In 2016, there were 87,015 military retirees in El Paso and Teller Counties[i]. In family court, military retirement is a hot topic, especially in light of new legislation and pending case law. As practitioners, we are seeing the military retirement system morphing in front of our eyes, with changes to post decree enhancements, survivor benefit plans, and the new blended military retirement system. Military retirement as we know it in dissolution matters is going by the wayside, causing most of the previous case law to become obsolete.
New Blended Military Retirement System
Beginning on January 1st, 2018[ii], service members with less than 12 years of service will face a critical decision regarding the financial future and retirement. Service members with one to twelve years of service will have until December to elect whether they want to stay in the traditional military retirement system or opt in to the new blended system consisting of a smaller pension and a 401k option. Members entering the service for the first time will automatically be enrolled in the new hybrid retirement system, while members with overs 12 years of service will be grandfathered in to the traditional retirement system. Members who do not elect prior to the end of the 2018 year will default to the traditional system. [iii],[iv]
The new blended retirement system will allow service members who separate from the military prior to 20 years of service a retirement benefit. Under the traditional system, there is an all or nothing benefit for retirees, meaning they either reach 20 years of service and receive their pension or separate prior to the twenty-year mark and receive nothing.
This new hybrid system was signed into law as part of the 2016 National Defense Authorization Act [v]and was amended by the 2017 National Defense Authorization Act signed in November 2016. There are three main components to the act.[vi]The first, is a pension similar to the current retirement benefit, however the multiplier is changed from 2.5% to 2%. This translates into benefits received in the pension portion being approximately 20% less than that received under the traditional plan. The second component is referred to as “continuation pay.” Upon reaching 12 years of service and agreeing to a new four-year commitment, the service member will be entitled to continuation pay. The amount will vary by career and branch, but is to be equal to no less than 2.5 months of the member’s basic pay. These funds can be received via cash or invested. The final component is cash contributions to an individual investment account (Thrift Savings Plan), similar to an ERISA 401k. Members enrolled in the new blended system will automatically receive a monthly amount which is equal to 1% of their basic pay. To further incentivize service members to contribute there is a matching contribution into the investment account ranging from 1-5% of the monthly basic pay. The Department of Defense will match dollar for dollar individual contributions to the accounts up to 3% of gross basic pay, on top of the 1% contribution each month for a total of 4%. In addition, they will also match 50 cents for every dollar on contributions more than 3% capping out at 5%. This provides the option for members to receive up to 5% of contributions from the government. These contributions become fully vested after just two years of service at which time the service member is free to do with the matching contributions as they would like. Just like other investment accounts, there is some risk to these plans as they are subject to market conditions. In addition, they are subject to the 10% early withdrawal penalty if the funds are withdrawn prior to age 59 ½, and taxes are deferred on contributions but payable upon the withdrawal of the funds.
A final change is the option for a lump sum cash payout of a member’s benefit when the member retires. Upon reaching their twenty years of service and electing to retire, retirees can choose either to receive their pension in the traditional form of monthly payments or receive a portion (25% or 50%) as a cash payout while reducing the amount that they will receive monthly until they reach the age 67. After this age, they will revert to receiving the entire benefit again. This option is similar to the current redux retirement option. This portion of the retirement system remains the most in flux as there is no real guidance of the precise amount that members electing this option will receive. It is clear that the amount will not be a simple calculation, but will be similar to those used to determine the current value of future payments and dependent on the discount rate that will be used. The details of this portion are left to the Pentagon.
These changes are going to impact the practice of family law pretty drastically. While some of the components are similar to those already in existence, there is a host of other potential considerations that practitioners will have to consider, such as continuation pay. Is property subject to division? Is it a vested interest? Is there a marital component to this which should be divided? Should the Court reserve jurisdiction over this? Another unknown is how the court will treat the lump sum payout option, and whether or not the service member will need to indemnify the former spouse if they choose this option. No matter the answers, the future of military retirement in dissolution matters is entering some uncharted waters where there is bound to be some litigation surrounding these changes.
Post Dissolution Enhancements
Also part of the National Defense Authorization Act for the Fiscal Year 2017[vii]is a change to the definition of disposable retired pay in 10 U.S. §1408, signed into law on December 23, 2016, and taking effect immediately. The effect of this change “freezes” the former spouse’s share of retirement as of the date of dissolution. This means that, unlike the old definition where former spouses benefited from post-dissolution career enhancements and promotions, former spouses are limited to receiving the amount as if the member retired on the date of divorce. Due to this change at the federal level, state courts are now effectively barred from using the time/rule or coverture formula and instead must use a new formula that captures the current state of affairs.
This change too will have a significant impact on property division in dissolution cases and equitable arguments. The scope of this change is limited to the military and does not affect federal government employees’ FERS or state PERA which both allow the former spouse to benefit from post-decree promotions and division per the time/rule formula. The result is potentially a disparity in the amount of these accounts received by each spouse. It is still unclear as to what the Courts will do to deal with this. Some options are offsets of other property or an equalization payment.
Earlier this year, the U.S. Supreme Court heard arguments in Howell v. Howell, a dissolution matter stemming from Arizona. The Federal Government requested cert to determine if the Uniformed Services Former Spouses Protection Act (10 U.S. Code §1408) bars state court from ordering a veteran to indemnify a former spouse for a reduction in retirement pay due to a post dissolution waiver to retirement in order to receive VA compensation for a service-related disability. Prior to the Court’s ruling Colorado, through the Warkocz[viii]case, along with a majority of other states authorized indemnification. In a shocking ruling, the United States Supreme Court aligned with the minority position prohibiting indemnification for a reduction in retirement pay post dissolution for receipt of VA disability compensation.
SBP Rule Change
Another less known and talked about change was included in the 2016 National Defense Authorization Act[ix], which relates to the Survivor Benefit Plan (“SBP”). Prior to the enactment, the rules regarding transferability of SBP coverage upon a former spouse’s death was undefined. However, in practice DFAS held that the SBP coverage died with the former spouse and all payments made were lost. The 2016 Act clarified this and now provides that upon the death of a former spouse, the retiree can transfer the coverage to a new spouse within one year of the former spouse’s death or within one year of a new marriage.
[ii]Implementation Timeline: The Uniformed Services Blended Retirement System,U.S. Dept of Defense, http://militarypay.defense.gov/LinkClick.aspx?fileticket=9mF48ZOOlXU%3d&portalid=3(last visited April 18, 2017).
[iii]National Defense Authorization Act for Fiscal Year 2017: Conference Report 114-840,§ 2943, 114th Cong. (2016),https://www.congress.gov/114/crpt/hrpt840/CRPT-114hrpt840.pdf(last visited April 18, 2017).
[v]National Defense Authorization Act for Fiscal Year 2016: Conference Report 114-270,H.R. 1735, 114th Cong. (2015),https://www.gpo.gov/fdsys/pkg/CRPT-114hrpt270/pdf/CRPT-114hrpt270.pdf(last visited April 18, 2017).
[vi]Active Component: The U.S. Uniformed Services Blended Retirement System,U.S. Dept of Defense, http://militarypay.defense.gov/Portals/3/Documents/BlendedRetirementDocuments/DoD-BRS%20AC%20FINAL%2010.1.2016.pdf?ver=2017-01-27-111503-300(last visited April 18, 2017).
[vii]National Defense Authorization Act for Fiscal Year 2017: Conference Report 114-840,§ 2943, 114th Cong. (2016), https://www.congress.gov/114/crpt/hrpt840/CRPT-114hrpt840.pdf(last visited April 18, 2017).
[viii]See In re Marriage of Warkocz, 141 P.3d 926 (Colo.App. 2006).
[ix]National Defense Authorization Act for Fiscal Year 2017: Conference Report 114-270,H.R. 1735, 114th Cong. (2015), https://www.gpo.gov/fdsys/pkg/CRPT-114hrpt270/pdf/CRPT-114hrpt270.pdf(last visited April 18, 2017).