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Military Retirement Results In Loss Of Separation Pay

When the military involuntarily separates a member prior to reaching the 20 years required for the traditional military retirement to vest, as long as the separation was not for misconduct there are often benefits, including military separation pay, awarded to help compensate for the loss of the anticipated retirement. Often, the alternatives to military retirement are divisible at divorce, and that’s especially true in Colorado, with Heupel.1In re: Marriage of Heupel, 936 P.2d 561 (Colo. 1997).

One such form of separation pay, common during the drawdown in the 1990s, was the Voluntary Separation Incentive, or VSI, paid pursuant to 10 U.S. Code § 1175. This benefit, available to members with at least six years of service who are not yet retirement eligible, provides the member with an annual payment equal to 2.5% x base pay at the time of separation x years of service (similar formula as with a military retirement, but the duration of separation pay is twice the length of service, rather than for life as it is with military retirement).

The catch, however, is that if the member later qualifies for a military retirement, she must repay the VSI separation pay by way of a deduction from the military retirement. 10 U.S. Code § 1175(e)(3)(A). This is not as counter-intuitive as it may appear – a member leaving active duty with VSI may join the reserves, may be subject to recall, or just could be accepted back onto active duty later, ultimately serving sufficient years to qualify for a 20-year retirement.

Indiana Court Ends Member’s Separation Pay Obligation After Retirement

A brand-new case from the Indiana Court of Appeals dealt with the issue of separation pay which ended when the member ultimately qualified for a traditional military retirement. In Ferrill,2Ferrill v. Ferrill (Ind.App. No. 18A-DR-2013, Mar. 6, 2020). the husband had left active duty in the 1990s, and at the time of divorce, was receiving annual VSI payments. In their property settlement agreement, the VSI payments were divided, but the husband was awarded his military retirement (which did not then exist).

VSI Separation Pay from the Military

Presumably in anticipation of the possibility that the separation pay could disappear should the husband retire from the military, the agreement also had a “savings clause” for payments equivalent to VSI to continue to the wife: “Should this VSI account be converted to any other form of payment, [Michael] will pay this $11, 000 obligation from this source prorated as received.”

Unfortunately for the wife, this was not enough to protect her. The husband subsequently returned to active duty, thereby terminating the VSI payments while he was receiving military pay, pursuant to 10 U.S. Code § 1175(e)(2). This was not the problem, as he continued to make the equivalent of the VSI payments to the wife despite not receiving any separation pay himself.

However, the husband’s continued military service ultimately resulted in his qualifying for a standard military retirement, which both (1) ended the VSI separation pay, and (2) resulted in DFAS recouping from the military retirement the $386,000 in VSI payments already received. However, while the VSI was shared between the parties, their agreement awarded the husband the entirety of his military retirement.

As a “courtesy”, the husband still continued paying to the wife the same $11,000/yr she had been receiving in VSI, then terminated such payments altogether five years later. Upon the payments stopping, she filed contempt, and the trial court found the husband in contempt, finding that with the clause referencing VSI being “converted to any other form of payment”, the parties intended for the wife to receive the same $11,000/yr payments, either as VSI, or from whatever the separation pay may have been converted to.

The husband appealed, and the court of appeals noted that the provisions requiring VSI payments even if converted was in conflict with the provision awarding the husband his military retirement as his “sole and separate property.” Ferrill.3Ferrill v. Ferrill, ¶ 10 (Ind.App. No. 18A-DR-2013, Mar. 6, 2020).

The Court’s ultimate holding:

“The trial court erred by interpreting the Agreement’s Pension Provision and VSI Provision to conflict. Rather, like other contracts, the Agreement should be read to give effect and meaning to all portions of the Agreement, such that pursuant to the Pension Provision, Michael’s military retirement pay is his sole and separate property, and the trial court abused its discretion by holding Michael in contempt for failing to continue the payments to Susan. Accordingly, we reverse.”

Ferrill.4Ferrill v. Ferrill, ¶ 16 (Ind.App. No. 18A-DR-2013, Mar. 6, 2020).

The takeaway? While it’s easy to be a “Monday morning quarterback” and criticize the attorneys who drafted the original agreement, in this case they did have a conversion clause which they reasonably figured would protect the wife if the VSI payments ended. But they then inexplicably awarded the husband any military retirement ultimately received, instead of dividing it. And then, despite the clear intent as found by the trial court, the court of appeals chose to give more meaning to the clause awarding the military retirement to the husband than the clause awarding the wife reimbursement if the VSI payments were converted to something else.

It’s not clear that the original attorneys contemplated that the husband would ultimately retire, and such retirement would terminate the VSI payments. And while I’m not sure Colorado would reach the same result as the Indiana court, to the extent the attorneys made a mistake, it was either (1) awarding the husband any future military retirement instead of simply reserving jurisdiction over it (but without knowing the negotiations, it’s hard to call this a mistake), or (2) not making the award of retirement to the husband “subject to the wife’s VSI payments”.

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