By Garrick G. Zielinski, CFP, CDFA
Divorce Financial Solutions, LLC
The Uniformed Services Former Spouses Protection Act (the Act) governs the terms and conditions regarding the division of your retired pay. Simply stated, they are too voluminous to completely explain in this article. This article will specifically address the four possible methods of defining the portion awarded to your soon-to-be former spouse. In a subsequent article we will explore the issues surrounding the survivor benefit plan (SBP) as well as other issues.
There are four potential options when considering a division of retired pay: a stated dollar amount, a percentage amount, a coverture fraction formula and a delayed order option. Each has its own advantage and/or disadvantage to you and/or your former spouse. Knowing how each method effects your financial situation could potentially put additional retired pay dollars into your pocket. I will comment on each below:
Coverture Fraction Formula
This Act states that the payment of an amount of retired pay must be expressed in dollars or as a percentage or fraction of disposable retired pay.
The most common way to divide a Military pension that has not yet matured would be through the use of a marriage coverture fraction formula. This formula simply divides the number of years of creditable service during marriage (numerator), into the total number of years of creditable service at the time the Member would retire (denominator).
On the surface this appears to be equitable and an argument can be made in either event. The major disadvantage to using this formula is that the DFAS will calculate the benefit based upon events that occurred after the date of divorce. Where the problem exists is that none of us have any idea as to what the future may bring. Anytime a formula is used to divide a pension at a later date; chances are the pension amount at a later date will be greater than the present day pension amount, due to increased earnings and accumulated years of service. Under the terms of your Military retired pay plan, you receive 2 or 2 ½ percent of your average 36-month high covered earnings, for each year of service. Do you think that your covered pay will continue to rise or fall in the future? Here's an example, lets assume that you have accrued a monthly benefit of $1,000 per month, you were married 15 years, you have 15 years of credible service, and your intent is to divide the benefit equally up to the date of divorce. Today, the equation states that 15 years of service over 15 years of marriage equates to 100%, meaning your former spouse is eligible for 100% of her 50% benefit or $500 per month. What happens if that Member continues to work, and retires with 30 years of service and his accrued benefit is now $3,000 per month. Under this scenario the equation is 15 years of marriage divided by 30 years of service or 50%. Thus, the former spouse is eligible for 50% of the 50% maximum benefit or 25% of $3,000. This equates to $750 per month as opposed to the $500 we calculated in the above scenario because the member continued to work after the divorce was final.
Your attorney can limit the potential increases with language stating that the Former Spouse's benefit is calculated based upon the covered earnings that were in effect on the date of divorce. In that regard, the Former Spouse will not benefit from your additional years of service or any gain in covered earnings with regard to your benefit calculation.
Many Members opt for this formula because they also use it to exclude service that was earned prior to the date of marriage. While your intent may be to exclude periods prior to marriage with the marriage coverture fraction formula, without the language we've recommended you may not end up with the outcome you expected.
If a marriage coverture formula is used, the Former Spouse's receives her benefit when it is paid to the Member. The Former Spouse's portion of the benefit is increased annually with a cost of living adjustment (COLA), just as the Member's benefit. Lastly, unless survivor benefit protection (SBP) is elected, the Former Spouse's benefit will cease upon death of the Member.
With respect to a member, using a dollar amount to express the awarded portion for a Former Spouse is unquestionably the most advantageous division . When expressing the award using a dollar figure, the Former Spouse is not afforded a COLA adjustment and the Member would receive that portion added to their portion of the retired pay. A Member's benefit can be easily calculated if you have a history of the Member's annual base pay while enrolled in the service. The Member simply accrues 2% (REDUX) or 2-1/2% per year for the first 20 years of the highest 36-month's base pay. Assume that Member's base pay is $3,219.60 per month and that's also his High 36. At 15 years of service the Member has accrued a monthly benefit of $965.88 per month payable after 20 years of service. Obviously, after 20 years of service the Member will generate a greater monthly benefit than $965.88. But in any event, using this scenario the Former Spouse is entitled to 50% or $482.94 at the date of divorce. Under this scenario, the Former Spouse will not be afforded a COLA and the Member will receive the COLA on the entire pension.
Using a percentage is another option, but for an un-matured pension it is probably the least acceptable option for Members . This is because you don't know the exact date of retirement. For example, let's assume you used the marital coverture fraction to award a percentage, such as 15 years of marriage over 20 years of service (or 15/20 = 75.00% marital or 37.5% awarded to Former Spouse), and the Member decides to stay in the Military longer, the Former Spouse gets more than originally intended. In other words, it would be in the Member's best interest not to use a formula or a percentage that would divide any future interests. Expressing the award as a percentage allows for an automatic COLA adjustment to the Former Spouse's benefit in proportion to the Member's benefit.
A deferred percentage is simply placing an order with the Military today, but leaving the calculation open and conclusion open. In that manner, when the Member applies for retired pay, all the parties would be notified and a “clarifying court order” would then be required. The reasoning behind this type of order is to notify the Military that a Former Spouse has been awarded a property settlement in regard to the Member's benefit. This method would be used if there impasse on any of the above methods. The only advantage to this method is that all the necessary information is readily available. This is without question the least attractive option for any Member. It delays the division to a later date and requires additional legal fees, time, and benefit delays. But, if there is impasse, this method works well. How this works is, at the date of commencement, all the calculations are complete and a new Military order is drafted using a percentage amount or a dollar amount based upon factual data.
Content provided by Divorce Financial Solutions, LLC. For more information about divorce financial counseling and analysis, contact: (414) 294-4755.
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