By Mark E. Sullivan

The New Pension Division Rule

Without notice to North Carolina or consultation with its Congressional delegation, Congress enacted, on Dec. 23, 2016, the National Defense Authorization Act for Fiscal Year 2017 (NDAA 17) and overrode North Carolina’s Seifert[1] formula and N.C.G.S. § 50-20.1(a)(3) and (d) for dividing pensions, as applied to military retired pay. With North Carolina’s substantial military population – the third-largest in the country – this means that many lawyers need to know how to present testimony and evidence in contested pension division cases, as well as how to prepare a properly worded military pension division order (MPDO).

This new rule will require a new set of skills for such lawyers.

The new statute contains a major revision of how military pension division orders are written and will operate throughout the nation. Instead of allowing the states to decide how to divide military retired pay and what approach to use, Congress imposed a rigid uniform method of pension division on all the states, a fictional scenario in which the military member retires on the day that the pension division order is filed. Effective Dec. 23, 2016, the new rule up-ends the law regarding military pension division in North Carolina and almost every other state.

The new rule applies to those still serving (active-duty, National Guard, or Reserves). It is a rewrite of the terms for military pension division found in the Uniformed Services Former Spouses’ Protection Act, or USFSPA.[2]  From now on, what is divided will be the hypothetical retired pay attributable to the rank and years of service of the military member at the date of the decree of divorce, dissolution, annulment, or legal separation. The only adjustment will be cost-of-living adjustments under 10 U.S.C. § 1401a (b) between the time of the court order and the time of retirement.

There are 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.

How Hard Is This, Anyway?

Known as a hypothetical clause at the retired pay centers,[3] “frozen benefit division” is the most difficult to draft of the pension division clauses available. A government lawyer familiar with the processing of military pension orders put it this way: “… over 90 percent of the hypothetical orders we receive 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.”

Due to the difficulty of doing such orders, more expenses will be involved in the military divorce case and a whole new team of experts will appear to help ordinary divorce attorneys comprehend and implement the new frozen benefit rule. Without the right help and the proper wording, rivers of rejection letters will flow back to attorneys who submit their pension orders to the retired pay center in the hope of approval. Since the new frozen benefit rule was written by Congress, which knows next to nothing about the division of property and pensions in divorce, there will be numerous problems in applying it in the courts of most states.

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 military cases. 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.

Strategy for the Servicemember

The attorney for the SM (servicemember) will have an easier time than the lawyer for the FS (former spouse) in getting through a trial or settlement. The SM has control over all the evidence and testimony needed for either procedure.

The active-duty SM needs to provide proof of the “High Three” retired pay base (i.e., average of the highest 36 months of continuous compensation) at the date of divorce.[4]  That will usually be the most recent three years, and the data will be found in the pay records of the SM. The court also needs to know the rank and years of creditable service of the SM.

Once the evidence has been admitted, the court will require an order to divide the pension. The attorney for the prevailing party is often tagged with the task of preparing the MPDO, unless all the necessary language is placed in the divorce decree or in a property settlement incorporated into the decree. It will help immensely if counsel obtains “outside assistance” from a lawyer experienced in writing such pension orders, and not at the last minute.

Whenever possible, the SM needs to request bifurcation of the divorce from the claim for equitable distribution or division of community property.[5]  The earlier that the SM gets the court to pronounce the dissolution of the marriage, the lower his or her “High Three” figure base will be, which means the lower the dollar amount for pension division with the spouse.

Strategy for the Former Spouse

The former spouse would oppose such a request for severance of the divorce and the property division, arguing that this would double the hearings involved and detract from judicial efficiency. The FS would also argue that that Congress has joined inextricably the divorce and the division of a military pension by requiring the setting of the retired pay base (the “High Three”) at the time of divorce.[6]  As soon as appropriate, counsel for the FS should begin discovery, seeking to determine when the member’s “High Three” years were, what the figure for that period is, and how many years of creditable service the member has (or, in the case of a Guard/Reserve member, how many retirement points).

As to documents and data, the strategy of the FS will be similar to that stated above for the SM for settlement or trial. If the SM is obstinate, it can take weeks or months to obtain this information from the source (that is, the pay center) with a court order or judge-signed subpoena.[7]

There are several ways to try to get around the division of a frozen benefit for the FS. No single approach is best, and the rules have not been written yet. The slogan is NOT “One Size Fits All.”  Some states may restrict or prohibit one or more of these strategies. The FS’s attorney may try out the following to “even the scales” in trial or settlement:

  • When the parties are in agreement, spousal support is one way to obtain payments not restricted to a retirement based on rank and years of service (and the High Three) at the time of the order. An alimony order – which can be used by skilled attorneys to mimic a pension division – gives much more flexibility in dealing with the retired pay center, so long as the payments do not end at remarriage or cohabitation of the FS. There is, for example, no requirement for 10 years of marriage overlapping 10 years of creditable service.[8]A consent order for spousal support should suffice to obtain the payments to the FS upon retirement of the SM, and the tax consequences will be the same, namely, the FS is taxed on the payments and they are excluded from the income of the payor/retiree.
  • The FS can ask the court for an award of spousal support to make up the difference, that is, the money which would be lost to the FS by division of the hypothetical retired pay of the SM. If the FS is awarded alimony while the member is still serving, the FS may try to argue that it should not end automatically at the SM’s retirement, since some amount might be needed to equalize the pension division for the FS.
  • The FS can always ask the court for an unequal division of the property acquired during the marriage in an attempt to even out the entire property division scheme due to the division of a truncated asset of the SM, not the final retired pay. Or the FS can ask for a greater share of the pension to make up for the smaller amount which will be divided.
  • The FS can also argue for a present-value division of the pension, with an expert witness setting the likely value of the retired pay, so that it can be offset by other assets given to the FS in exchange for a full or partial release of pension division. Evaluating a pension is a complex task. These complicated computations generally demand the evaluation report and testimony of an expert.
  • Another approach is to delay the divorce. The longer this is put off, the larger the High Threeamount will be. More time means possible promotions and pay increases.
  • The FS can still use the standard time-rule clauses pursuant to the Seifert. The new law limits the “disposable retired pay” (DRP) which the retired pay center (DFAS or the Coast Guard Pay and Personnel Center) will honor, limiting DRP to “date-of-divorce” dollars in the High Three (for those still serving). The court may still enter a time rule order if it complies with the interim guidance or, when published, the rules implementing the frozen benefit law. The court should state that at the SM’s retirement only a portion of the pension-share payment for the FS will come from the retired pay center. The order would provide that the member will still be responsible for the rest and will indemnify the FS for any difference between the two amounts. The duty to indemnify is a potential remedy for the reduction in payments to the FS and there is statutory support in 10 U.S.C. § 1408 (e)(6), the “savings clause” in USFSPA, which allows the courts to employ state enforcement remedies for any amounts which may not be payable through the retired pay center.[9]

As a final note, be sure not to use “disposable retired pay” in the order to describe what is apportioned to the FS. DRP means the restrictive definition in the frozen benefit rule (i.e., the retired pay base at the date of divorce) less all of the other specified deductions, such as the VA waiver and moneys owed to the federal government. The best way to word a pension clause for the FS is to provide for division of total retired pay less only the SBP premium attributable to coverage of the former spouse. Regardless of the language used, DFAS will construe orders dividing retired pay as dividing “disposable retired pay.”[10]

Resources

The final rules have yet to be published by DFAS, the Defense Finance and Accounting Service. 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. The only information presently available from DFAS is a “Notice of Statutory Change” and a sample order.[11]

A complete guide to problems and pitfalls stemming from the “Frozen Benefit Rule” is in the “Silent Partner” infoletter, “Fixing the Frozen Benefit Rule.”  How to write acceptable military pension clauses may be found at the “Silent Partner,” “Guidance for Lawyers: Military Pension Division.”  For the necessary terms for the MPDO, see the “Silent Partner,” “Getting Military Pension Orders Honored by the Retired Pay Center”; this guide includes the necessary elements and language for a proper hypothetical clause. All these infoletters are located at the military committee websites of the N.C. State Bar, www.nclamp.gov ,(Click for Lawyers.) and the American Bar Association’s Family Law Section, www.americanbar.org , (Click Family Law Section then Military Committee.)

 

[1] Seifert v. Seifert 82 N.C.App. 329, 346 S.E.2d 504 (1986), aff’d, 319 N.C. 367, 354 S.E.2d 506 (1987). The Seifert case approved the fixed percentage method of pension division, meaning that the pension benefit is multiplied by a marital fraction consisting of months of marital pension service (until separation) divided by total creditable service toward the pension. The result is the marital share of the pension, which is then apportioned between the parties; the presumptive share for the nonemployee spouse is 50%. The Seifert method of dividing military retired pay was most recently upheld by the Court of Appeals in Gurganus v. Gurganus, No. COA16-163 (Feb. 21, 2017).

[2] 10 U.S.C. § 1408.

[3] For the Army, Navy, Air Force and Marine Corps, the retired pay center is DFAS (Defense Finance and Accounting Service) in Cleveland, Ohio. Pension garnishments for the Coast Guard and the commissioned corps of the Public Health Service and of the National Oceanic and Atmospheric Administration are handled by the Coast Guard Pay and Personnel Center in Topeka, Kansas.

[4] The other element for determination of retired pay is the “retired pay multiplier,” which is 2.5% times years of creditable service (in an active-duty case). In a Reserve or National Guard case, the court order must also provide the applicable number of retirement points.

[5] See Brett R. Turner, Equitable Distribution of Property (3rd Ed. & 2016-2017 Supp.), Sec. 3.2. In those states which have adopted the Federal Rules of Civil Procedure, the issue of separate trials under Rule 42 (b) deals with bifurcation of claims into separate hearings.

[6] For an excellent summary of arguments against bifurcation of the divorce and the property division, along with case citations for state appellate decisions, seeBrett R. Turner, Equitable Distribution of Property (3rd Ed. & 2016-2017 Supp.), Sec. 3.2.

[7] The anticipated delay, however, may work to the FS’s advantage. The longer the division of retired pay is put off, the better chance the FS will have of dividing a higher amount of retired pay. In general the FS’s case usually will benefit from delay under the new rule.

[8] 10 U.S.C. § 1408 (d)(2) requires this 10/10 overlap of marriage and military service for garnishment of military retired pay as property division.

[9] See also Brett R. Turner, Equitable Distribution of Property (3rd Ed. & 2016-2017 Supp.), Sec. 6.4.

[10] DoDFMR, Vol. 7B, ch. 29, Sec. 290601.

[11] Type into any search engine, “Notice of Statutory Change” and “DFAS” to locate this. DFAS has placed the Notice at its website, www.dfas.mil > Garnishment Information > Former Spouses’ Protection Act > NDAA-’17 Court Order requirements.