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Military Spouse Divorce Retirement Pay vs Separation Pay

Separation pay is what a member may receive when separated from the military prior to retirement – these alternatives to retirement are often divisible at divorce, especially in Colorado thanks to the Heupel decision. And when a share of that separation pay awarded to a former spouse disappears when the member rejoins the military, there is no military spouse divorce retirement pay instead should that member later rejoin and retire from the military.

One 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. They are similar to a military pension, except that the payments only last for twice the length of service, and not for the retiree’s lifetime.

One 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 unusual 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.

And another catch is that separation pay is not the same as military spouse divorce retirement pay, so a former spouse who was awarded a share of one of them at divorce may not receive a share of the other.

Indiana Court Denies Military Spouse Divorce Retirement Pay

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, 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 later awarded a military pension and that separation pay stopped.

Military Spouse Divorce Retirement Pay vs VSI

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 as it did not reference military spouse divorce retirement pay, and there was no longer a VSI.

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 itself was not the problem, as he voluntarily continued to make the equivalent of the VSI payments to the wife despite not receiving any separation pay himself.

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 did not explicitly award the military spouse divorce retirement pay.

“Courtesy” Military Spouse Divorce Retirement Pay

As a “courtesy”, the husband still continued paying to the wife the same $11,000/yr she had been receiving in VSI, in lieu of military spouse divorce retirement pay. But the problem with voluntary payments is that they are dependent upon the goodwill or the payor to keep them coming. And the husband terminated his payments five years later.

Upon the payments stopping, the wife filed for 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. So while she was not exactly awarded military spouse divorce retirement pay, she was at least entitled to the equivalent of the VSI she had been receiving.

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, ¶ 10.

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, ¶ 16.

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 addressing military spouse divorce retirement pay.

And then, despite the clear intent as found by the trial court, the court of appeals chose to give more meaning to the general 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 at least addressing the possibility of military spouse divorce retirement pay (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”.

Real-World Disputes Over Military Spouse Divorce Retirement Pay

Finally, I litigated a similar case a few years ago where the husband started his career on active duty, but was released from active duty after not being promoted quickly enough. He joined the reserves, and was in the reserves at the time of the decree. The parties did not contemplate that he would ever rejoin active duty, so in multiple parts of the agreement the attorneys (not Graham.Law!) referenced the wife being awarded a share of the military reserve retirement, without either contemplating an active duty retirement, or at least using broader language which would cover both types of military pension.

A couple years after divorce, the husband rejoined active duty, and was then promoted a couple more times, ultimately receiving an active duty retirement as a lieutenant colonel. He argued his ex was not entitled to a share of the retirement until he turned 60, and would convert the active duty retirement to a reserve one (done for a step-up in COLAs).

Fortunately, the court saw through this shenanigan, and awarded our client a share of the retirement he was actually receiving, based upon the credits earned during the marriage. However, our firm typically includes language in our proposed orders which would avoid such disputes by simply awarding military spouse divorce retirement pay, without regard for what type is received:

“Former spouse is entitled to a share of the actual disposable retired pay received, whether active duty or reserve, and is not entitled to retirement if none is received. Reserve retirement points which are credited towards retirement are interchangeable with days on a point-per-day basis, and to the extent points are referenced but member receives an active duty retirement, such points shall be treated as days, and to the extent days are referenced but member receives a reserve retirement, such days shall be treated as points.”

And a simple reservation of jurisdiction clause to address what happens to military spouse divorce retirement pay should the member receive separation pay or other benefits instead (or vice versa, as happened in the Indiana case) would have prevented the problem faced by the wife in that case.

Award-Winning Military Spouse Divorce Retirement Pay Lawyers in Colorado

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