Division of Military Retirement Pay - Dual Coverture

Update: The 2017 National Defense Authorization Act changed the definition of "Disposable Retirement Pay". This mimics the calculations discussed here - one coverture fraction for time or points, and a second coverture fraction for rank/longevity or salary. However, as of January 2018, phone calls with DFAS paralegals confirm the only type of divison they accept for post-NDAA2017 cases is the Hypothetical Method. DFAS is implementing law intent by ignoring the law's letter: The Hypothetical Method percentage they calculate must be applied to the old definition of DRP. Otherwise, the discount is double-applied: once by the ratio of hypothetical salaries and once inside the definition of DRP. When the marriage starts after the military career, or with multiple spouses, the Area Method is still the only way to equitably calculate the marital asset. Additionally, the dual covertures in the Area Method can accomodate both the intent and letter of the new law. For more information, see the web page tutorial on the USFSPA amendment in the 2017 NDAA law. .

Introduction

Divorce is a path many people have to live with, and under these situations, it is beneficial to pursue equity. In order to equitably divide the marriage asset of military retirement pay due to divorce, one must understand different issues than other types of retirement. Issues discussed on this page apply to both Active Duty and Reserve military retirements. If you are intested in Reserve military specific issues, please see another web page about dividing military reserve retirement pay. If your concerns are more specific, see other web pages describing Promotion Enhancement or Area Method calculations.

When dealing with normal civilian retirements, a coverture fraction method typically calculates what portion of a retirement was earned during the marriage, and then that portion is divided. Historically, this manifests as a "coverture fraction" that you are probably familiar with. Extending the coverture concept to a Dual Coverture fraction is required to equitably deal with military retirements. There have been nascent attempts by attorneys and courts to implement this concept, but without complete documentaion, attempts have been rife with litigation and confusion.

This page introduces the Dual Coverture formulaic method which accommodates situations where there is no military duty before marriage, and there is one spouse with divorce prior to retirement. Downloadable resources demonstrate Dual Coverture utility and offer formulaic representation. Additional research has yielded a superior method called the Area Method method which has wider scope of applicability than all previously published methods, while matching the results of well-known formulaic methods such as those published by DFAS.

Retirement Division Methods

Civilian retirements use calendar months as proration in the first coverture fractions because individuals work contiguous days. For military with a Reserve retirement, duty points have been used in the place of calendar time in the coverture fraction because any period of calendar time may include many duty days varying down to none at all.

A January 2011 New Jersey Appellate Court ruling (see detailed discussion) confirms the inability of time-only or point-only coverture fractions to equitably divide a military retirement asset. A military retirement is different than civilian retirements because it is looked up in a 2-dimensional pay table, using 1) time of service, and 2) rank. Reference 10 USC 12739, and 10 USC 1406 or 1407. The two factors of time and rank are independent, and cannot be captured in one fraction; a proper coverture fraction is the result of two mathematical fractions multiplied together: the time or Duty Fraction, and the Rank Fraction. A blog entry from the lead defense attorney in the NJ case questions whether the single time fraction is viable any more. Several contract firms that generate military division orders for attorneys have picked up on the same court case and discuss it on their web pages.

If only one ratio is used, the non-military spouse would benefit from all military promotions outside the marriage, and this is contrary to equity. Unlike time-based promotions where the two issues can be comingled into one coverture ratio, military promotions are always unique, special, or outstanding based on stratification of eligible promotees, limited quotas, deployment records, testing results, advanced school degrees, competitive formal performance reports, and professional military education. An entire web page and white paper is dedicated to the topic of dividing military promotion enhancements equitably in a divorce.

Due to a Federal interest to have uniformity among the state's rulings and protect Federal interests, there is a sanctioned method of doing these calculations espoused by the Department of Defense, Senate, Congress, and Federal Defense Finance and Accounting (DFAS) office to ensure equitable division when additional military duty or promotions are done after a divorce. DFAS calls this method their Hypothetical Method, outlined step by step in Para 2, Page 9 of the January 4, 2010 version of the USFSPA Attorney Instructions Dividing Military Retired Pay.

In a Department of Defense report to Congress and the DFAS document, the precise method of calculable precision is given to separate the portion of indivisible non-marital enhancement due to promotions. The DFAS guide has several examples, so be sure to consider the examples suited to your particular situation. All calculation methods and examples are not interchangeable, and some will be wrong for your situation. Although DFAS cites the Hypothetical Method for Active Duty military members who receive a promotion after divorce, they fail to cite the same method again as applied to Reserve military members, leading some attorneys to incorrectly assume Reserve officers are never promoted after divorce.

In order to clarify the calculations involved, I have made available a detailed white paper memorandum titled Attorney Instructions - Dividing Reserve and Active Duty Military Retirement. This paper also includes discussion about a new Federal January 2008 law that applies to dividing Reserve Military Early Retirement. The paper includes a derivation of the formulas, example legal order text, and calculation examples. If you are taking military retirement issues to court, I recommend you print out a copy, have it reviewed by a CPA and then pay the CPA to show up as an expert witness. The "Hypothetical Method" the NJ Court refers to on pg 19 of its opinion, and the Dual Coverture method the NJ Court refers to on pg 22 are mathematically identical if you stipulate that COLA increases are about the same as military pay raises. Although the two methods yield the same result, you should read why the Dual Coverture method is better.

The Dual Coverture method uses two fractions multiplied together. One fraction is a time ratio (duty during marriage/total duty), and the other is a rank ratio (basepay of rank at divorce/basepay of rank at retirement). Be careful to use the same year's pay charts when looking up the numerator and denominator for the rank ratio--doesn't matter which year chart you use because you're calculating just a ratio, not the isolated values. Multiplying the time ratio and the rank ratios together gives the proper overall dual-coverture fraction to use in the court order sent to DFAS.

Federal Opinion and DFAS Guidance

The Federal government has interest in allocating Federal retirement, and has given specific guidance. As a result of the DoD report to Congress, DFAS created the Hypothetical Method and explained it in their Instructions to Attorneys document. Remember, the DFAS assertions have been vetted through Dept Defense, Senate Armed Services Committee, House Armed Services Committee, and undergone countless hours of public scrutiny and debate. DFAS wrote the following text:

"We apply retired pay COLAs to the hypothetical retired pay amount up to the member’s actual retirement date to find a “present value” of the hypothetical retired pay as of the member’s actual retirement date. This adjustment does not result in the former spouse benefiting from the member’s additional service time or promotions after the hypothetical retirement date. It simply provides the former spouse with the amount he or she would have received had the member actually become eligible to receive retired pay on the hypothetical retirement date.

Notice the last two sentences mitigate the concern that it's biased against the military member. It's clear that both spouses receive time-value of money while waiting for the payments to be delivered. Remember the Hypothetical Method and Dual Coverture methods create the same coverture fraction and are applied to retirement payments in the same way, so when you talk about one, you talk about the other. DFAS wrote the updated manual quoted above in response to direction in the DoD Report to Congress Concerning Federal Former Spouse Protection Laws, page 71-72, dated September 5, 2001:

"Congress should amend the USFSPA [laws] to provide that all awards of military retired pay be based on the member’s rank and years of service at the time of divorce. This provision should be exclusively prospective. For example, if a future divorce occurs when the member is an O-4 (i.e., Major/Lieutenant Commander) with 14 years of creditable service, the award of military retired pay must be based on that rank and time served. That the member retires as an O-6 (i.e, Colonel/Captain) with 24 years of service is irrelevant to the award of military retired pay as property.

"The pay increase attributable to the promotions and additional time served should be viewed as the member’s separate property. [emphasis mine] However, as a matter of equity, the former spouse should benefit from increases in the pay table applicable to the O-4 grade. Thus, as the pay for an O-4 with 14 years of service is increased due to increases in the pay table, so too is the value of the allocation to the former spouse. The objective in this regard should be to provide the former spouse, on a present value basis, with approximately the same amount of retired pay that he or she would have actually received had payments begun on divorce. DFAS should include a formula in its recommendations that could be used by parties who divorce while the member is still on active duty.

I would again emphasize that the only way to do what is written in the quote above with a formula in a court order is the Hypothetical Method or a Dual Coverture method, and the Dual Coverture Method is much simpler and better for both parties.

According to the last sentence recommendation quoted above from the Congressional report, DFAS did include a formula, and this formula gives results identical to the dual fraction method requested by the defendant in the New Jersey Appellate Court case, and supported by the Department of Defense, vetted through the Senate Armed Services Committee, House Committee on Armed Services, and Defense Finance and Accounting Services.

Damages

The resultant damages of using a single coverture when a dual coverture is the equitable answer are significant; rank promotions hover around 17% increase in base pay with some higher or lower (and retirement is proportional to base pay). Because the mistake comes from the military member to the non-military member, that creates a double, or 38%, error in equity. This is huge -- much larger than 15% rule of thumb on income changes to change support payments, or the 5% threshold where medical insurance would be ordered for a child.

Multiply this error by the number of military in the nation and the number of divorces and the duration of a person's retirement time, and you'll see that this is a $Billion dollar issue misunderstood by the court system.

Numerical Comparison of Division Methods

Here is the text you can use to do the Hypothetical Method. This method is tangled because the wording must be slightly different depending on whether the military member is active duty or reserve (months or points), or was commissioned before or after 1980 (final pay or average of high 36 months), etc. These complications are part of why Dual Coverture or Dual Coverture Value are better.

"The former spouse is awarded 50% of the disposable military retired pay the member would have received had the member retired with a base pay of $6,534.30 and with 14 years of creditable service on 16 January 2009. The balance of the military retired pay is awarded to military member as sole and separate property."

Instead of $6534.30, you should put your real base pay or "average base pay of high 36 months" at time of divorce. Instead of years of creditable service, a Reservist would name the points accrued at time of divorce. This legal language would invoke the following division, using the process described in DFAS' Attorney Instructions document, steps 2(a) throgh 2(c). Assume 252 month (21 yr) retirement as an O-5 in 2016.

Step 2(a) Hypothetical retirement pay 0.025 * 14 * $6534.30 = $2287.01

Step 2(b) Add in "time value of money" while spouse waits for actual retirement - 7 years in this case. Using actual COLA rates from the Social Security web page,

2010 1.000
2011 1.000
2012 1.036
2013 1.017
2014 1.015
2015 1.017
2016 1.000

Total COLA (multiply all together) = 1.0876
Value of hypothetical retirement after time value of money $2287.01 * 1.0876 = $2487.35

Step 2(c) Calculate percentage from the ratio (Hypothetical/Actual). 2016 pay chart says $8617.00 base pay upon actual retirement, so actual retirement is 0.025 * 21 * $8617 = $4523.93
So percentage is 50% * 2487.35 / 4523.93 = 27.49% (spouse gets $1243.68)

The Single Coverture method is defective because it incorrectly divides actively earned promotion enhancements after the marriage. It is included here for reference.

"The former spouse is awarded a percentage of the member’s disposable military retired pay, to be computed by multiplying 50% times a fractions, the numerator of which is 168 mo, and the denominator of which is the total number of months of retirement creditable service.

This legal language would cause the following division, assuming the same final retirement numbers above. A reservist can use points instead of months.

50% * (168 mo / 252 mo) * => 33.33%
Retirement is 2.5% * 21 * $8617 => $4523.93
ex-spouse receives 33.33% * $4523.93 => $1507.82 (higher because after divorce promotion enhancements are incorrectly also divided with the Single Coverture method).

The Dual Coverture method introduced on this web page can also be used for equitable division. Hypothetical is not correct if there were any months of military duty before the marriage. Hypothetical method above gives to the ex-spouse "time value of money" calculated from national COLA averages each year, while the military member gets time value of money calculated from military pay chart raises each year. The Dual Coverture method below gives military pay chart raise to both, which is also more equitable.

"The former spouse is awarded a percentage of the member’s disposable military retired pay, to be computed by multiplying 50% times two fractions, the first numerator of which is 168 mo, and the first denominator of which is the total number of months of retirement creditable service, and the second numerator is the base pay of a 14 year O-4 rank, and the second denominator is the base pay of the member years and rank upon retirement. Both base pay amounts are to be taken from the SAME year military chart.

This legal language would cause the following division, assuming final retirement was with 252 months and O-5 rank in 2016, after 21 years of service. Notice the second ratio of two base pay numers stays the same no matter what year pay chart is used.

50% * (168 mo / 252 mo) * ($6,534.30 / $7,697.40) => 28.30%
Retirement is 2.5% * 21 * $8617 => $4523.93
ex-spouse receives 28.30% * $3951.68 => $1280.27

Notice the ex-spouse percentage is nearly identical to the Hypothetical Method, different only because Social Security COLA is not exactly the same as military pay raises each of the 7 intervening years. For any set of years, either method could be slightly higher than the other method. To be equitable, both should get time value of money increases based on the same increases (Dual Coverture instead of Hypothetical).

The Area Method is an extension of the Dual Coverture method above, which can be used in all situations. When situations are simple, the math simplifies to be indentical to Dual Coverture.

Conclusion

In summary, even though they misunderstood other facts, the NJ Appellate Court properly allowed that post-marriage promotion enhancement should not be divided, introducing the Dual Coverture method into case law. This matches other juristictions and Federal recommendations. The Dual Coverture method is better than the Hypothetical Method for multiple reasons, and has been extended to a Area Method method which is better than both because of its versatility and scope. When declining the defendant's proposed formulaic implementation of Dual Coveture, the NJ Appellate Court made a factual error that led them to make a judicial error with great injustice to a military member.

References

Barr v. Barr New Jersey Appellate Court ruling, January 2011, 418 N.J. Super. 18 (App. Div. 2011). Argued by Jennifer Millner and Eliana T. Baer and Robert A. Epstein v. Mr. Silber and David E. Alberts in front of Axelrad, R.B. Coleman, and Liholts. (FindLaw.com, Law.com #1, Law.com #2, Leagle.com, Rutgers.edu, increa copy) (31 pgs, 106kb)
"Be specific in divorce agreements to avoid future legal trouble", Jennifer Millner, Air Force Times, 24 March 2011.
DFAS "Guidance on Dividing Military Retired Pay", 2 April 2012, 20 pgs, 119 KB pdf. (DFAS.mil, increa copy)
DFAS "Attorney Instructions - Dividing Military Retired Pay", April 2001, 19 pgs, 74kb pdf. (DFAS.mil, increa copy).
DoD Report to Committee on Armed Services of the US Senate and House of Representatives, 1998. (Defense.gov, increa copy) (84 pgs, 279kb pdf)
Mork Attorney Instructions - Division of Reserve and Active Duty Military Retirement (increa copy).
Blog post Dual Coverture is better than DFAS Hypothetical Method, February 2011.

This article originally appeared on the Increa.com blog. The shell of this expanded document was created using AbiWord under the Linux Gnome desktop. Content was edited using Kompozer.