Important Financial Considerations in Military Divorce
By Kristine Rushing, CFP® or CDFA®
Those who have served in the United States Armed Forces experience a high level of personal sacrifice, from family challenges to the ultimate sacrifice. Whether during war or peacetime, frequent moves, multiple deployments, isolation, stress of war, injuries, and returns to civilian life can all cause stress and anxiety for service members, spouses and their children.
Programs such as the Strong Bonds Program (Army), Prevention and Relationship Enhancement Program (Marine Corps), Chaplain Religious Enrichment Development Operation (Navy/Coast Guard), and the MarriageCare (Air Force) are available to provide assistance for struggling spouses and families, but cannot eliminate military divorce. Like their civilian counterparts, military spouses will need to determine a co-parenting plan, asset and debt division, and child/spousal support. However, those experiencing a military divorce need to be aware of some special rules.
Jurisdiction and State Law
Generally speaking, a spouse may file for divorce in the state where either spouse legally resides, with minimum residency requirements. However, the laws and treatment of property varies from state to state, and if filing in a state that is not the legal residence of the service member, the court may not have the authority over certain aspects, such as dividing the military pension without the service member’s consent. There are some other factors pertaining to jurisdiction for military spouses, especially if divorcing while the service member is overseas, so if there are questions about this it would be wise to consult with a knowledgeable attorney. For the most part, all other aspects of the property division, co-parenting, and child or spousal support follow state law.
Here in California, at last one spouse must have resided in the state for the last six months, and in the county where filing for at least three months. As a community property state, the assumption is that property acquired by the parties during marriage is assumed to be community property and, thus, subject to equal division.
Regardless of the state, proceedings are handled similar to a civilian divorce. However, the “Service Members Civil Relief Act,” or SCRA, allows active-duty service members to file a Motion to Stay Proceedings. If granted, this will cause a delay of 90 days, plus possible extensions. The purpose of the SCRA stay is to protect members of the United States Military, as well as reservists and members of the National Guard when in active federal service, from legal or financial burdens while called up for active duty so they may focus all of their energy on military service. If the service member is in the U.S. and available, the divorce will likely proceed as normal.
As with civilian divorce, one of the most important decisions a couple has to make is which process to use. There are four major options: DIY/Kitchen Table, where couples sit down and reach their own settlement agreement; Mediation, where couples hire a neutral professional to assist them with the negotiations; Collaborative Divorce, where each party has their own legal representation, one or more divorce coaches/therapists, a neutral financial advisor, and perhaps a child specialist, all working together in a team approach; and Litigation, where parties cannot agree and ask the court to decide the outcome. Whenever possible, either mediation or collaborative divorce are recommended. These usually provide the most efficient process and set the parties up for more effective co-parenting and healing post-divorce.
Dividing Military Retirement
Retirement accounts are often among the most valuable assets a couple has, and military retirement plans are no exception. Military pensions are considered a marital asset and the Uniformed Services Former Spouses’ Protection Act (USFSPA) allows for division, though it is not necessarily required. Technically, it is the “disposable retired pay” that is subject to division, which is the gross retired pay less deductions for disability pay benefits and Survivor Benefit Plan premiums. When considering how to handle a military pension account in divorce, there are two main considerations. First, whether the service member has already retired and the pension is in pay status. Second, whether spouses wish to divide the pension or, instead, arrange a full or partial off-set via lump sum payment in cash or other assets to the non-service member spouse. The option for a lump sum is more common in short term marriages and requires a pension valuation to determine the present value of the off-set amount.
Those divorcing after retirement use a straight-forward coverture formula to determine the marital portion: months of marriage overlapping military service ÷ total months of military service at the time of retirement. As an example, consider a couple married for 15 years, 10 years (120 months) of which overlapped with years of military service. If there were a total of 25 years (300 months) of military service, then the marital portion would be 40% (120 overlapping months ÷ 300 total service months). If dividing the marital portion equally, the non-service member spouse would receive 20% of the disposable retired pay benefit. The gross benefit amount is based on the following formula: total months of service x service member’s benefit accrual rate (such as 2.5% per year) x pay rate (based on Retirement Plan rate such as High-3, Redux or BRS). If the service member in this example had a final pay of $6,000 then the gross benefit would be calculated as follows: 25 yrs. x 0.025 rate x $6,000 pay = $3,750. If there were no benefit deductions, the non-service member would receive 20% of that amount, or $750 per month, and the service member would receive the remaining 80%, or $3,000.
For those divorcing prior to retirement, the 2017 NDAA serves to “freeze” the former spouse’s share of the calculated military benefit as of the date of dissolution. While the share awarded to the former spouse will still receive Cost of Living Adjustments (COLAs), it will exclude any post-decree promotions or longevity increases in the determination of the benefit payment. There is still a coverture fraction, calculated as a percentage of the service months overlapping marriage based on the total service months at the time of dissolution. However, it is applied to the hypothetical retirement benefit the service member would have received based on pay at the time of dissolution rather than actual retirement. Since promotions and pay increases generally increase the closer one gets to retirement, the actual retirement benefit is typically larger upon retirement than at the time of dissolution. This division approach results in the service member benefitting from the promotion and pay increases, while the non-service member only receives the hypothetical benefit at the time of divorce plus COLAs.
With the implementation of the new Blended Retirement System (BRS) in 2018, new service members, and those who have opted in, are enrolled in the new BRS program. The main benefit of the BRS is that it does not require 20 years of service prior to benefits vesting, as the legacy High-3 system requires. Instead, it reduces the pension benefit calculation accrual rate multiplier, but includes automatic contributions and possible matching to the service member’s Thrift Savings Plan (TSP), a defined contribution account. The TSP operates much like many private company 401(k) plans do, allowing service members to leave the military with those TSP retirement benefits before serving a full 20 years, even if they choose to forego the pension benefits. BRS also introduced a lump sum payment option upon retirement, in which service members may elect to receive either a 25 percent or 50 percent payment of their discounted retirement pay from the date of retirement through full Social Security retirement age (67 for most people). If this option is selected, the service members then receive their full retirement pay upon reaching full Social Security retirement age.
Rather than time spent in service, Reserve and National Guard retired pay is based on a point system which includes total active days, active points earned, and inactive points earned. The points credit is then converted to a number of active duty months, and the general rules for division outlined above apply. Additionally, the election of retirement and benefit payments is handled differently. Typically, the Reserve or Guard service member is not eligible to receive benefit payments until reaching 60 years of age.
Getting the Retirement Division Done Right
Once the non-military spouse’s retirement benefit allocation has been determined, there are two ways in which the actual division and payment administration can take place. If qualified according to the “10/10 Rule,” the benefit payments for the non-military spouse may be issued directly from the Defense Finance Accounting Service (DFAS). The 10/10 Rule refers to the provision within the USFSPA which allows for this direct payment to a non-service member spouse as long as the pension division results from a marriage lasting ten years or more, which also overlapped service by ten years or more.
Retirement divisions that do not qualify for direct DFAS administration and payment according to the 10/10 Rule must be handled directly between the parties. This requires the service member to pay the former spouse directly, typically by bank transfer or check, pursuant to the court order.
When qualified for non-service member payment through DFAS, a Military Pension Division Order (MPDO) must be carefully completed and submitted to DFAS. This is similar to the Qualified Domestic Relations Order (QDRO) required for the division of a civilian qualified retirement plan, such as a 401(k). The MPDO lays out the terms for division and should be prepared by an attorney or someone experienced in preparing these legal documents. There is ample opportunity for error here. For example, if the benefit to the non-service member is identified as a dollar amount rather than a percentage, COLAs will not be applied. There is also a limit – no more than 50% of the disposable retired benefit pay may be allocated to the non-service member spouse.
There are additional considerations for survivor benefits and disability pay. The Survivor Benefit Plan (SBP) is an annuity program allowing the service member to provide continued income to a surviving beneficiary in the event of their death. Only one beneficiary may be designated, so a service member cannot name a former spouse as well as a new spouse. If this election is not made during the divorce, and the former spouse is not named as beneficiary in a timely manner, the option is lost. If the service member dies and there is no SBP in place naming the former spouse as beneficiary, the former spouse receives nothing. Any retirement benefit being paid to the former spouse ceases upon the service member’s death. If the SBP is chosen with the former spouse named as beneficiary, the divorce decree must be registered with the DFAS and they must be informed of the deemed election. In the event the non-service member spouse dies first, that portion of the benefit reverts back to the service member.
As mentioned earlier, the disposable retirement benefit is net of any disability pay, meaning the amount available for division is reduced by medical pay or veteran’s disability compensation. Post-divorce, the service member may have the option to reduce retirement pay in order to obtain disability pay, incentivized by the fact that disability pay is not taxable, and perhaps to intentionally reduce the amount of benefit the former spouse receives. This risk needs to be understood and managed, where possible, by the non-military spouse.
Unlike the military pension, which is a defined benefit plan, division of the defined contribution TSP is more straight forward. Once the amount or percentage being allocated to the non-service member spouse is determined, and after the divorce is final, the account funds may be transferred into another retirement account in the non-service member’s name, such as an IRA. Similar to the MPDO used for the pension, this is accomplished with a Retirement Benefits Court Order (RCBO). Again, it is important that the terms be defined clearly and having a professional prepare it is recommended.
Healthcare and Other Benefits
Tricare and care at military treatment facilities, as well as commissary and exchange privileges, may be available to the non-service member spouse in long-term marriages that overlap service. The USFSPA offers Full Coverage under the “20/20/20 Rule,” and Transitional Coverage under the “20/20/15 Rule.” The full coverage rule requires the spouses to have been married for at least twenty years, the service member must have at least twenty years of creditable service toward retirement pay, and that twenty years of marriage overlap twenty years of creditable service. The transitional coverage rule provides one year of medical coverage (no commissary or exchange privileges) when the spouses were married for twenty years, the service member has at least twenty years of creditable service toward retirement pay, and at least fifteen of years of marriage overlap the years of creditable service. Under either rule, benefits are suspended in the event of remarriage or obtaining health coverage from another entity such as an employer or private health insurance plan.
For those non-military spouses who do not meet the 20/20/20 or 20/20/15 Rule criteria, health benefits may be purchased individually, or through the military’s version of COBRA, the DOD Continued Health Care Benefit Program. This coverage is available for up to 36 months but requires enrollment in a timely manner.
Co-Parenting, Child Support, and Spousal Support
At first glance, co-parenting may not appear to be a financial issue in military divorce, but getting this right has many financial implications. As with civilian divorce, it is important to create a workable custody and parenting plan that serves the child/ren’s best interests. However, there are complicating factors for service members and their spouses, including frequent moves, temporary-duty assignments, overseas assignments, and deployments. Spouses having difficulty agreeing on a parenting plan should consider working with a mediator, parenting plan specialist, and/or a child specialist.
Even after the parenting plan and custody schedule is determined, it always remains modifiable by the court, with an eye toward what is in the best interest of the child and an understanding that schedules may need to be adjusted as children get older. A military deployment out of state will likely require such modification, but is typically considered to be temporary, with the expectation that the original schedule upon return. Most states have laws protecting service members from any permanent orders being made in their absence. Parents who cannot agree on a temporary parenting plan in these situations, or who are concerned about the possibility of custody actions, should consult with an attorney to discuss their options. Whenever possible, working together in a mediated or collaborative setting will lead to a better solution than allowing a judge to decide.
Child support is based on state law, including factors such as custody, time with each parent, and incomes. The Leave and Earnings Statement (LES) should be used to determine all forms of compensation, including Basic Allowance Housing (BAH), the value of on base housing, and other non-taxable in-kind compensation. When the payor is the service member, support may either be paid directly (bank transfer or check), through voluntary deductions from the military paycheck, or by paycheck garnishment when filed through DFAS. While service members can face penalties from their commanding officer if delinquent on support payments, enforcement is typically handled by the state court system.
Like child support, spousal support, also called alimony, is determined according to state law. The USFSPA, however, limits the amount paid to a former spouse directly through DFAS to 65% of disposable retired pay, including up to 50% of pay for pension division and other garnishments such as alimony and child support. Considerations for the spousal support order may include the length of the marriage, the earning capacity of each spouse, age, and health. In some states, such as California, there is a calculator used to determine temporary support, but some states have no spousal support statues at all. With the employment and career interruption military spouses often experience, spousal support may become part of the settlement agreement and court order, whether the service member is active or retired.
A Final Thought
While most of the issues facing military spouses in divorce are the same as their civilian counterparts, these specific concerns do need to be addressed carefully. Spouses should take advantage of the various resources available and consult with an attorney who specializes in military divorce when needed. Again, one of the most important decisions a divorcing couple must make is which process to use. Whenever possible, work cooperatively with your spouse and consider mediation or a collaborative approach. Having the right team of professionals, from an attorney to a CFP® or CDFA®, as well as therapists and/or coaches, can provide the best chance for effective co-parenting and healing post-divorce.
To find out how Financial Harmony can assist with your divorce issues, please reach out for a free consultation.