In many instances involving military families, the service member’s military retirement is the single largest asset of the divorcing couple. How this asset has been treated in the context of a divorce in New Hampshire has changed significantly over the last 30 years.
In Baker v. Baker, the New Hampshire Supreme Court first addressed military retirement benefits, concluding that such benefits were not “property” to be divided in a divorce. The Baker Court concluded that military retirement pay was not part of the marital estate as it lacked characteristics of property, such as “cash surrender value, loan value, redemption value, lump sum value and value realizable after death.” Although holding that military retirement pay could not be “allocated and distributed as part of a division of property,” the Baker Court did find that retirement benefits “could be considered in making equitable support orders and property distributions.”
The New Hampshire Supreme Court revisited the issue of military retirement pay 10 years later in Blanchard v. Blanchard. The Blanchard decision followed changes in both the federal and state law. Specifically, RSA 458:16-a, I, effective January 1, 1988, specified that, in a divorce proceeding, “[p]roperty shall include all tangible and intangible property … Intangible property includes, but is not limited to, employment benefits, vested and non-vested pension or other retirement benefits….” The enactment of RSA 258:16-a was preceded by a change in the federal law allowing for military retirement to be considered property in a divorce proceeding. The Uniformed Services Former Spouses’ Protection Act (USFSPA) was enacted on September 8, 1982, and effective retroactively to June 25, 1981. With the enactment of the USFSPA, state courts were authorized to “treat disposable retired pay payable to a member for pay periods beginning after June 25, 1981, either as property solely of the member or as property of the member and his spouse, in accordance with the law of the jurisdiction of such court.”
In looking at state law, the Blanchard Court found that the language of RSA 458:16-a “is unambiguous and plainly includes military retired pay.” In considering federal law, the Blanchard Court found that, through the USFSPA, “Congress gave back to the States the power to decide whether military retired pay is divisible as property in a divorce action.” Thus, the Blanchard Court concluded that “military retired pay is divisible as property in New Hampshire divorce actions.”
The Blanchard Court gave some guidance as to how military retirement benefits might be divided by equating military retirement to pensions. Specifically, in looking at Hodgins v. Hodgins, the Blanchard Court noted that, although the nature of a pension can make valuation impossible in some cases, “in such cases, where it is nevertheless clear that the pension in question has some significant value, the problem of valuation may be avoided, and the risk of uncertainly evenly placed upon the parties, by a decree providing ‘that upon maturity of the pension rights the recipient pay a portion of each payment received to his or her former spouse.’”
(To learn more, see Division of Military Pensions in Divorce).
Most family law practitioners are familiar with the Hodgins formula, dividing a pension plan based on the amounts accrued between the date of marriage and the filing of the petition for divorce or legal separation, a formula which has become so common it has been incorporated into the model forms for the family divisions of the circuit courts. Unfortunately, unlike most pensions, military retirement cannot always be divided by order of a state court.
A Military Pension Division Order (similar in format to the Qualified Domestic Relations Orders that most divorce practitioners are familiar with) can be issued dividing a service member’s military retirement, but the Defense Finance and Accounting Service (DFAS) will not issue payment directly to the non-military spouse unless the “10/10/10 rule” has been satisfied. Under the 10/10/10 rule, the parties must have been married for 10 or more years, and 10 years of the marriage must have overlapped 10 years of creditable service. This often leads to confusion by the parties, wherein one or both believe that the non-military spouse is not entitled to a share of the military retirement. This rule, however, goes to the method of payment, not the entitlement.
Assuming the 10/10/10 rule is satisfied, once a Military Pension Division Order has been submitted and approved by the Court, a certified copy must be forwarded to the appropriate Uniformed Services designated agent with a DD Form 229333, entitled “Application for Former Spouse Payments from Retired Pay.” The DD Form 2293 is also the form used for requesting direct payments of alimony or child support from retired pay. Once processed, payments will be made directly to the non-military spouse and each party will be issued an IRS Form 1099-R for the retirement benefits received during each tax year.
For those who do not meet the 10/10/10 rule, an order can still be issued dividing the retirement benefit, but the military spouse will need to make the monthly payments directly to his or her former spouse. For some couples, this is more hassle than it is worth – especially when benefits will not commence for several years and the couple has no other reason (such as children) to maintain an ongoing relationship. In these instances, the approximate value of the marital share of the retirement could be calculated and the parties could agree to an offset against another asset. For divorcing couples where only a few years of marriage overlap, this is often an attractive option as it allows the parties to part ways and avoid concerns about receiving small monthly payments over time. In electing this method, practitioners should remember that the expected benefit to be received over time needs to be reduced to a net present value. For the practitioner hoping to get a general idea of this value, one of the many reverse annuity calculators on the web can be useful. For a more exact figure, contact a certified public accountant who can factor in and include future cost of living increases and other variables.
(For more information, check out our overview article on, "Dividing Military Pensions at Divorce").
If, by agreement or order, the parties do find themselves dividing the military retirement by way of payments from the retired military member to the former spouse, the Decree of Divorce will need to address how the tax consequences of this division are going to be handled. Since the military spouse will receive an IRS Form 1099-R for the full amount of the military pension payments, the military spouse will incur the tax burden on the full amount of the retirement received although only his or her portion was retained, unless this division is properly addressed. One option is for the military spouse to deduct the estimated income taxes from the portion to be paid to the former spouse. The one problem with this solution is that, if the non-military spouse is in a lower tax bracket, taxes are paid at a higher rate than is necessary. Another option is to have the military spouse issue an IRS Form 1099 to the recipient spouse for the sums paid. Yet another possibility is to have the payments treated as alimony for tax purposes so they are includible in the gross income of the recipient spouse and deductible by the military spouse. Such a provision should include clear language regarding the purpose, along the lines of: “Such alimony designation is solely for the purposes of allocating the tax liabilities of the military retirement received by each party.”
Regardless of how the parties decide to effectuate the proper allocation of taxes, language should be included in the decree or stipulation that explains the intent and allows for any necessary modifications to comply with IRS regulations. For example, after specifying the amount of the retirement to which the recipient spouse is entitled, the parties could use the following language:
As Spouse 1 cannot be paid her share of the military retirement directly from the Defense Finance and Accounting Services office under current federal law, Spouse 2 shall pay directly to Spouse 1 her share of Spouse 2’s military retirement. In the alternative, the parties shall work together with an accountant to achieve the parties’ intent of Spouse 1 receiving, and paying taxes on, her share of the Spouse 2’s military retirement. Both parties shall cooperate in signing any additional documents or orders necessary to effectuate the intent of this provision.
It is important that the foregoing issue regarding taxes be addressed not only when the parties are in agreement, but in any final hearing as well. Orders are commonly issued dividing military retirement pursuant to the Hodgins formula, leaving the parties to determine how taxes and future payments are to be dealt with if the 10/10/10 rule is not satisfied. Be specific in your proposed orders and explain to the Court why the requested relief is important. Or, better yet, reach an agreement on the issue of how the military retirement will be handled and submit a partial stipulation addressing this issue.