A lot of changes were made with regard to military retirement on December 23, 2016, when the National Defense Authorization Act (NDAA) was signed by then President Obama. Below we discuss important aspects of the bill that could impact you and your family.
The Blended Retirement System
A new military retirement system will be implemented effective January 1, 2018, call the Blended Retirement System (BRS).
If the military member is active as of December 31, 2017, they will be “grandfathered” under the current plan. Active service members with fewer than 12 years and Reserve service members with fewer than 4,320 retirement points have the option to join the new plan but must do so no later than December 31, 2018. Although, it is unclear as to why anyone would voluntarily make that decision. This plan really affects anyone that joins the military on or after January 1, 2018, as they will have no choice but to be part of the BRS.
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What does the BRS entail?
- Pension (Defined Benefit Plan): Retirement pay will be 2% times the number of years of service. If a person retires at 20 years, their pension will be equal to 40% of final base pay. If a person retires at 30 years, their pension will be equal to 60% of final base pay. The service member can choose 1) full pension; 2) a lump sum at retirement equal to 25% or 50% of their discounted retired pay with a reduced monthly annuity until full social security retirement benefits are available at which time they begin getting their full monthly annuity.
- Thrift Savings Plan (TSP) (Defined Contribution Plan): The military will contribute 1% of the service member’s base pay commencing 60 days from their date of service. Service members are automatically enrolled with a 3% contribution which can be raised, lowered or terminated thereafter. The military would match up to 4% of individual contributions after two years of service and the service member would be vested after two years of service. The military stops making contributions to the service member’s TSP after 26 years of service.
- Continuation Pay: As a way to encourage service members to continue service, continuation pay is payable between the completion of 8 years of service and 12 years of service. The determination of the continuation pay is based on several factors, including, but not limited to, retention needs and is determined by each service division.
In my opinion, the only advantage to the BRS is that if a person decides not to stay in the military for 20+ years, they have some retirement saved because of the TSP contributions made by the military.
Should a service member take a lump sum option at the time of retirement, they will significantly reduce the total amount of overall retirement coming to them, potentially a reduction of more than $100,000. In some calculations, a service member could forfeit over $400,000 if they take the 50% lump sum option at retirement.
New Formula for Dividing Military Retirement
The formula for dividing military retirement when there is a division of property went into effect on December 23, 2016. Therefore, it affects any Final Decree of Divorce entered after that date. The National Defense Authorization Act changed the definition of disposable retired pay. 10 US Code § 1408(a)(4)(B) now states:
“For purposes of subparagraph (A), the total monthly retired pay to which a member is entitled shall be (i) the amount of basic pay payable to the member for the member’s grade and years of service at the time of the court order, as increased by (ii) each cost-of-living adjustment that occurs under section 1401a(b) of this title between the time of the court order and the time of the member’s retirement using the adjustment provisions under that section applicable to the member upon retirement.”
Prior to this enactment, the disposable retired pay typically included promotions and increases in pay that the military member received after the divorce was final.
For example, prior to the enactment, a military member’s disposable retired pay was typically divided as follows:
Under the new act, a military member’s disposable retired pay is divided as if the military member retired as of the date of the divorce. Defense Finance and Accounting Services (DFAS), which administers military retired pay, requires that all requests for the division of military retired pay include:
- The calculation used to determine former’s spouse’s share, i.e. a fixed amount, a percentage, a formula or a hypothetical award
- The military member’s High Three (the average monthly base pay for the last 36 months) at the time of the divorce
- The military member’s years of creditable service at the time of the divorce.
If you have any questions about how these changes may affect you and your family, please feel free to contact us with your questions.