The Blended Retirement System and Divorce

Introduction: SILENT PARTNER is a lawyer-to-lawyer resource for military legal assistance attorneys and civilian lawyers, published by the Military Committee of the American Bar Association’s Family Law Section. Please send any comments, corrections and suggestions to the address at the end of this Silent Partner. There are many SILENT PARTNER infoletters on military pension division, and other aspects of military divorce. Just go to www.americanbar.org >Section of Family Law >Military Committee or www.nclamp.gov (the website of the military committee, N.C. State Bar) > “For Lawyers.” Credit for writing the initial draft of this SILENT PARTNER goes to Major Amelia B. Kays, USMC.

Introduction

In the National Defense Authorization Act for 2016, Congress passed legislation to modernize the retirement systems for the uniformed services. [1] This involved implementing a blended retirement system which combines a “defined contribution” component with a “defined benefit” program. The new Blended Retirement System, effective as of January 1, 2018, applies to everyone who enters service on after that date. Those who entered the uniformed services on or before December 31, 2017 will have a choice: to opt into the new system or to remain “grandfathered” in the current military retirement system, as further explained below.

The Current Military Retirement System

The current military retirement system is a defined benefit system. Servicemembers (SMs) who serve honorably for 20 years become vested in the retirement system. When active-duty SMs retire, they receive a monthly pension calculated by multiplying the average of the SM’s highest three years of continuous pay (the retired pay base) by 2.5% times the years of service (the retired pay multiplier). For example, assume that John Doe is an E-7 who served for at least three years as an E-7 and has a total of 21 creditable years. He retires in 2016 and his “high-3” (retired pay base) is $4,423.80. John’s retired pay multiplier is 21 years of service x 2.5 = 52.5%. This means that he would receive retired pay based on 52.5% of his high three basic pay, or $2,322.50 per month.

The current Reserve Component (RC) retirement is based on a combination of satisfactory years and points achieved each year. An RC member (that is, a member of the National Guard or Reserves) earns 15 points each year for participation, one point each day for two weeks of annual training and any other active-duty time served, and points for weekend drills, performing funeral honors, and completing correspondence courses, depending on how many hours of work are performed. RC members must earn 50 points annually to have a satisfactory year. Once the RC member has 20 satisfactory years, he or she can apply for retirement. Although it may commence earlier, RC retired pay generally begins at age 60.

The calculation of RC retired pay is a bit more complicated than that used for a “regular retirement,” that is, one from active duty. Assume that Roberta Roe is an E-7 who has served for at least three years as an E-7 and served a total of 21 satisfactory years. She applies for discharge in 2016 and she has a “high-3” pay rate of $4,423.80 for her retired pay base. [2]

Her retired pay multiplier is the number of points she earned during her career divided by 360, multiplied by 2.5%. In this case, assume that Roberta earned 365 points during her first year of service − attending recruit training and her Military Occupational Specialty (MOS) school while on active duty − and then she earned the minimum 50 points each year thereafter for 20 years. Accordingly, Roberta has 365 + 1,000 points or 1,365 retirement points. The number of points divided by 360 equals 3.79 – this is the equivalent of active-duty time. This number is then multiplied by 2.5% to get the retired pay multiplier, that is, the percentage of her base pay that will establish the amount of the pension. In this case it’s 3.79 x 2.5% = 9.475%.

The last step is to determine the monthly pension payment. This is the product of the retired pay base (shown above) and the retired pay multiplier just established: $4,423.80 x 9.475% = $419.16 per month retired pay.

The Blended Retirement System

As stated above, the Blended Retirement System (BRS) contains two elements, a defined benefit program and a defined contribution component. The first of these is the same as the current retirement system except that the percentage contained in the retired pay multiplier will change from 2.5% to 2.0%. The defined contribution portion will allow the SM to participate in the Thrift Savings Plan (TSP), which is similar to a civilian 401(k) plan, and the SM will receive matching contributions from the government. Starting at 60 days of service,[3] the government will create a TSP account for every SM who participates in the BRS, depositing 1% of the SM’s base pay into the account. Servicemembers will be automatically enrolled in the TSP at the rate of 3% of their base pay, but they will have the option to change this amount. At two years of service, the government will match member contributions as follows:

SM Contributes	DoD Contributes	Auto DoD Matches	SM+DoD Total
0%	1%	0%	1%
1%	1%	1%	3%
2%	1%	2%	5%
3%	1%	3%	7%
4%	1%	3.5%	8.5%
5%	1%	4%	10%

 

From two years of service forward, members are vested in the BRS and can keep their DoD automatic contributions and matching amounts if they choose to separate from their uniformed service.

Continuation Pay

The BRS will also provide SMs with mid-career Continuation Pay between eight and 12 years of service. The amount of Continuation Pay will range from 2.5 to 13 times the amount of monthly base pay for active duty service members and .5 to 6 times the amount of monthly base pay for Reserve SMs. Receipt of Continuation Pay is conditioned upon the SM entering into a written agreement to perform additional obligated service.

Lump-Sum Option

Additionally, participants in the BRS will have the option to take a lump-sum payment upon becoming eligible to receive retired pay. SMs will have the option to take either 25% or 50% of their monthly pension payments between the date of retired pay eligibility (upon retirement from active duty and, for RC members, usually at age 60) and the age of Social Security payment eligibility when they retire from military service; as of this writing (2021), this is at age 67. The lump sum will be reduced by a “Discount Rate,” which will be published annually on June 1 and go into effect on the following January 1. When the SM reaches the age for collection of Social Security, the pension payments will return to the full rate.

Opt-In Decision

Those who entered the uniformed services on or after January 1, 2018 are enrolled in the BRS. Active-duty members entering service after January 1, 2006 but before January 1, 2018 and RC members with fewer than 4,320 points on December 31, 2017 could choose between opting in to the new system and remaining in the pre-2018 retirement system (now called the “legacy system”). Members with 12 years of service (for RC members this is calculated as 4,320 points or more on December 31, 2017) cannot opt out of the legacy system. Additional BRS information may be found at http://militarypay.defense.gov/BlendedRetirement/.

Impact of the BRS on Family Law

Enrollment in the new retirement system is a significant change in retirement planning. It will not only affect a member’s family; it also could affect, when applicable, the SM’s former spouse. This is because under the new system, the annuity will be reduced from 50% of the “high-3” base pay for those who serve 20 years to 40%. For members who have already signed a separation agreement or received a divorce decree, dissolution of marriage, property division judgment or court-ordered property settlement providing a percentage of retired pay to a former spouse, the choice to opt into the new retirement system will directly impact the amount of retired pay that the former spouse receives. Additionally, members or military spouses who file for divorce in cases where the SM is eligible to opt into the BRS will need to include provisions in their separation agreements and settlements to address how this choice affects the distribution of the marital or community-property share of the SM’s military retired pay. The same issues will be present when the case is tried, not settled – the judge will need to be educated on the options and their impact.

Advocacy Issues

If you are representing the spouse or the former spouse, and the SM may have opted into the BRS, include a clause in the divorce settlement which ensures that the court retains jurisdiction so that adjustments can be made to the property division should the SM choose to opt into the BRS, such as:

The parties consent to the court’s retaining continuing jurisdiction to adjust the pension division payments or the property division specified herein if Defendant elected to opt into the Blended Retirement System or waives military retired pay in favor of disability compensation or takes any other action (such as receipt of military disability retired pay, severance pay, or a separation bonus or incentive) which reduces the amount or share of retired pay for Plaintiff as set out herein.

An alternate clause to insulate the client from possible future reductions would be as follows:

Unlike most retirement plans, the uniformed services retirement program allows for pre- and post-retirement changes in retired pay, whether they are initiated by the member (such as selecting an early-out bonus or incentive, electing to receive VA disability compensation or Combat-Related Special Compensation, or opting into the Blended Retirement System), initiated by the government (such as disability retired pay and some forms of severance or separation pay), or caused by a combination of action and inaction by the member. In the event of a reduction in the amount or share of the Plaintiff, the Defendant will pay back any loss to the Plaintiff in consequence thereof.

The language in either of these paragraphs will help to indemnify the Plaintiff if the Defendant opted into the BRS causing the retired pay multiplier to be reduced. There is additional protection if other alternatives occur outside of electing BRS.

 If you are representing the SM, you should reject any provision that attempts to limit the SM’s ability to opt into the BRS or to restrict in any way the ability of the SM to choose plans, benefits or programs which are available under federal law. Such provisions are probably not legally enforceable [4] but including them in a separation agreement or property division judgment may be read as an agreement between the parties that the SM will not take any steps to reduce the divisible retired pay of the spouse. This could allow the court to reallocate the marital assets or require reimbursement should the SM choose to opt into the BRS under the concept that the SM has violated the covenant of good faith and fair dealing. [5]

 If you have a client who already has a separation agreement, property division judgment or court-ordered property settlement dividing a military pension, and that client later finds out that the former spouse has opted into the BRS, examine the language of the document to determine if there is an indemnification clause or a provision that allows the court to retain jurisdiction over the matter. With these clauses in place, the court may be able to reallocate other marital assets or require reimbursement to compensate the client for the SM’s action in reducing the divisible retired pay.

 Members who opt into the BRS will have the option to receive Continuation Pay at 12 years of service and a lump sum payment upon becoming eligible to receive retired pay. Continuation Pay, depending on state law, could be compared to an employment bonus and might be considered to be divisible upon dissolution of the marriage. Distribution of Continuation Pay should be addressed in any Separation Agreement drafted for service members who opt into the BRS. The lump sum payment option will have the effect of reducing the value of the defined benefit (annuity) portion of the pension in exchange for a cash payment. This will also need to be specifically addressed in Separation Agreements for servicemembers participating in the BRS.

(Rev. 3-11-21)

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This SILENT PARTNER was prepared by COL Mark E. Sullivan (USA-Ret.). For revisions, comments or corrections, contact him at 919-832-8507, or at mark.sullivan@ncfamilylaw.com.