after September 8, 1980.

There is a reason why military retired pay is divisible marital property in divorce. In 1982, the Uniformed Services Former Spouses Protection Act (USFSPA) made it so. 10 USC § 1408. The USFSPA, which controls military pension division, makes the service member’s “disposable retired pay” a potentially divisible marital asset in Arizona divorce proceedings. This is important! Only the marital component of the service member’s disposable retired pay is a divisible asset in Arizona divorce law.

Since its passage, the USFSPA has been amended numerous times. One revision, particularly, has had a substantial impact on military pension division. In 2016, a federal rule changed how military retired pay is calculated prior to division in dissolution proceedings.

Uniform Frozen Benefit Division Rule

The National Defense Authorization Act for Fiscal Year 2017, or NDAA 17, updated the USFSPA with a frozen benefit division rule. Pub. Law 114-328 Dec. 23, 2016. Service members and their spouses need to understand how the frozen benefit division rule applies to military retired pay division in Arizona divorce, legal separation, or annulment.

When preparing for division of disposable military retired pay in divorce, § 641 of NDAA 17 mandates using the service member’s current pay grade and years of service and retired-pay cost-of-living adjustments (COLA). This put a stop to using the service member’s final retirement pay grade and years of service to determine disposable retired pay for division in divorce. Take a closer look at how the federal rule is implemented.

Active Duty Military

Retirement Pay Divison for Military Divorce of US VeteransThe frozen benefit division rule applies to spouses who entered the service on or after September 8, 1980. Included are members of the Armed Forces (Army, Navy, Air Force, Marine Corps, and Coast Guard); commissioned corps of the Public Health Service and National Oceanic and Atmospheric Administration (NOAA); and the National Guard and Reserves.

This rule applies uniformly to all states, the District of Columbia, and U.S. territories. No longer is the method of dividing an active duty service member’s retired pay left to the individual states to decide independently. Since its December 23, 2016, effective date, all states must apply the federal rule uniformly in dividing pensions in divorce proceedings.

Arizona public policy encourages parties to negotiate and agree to terms for their separation agreement that settle division of community assets and debts, including pensions, but the frozen benefit division rule must still apply. Spouses in military divorce cannot reach any agreement or settlement that deviates from the federal rule’s requirements.

Retirement Status at Time of Divorce

The frozen benefit division rule is used to determine the military pension’s value prior to its division in the divorce. Furthermore, the rule only applies to military spouses not yet receiving retired pay.

Is the service member already receiving retired pay from the military at the time of the divorce?
Rule Does Not Apply: If the service member is retired and receiving retired-pay at the time of divorce, then the frozen benefit division rule does not apply to the division of his or her military pension.

Rule Does Apply: If the military spouse is actively serving and is not receiving retired-pay at the time of divorce, then the frozen benefit division rule must be applied.

What follows is a break-down of how the frozen benefit division rule typically works in the military divorce of an active-duty spouse.

Calculating Disposable Retired Pay

The frozen benefit division rule requires asserting an hypothetical retirement date before determining how much of the service member’s pension the other spouse is entitled to in the property division. Under the federal rule, the military spouse’s so-called retirement date is the day of the divorce. That’s a legal fiction in almost every case. The active-duty service member’s actual retirement date (or final retirement pay grade) is not considered when determining disposable retired pay as defined in § 1408(a)(4) of the USFSPA. Remember: Only the marital portion of the service member’s disposable retired pay must be divided by law in divorce. The former spouse can only be paid a share of the military spouse’s total monthly retired pay as determined on the hypothetical retirement date. That would be the date of the final decree (whether divorce, annulment, or legal separation).

Hypothetical Clause in a Qualified Order Dividing Retired Pay

The so-called “hypothetical clause” refers to the factual details the court must include in the written order for it to serve as a qualified pension division order acceptable to the federal government. If incorrect, ambiguous, or missing information, then the military pension division order will not be in compliance with the USFSPA’s “hypothetical clause” requirement in 10 USC § 1408. The order must also state that the amount to be divided is “disposable retired pay” as set forth in the NDAA 17’s § 641 and as codified in the USFSPA’s § 1408(a)(4). Be mindful that it is the attorneys who draft the proposed court order for the judge’s signature. Therefore, the responsibility of getting the language of the hypothetical clause absolutely correct lies with the attorneys. Trial experience in military divorce law matters.

Nothing Less Than 100% Accuracy

In other words, the federal government will not honor any court order attempting to divide military retired pay unless it is accurate and absolutely spot-on. Only a qualified order dividing retired pay will result in military pension division upon divorce. The pension division retired pay center at the Defense Finance and Accounting Services (DFAS) rejects any submitted order that is noncompliant with the applicable DoD Financial Management Regulation. Guess-work and ambiguity in the order, even when signed by the judge in the case, will likely result in its rejection by the DFAS. The order simply won’t get processed. As they say in baseball, “Close only counts in horseshoes and hand grenades.”

Community Property Fraction of Military Retired Pay

To determine the community property portion of military retired pay, take the marital pension service and divide it by the total pension service as of the divorce date. Multiply the disposable retired pay by this community fraction. The result is the marital portion of disposable retired pay to be divided equally between the spouses.

Although the divisible marital portion of the military pension is determined as a fraction, that’s not the only option for the order. The parties could set the former spouse’s share as a fixed dollar amount, percentage, formula, or hypothetical with contrived rank with manufactured years of service.

Generally, with divorces filed in Arizona accumulation of months of marital pension service stops on the date the case commences. That is, when the petition for dissolution of marriage is filed and served on the other spouse if it results in dissolution of marriage. ARS § 25-211. Recall, too, that with pensions for those in the National Guard and Reserve, the community fraction is determined using retirement points, not months of service.

Cost of Living Adjustments

Another aspect of military retirement is the permissible divisible cost of living adjustments under 10 USC § 1401(a)(b) with computation of retired pay. The only COLA to be included in the marital property division is that which occurred between the date of the court’s pension division order and the date the service member actually retires. (Not the hypothetical retirement date, but the real retirement date.) See 10 USC § 1408(a)(4).

Disability Retired Pay in Military Divorce

Property division is handled differently when the military spouse’s retirement is based upon disability. A service member’s disability pay could come in two forms:

Military Disability Retired Pay (Administered by the DoD):
This is compensation for those in the Armed Forces who have been determined unfit for continued duty. The service member who cannot perform his or her assigned duties and who is placed on the disability retired pay list should be eligible for disability retired pay.
Example: First, calculate retired pay based upon years of creditable service as if no disability (this is the military spouse’s gross pay). Second, multiply active duty base pay by the service member’s disability rating. Then compare the two results. Of the two figures, the service member is entitled to the higher amount as his or her disability retired pay. Under the USFSPA, the only portion divisible in divorce as property is the difference between gross pay and disability pay based upon disability rating. For some civilian spouses, half of the community portion will not amount to much. Negotiating other alternatives, such as increased spousal maintenance, could make up the difference.

VA Disability Compensation (Administered by the Department of Veterans Affairs:
This is compensation for service-connected illnesses that may reduce the military spouse’s earning capacity. Disability could be determined before or after retirement. Or the disability might not be such that the service member will qualify for military disability retired pay.

If the service member is unable to obtain military disability retired pay, then he or she can look to the VA for disability compensation. There is much to consider with disability pay, such as disability severance pay, combat-related special compensation, and concurrent retirement and disability pay. All of these possibilities should be discussed with your military divorce attorney.
Disability pay is considered personal to the service member. Because disability pay is not the same as disposable retired pay in the USFSPA, disability pay is not property to be divided in divorce. Frequently, the amount of gross retired pay is made up of both disposable retired pay (or longevity pension) and disability pay. However large or small, only the longevity pension is disposable retired pay divisible in divorce.

Waiver of Retired Pay in Exchange for Disability Pay

Before retiring, many service members have the option of waiving a portion of their disposable retired pay (the longevity pension) and elect, instead, a matching amount in VA disability compensation. The total monthly payment is the same, but the disability component keeps more money in the service member’s pocket.

The VA disability payment election impacts both spouses. The first has to do with divorce and taxes. For the military spouse, the disability portion is not taxable. This is incentive to waive some of the longevity pension that is disposable retired pay (which is taxable income) in exchange for disability pay (which is not taxable income). Another incentive is to prevent the other spouse from receiving any portion of the disability retired pay in an annulment, divorce, or legal separation.

For the other spouse, disability retired pay means less community property is available for division. Arizona law also protects the service member’s disability benefits from division. In fact, Arizona prohibits the court from attempting to consider disability benefits in property division; from indemnifying the other spouse for the service member’s waiver of disposable retired pay in exchange for disability pay; and from making up the difference to the other spouse by awarding him or her income or property belonging to the service member to be more equitable. That is, in order to balance things out between the spouses. Take a look at ARS § 25-318.01:

In making a disposition of property pursuant to § 25-318 or 25-327 [property disposition modification or revocation], a court shall not do any of the following:
1. Consider any federal disability benefits awarded to a veteran for service-connected disabilities pursuant to 10 USC § 1413a or 38 USC chapter 11.
2. Indemnify the veteran’s spouse or former spouse for any prejudgment or postjudgment waiver or reduction in military retired or retainer pay related to receipt of the disability benefits.
3. Award any other income or property of the veteran to the veteran’s spouse or former spouse for any prejudgment or postjudgment waiver or reduction in military retired or retainer pay related to receipt of the disability benefits.

Thrift Savings Plan

There is one more military retirement asset to consider – the Thrift Savings Plan. Voluntarily contributing a portion of his or her military bonus, special, or incentive pay to a TSP is another retirement option for service members. Paralleling the civilian’s 401k, the community portion of a tax-deferred TSP is also subject to division in Arizona divorce.

We Take Our Military Divorce Practice Seriously

Every attorney on our military divorce team is dedicated to staying abreast of changes in the law. We review new cases and statutes; examine changes to federal, state, and local rules of court; analyze judicial interpretations of state and federal legislation; and study applicable military rules and regulations. We closely follow legal trends that could potentially impact our clients’ cases. In our law practice, we routinely examine the learned publications of our peers. In this, special recognition goes to North Carolina attorney Mark E. Sullivan, former Army JAG colonel and author of “The Military Divorce Handbook,” for his substantial contribution to this area of practice.