Recent Changes to Military Retirement Division in Divorce, 0418 COBJ, Vol. 47, No. 4 Pg. 34

Author:JENNIFER L. CARTY, J.
Position:Vol. 47, 4 [Page 34]
 
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47 Colo.Law. 34

Recent Changes to Military Retirement Division in Divorce

Vol. 47, No. 4 [Page 34]

The Colorado Lawyer

April, 2018

FEATURE FAMILY LAW

JENNIFER L. CARTY, J.

The National Defense Authorization Act of 2017 and recent case law have changed how military retirement benefits are divided in divorce proceedings involving a service member. This article discusses these important changes.

The year 2017 brought significant changes to the military retirement system, particularly as it pertains to the division of a service member's military defined benefit annuity in a divorce. New federal legislation, a U.S. Supreme Court decision, and the military's move to a blended retirement system in lieu of the old "20 years or nothing" defined benefit annuity require significant changes in the way that family law attorneys advise clients and draft divorce settlement agreements. Under the new federally mandated retirement division formula, former spouses will no longer benefit from a service member's increase in pay after divorce, and the former spouse's portion of the retirement benefit may be significantly less, or entirely eliminated in certain circumstances. Conversely, under the new system, most military members will now have a vested defined contribution asset available for division at the time of divorce.

Domestic relations practitioners should familiarize themselves with these important changes before undertaking representation of a service member in a divorce proceeding, particularly because a service member's retirement is often one of the largest assets in the marital estate in a military divorce.

National Defense Authorization Act of 2017

On December 23, 2016, the President enacted the National Defense Authorization Act of 2017 (NDAA), which substantially amended the Uniformed Services Former Spouses' Protection Act (USFSPA), 10USC § 1408. This article focuses on the NDAA changes to (1) the formula for calculating the non-military spouse's portion of the military retirement benefit and (2) the structure of military retirement benefits, which have wide-sweeping implications for dissolution of marriage cases involving military retirement assets.

Dividing Military Pensions in Divorce

The legacy military defined benefit annuity retirement (commonly referred to as the "military pension") is noncontributory.1 A service member earns credit toward retirement based on his years of creditable service and must have 20 years of creditable service to be entitled to a benefit. There is no "partial vesting" with a military defined benefit annuity; if the service member does not earn 20 years of creditable service, she is not entitled to the benefit.2

The value of a military defined benefit that is unvested and has not yet matured is unknown at the time of divorce. The trial court thus has two options for addressing the asset in the context of a dissolution of marriage property division: (1) enter an order for deferred distribution, or (2) reserve jurisdiction and address the division at the time of retirement.3 Most courts appear to prefer the deferred distribution method because it eliminates the need for parties to return to court, sometimes decades later, and it defines the non-service member spouse's rights and benefits at the time of the divorce. Deferred distribution orders predetermine a portion of the service member's military retired pay that a former spouse will be entitled to when the defined benefit vests and matures.[4]

The Time Rule Formula

Before enactment of the NDAA, Colorado practitioners were guided by In re Marriage of Hunt in Colorado divorce cases involving the division of military retired pay. In Hunt, the Colorado Supreme Court approved application of the "time rule formula" in determining the marital portion of the service member's future military retired pay.5 The time rule formula entailed multiplying the service member's "disposable retired pay," as defined in 10 USC § 1408,6 by the marital (or coverture) fraction. The marital fraction consisted of a numerator equal to the total number of months the military member earned toward the benefit during the marriage and a denominator equal to the total months of service at the time of retirement.7 The former spouse was often awarded half of the resulting amount, that is, half of the marital portion of the benefit as determined by the time rule formula:

Marital Asset = Disposable Retired Pay x (marital duty months/total duty months)

Former Spouse Benefit = ½ x (marital asset) (assuming equal division)

The time rule formula determined a former spouse's benefit based on the service member's retired pay at retirement.[8] Thus, under this formula, the former spouse received the benefits of the military member's rank and time-in-service pay increases that occurred after the divorce.9

The Colorado Supreme Court granted certiorari in Hunt to determine whether benefit increments based on post-dissolution increases in rank are included in determining what portion of the military defined benefit annuity is subject to division as marital property.10 The Court explored the nature and effect of the time rule formula and expressly held that "post-dissolution increases in pension benefits are marital property when the trial court, in the sound exercise of its discretion, divides the pension under either the deferred distribution or reserve jurisdiction method."11 In the Court's view, the "economic partnership" of the previous marriage laid the foundation that allowed the service member to achieve the resulting rank and pay.12 The commingled career efforts during the marriage resulted in an enhanced future benefit. This is known as the "marital foundation" theory.13 The Court noted that this theory was fair because the "risks, delay, and uncertainty of the receipt of pension benefits" was in the control of the service member.14 If the service member left the service before the required 20 years or acted in ways to hurt his career, an ex-spouse could end up with no benefit or a substantially reduced benefit.

The New "Freeze Time Rule"

The NDAA significantly changed the calculation of the former spouse's portion of a military defined benefit. The new federal statute preempts existing state law. Thus, Hunt no longer controls, and the time rule formula may not be applied in determining the former spouse's benefit. Instead, a new calculation, commonly referred to as the "freeze time rule," applies, under which a former spouse may not benefit from the rank and time-in-service pay increases that occur after the couple gets divorced.15

To understand the change brought about by the new rule, it is helpful to examine the retirement benefit calculation. At the time of retirement, a military member's monthly annuity check (disposable retired pay) is based on her "retired base pay." Retired base pay is an average of the highest 36 months of basic pay at the time of retirement. This amount is then multiplied by the "service percent multiplier." The service percent multiplier is determined by multiplying 2.5% by the years of service.16 For example, the service percent multiplier for a service member with 20 years of service is 50% (2.5% x 20). A...

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