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Recent Case Law
Coverture Fraction Challenged

The recent decision of the Appellate Division, Superior Court of New Jersey in Barr v. Barr, January 19, 2011, is likely to make the preparation of Domestic Relations Orders regarding the assignment of retirement benefits derived from Military, Federal or New Jersey Retirement Systems substantially more complex due to the variations of the “Marx Coverture Fraction” suggested by the Barr court.

Since the focus of the Barr court was the Military Retirement System this article is limited to Barr and the Military Retirement System.

Military Retirement System.
It is well settled in New Jersey that the amount of an award of military retirement benefits is fully within the scope of the New Jersey courts. However, if the courts seek to have its assignment to a former spouse enforced under the Uniformed Services Former Spouses Protection Act (USFSPA), then the courts are limited to formulas expressed in a format that is in compliance with the USFSPA. Hence, the award must be expressed as either:

  • Fixed Dollar Amount
  • Percentage of “Disposable Retired Pay” [10 U.S.C 1408(a)(4)].

Be clear, no other formats are acceptable to Defense Finance Accounting Service (DFAS), the entity that approves or rejects your proposed Military Domestic Relations Order.

The military retirement benefit formulas are rather traditional. Each of the formulas discussed below has three easily recognized components:

  • Average Pay
  • Years of Service
  • Annual Accrual Percentage

Based on this package there are three separate and distinct military retirement formulas. The formula applicable in any case depends on the member’s Date of Initial Entry Military Service (DIEMS) date.

The Three Retirement Formulas:

  • Final Pay
  • High-3 Year Average
  • Military Retirement Reform Act of 1986 (CSB/REDUX)*

*At this time members with a DIEMS date of August 1, 1986 or later may elect to participate in either High-3 or the CSB** /REDUX systems.
** Career Status Bonus

Commentary:
Members who were initially covered by REDUX, have the option to elect either High-3 or CSB/REDUX systems.

How to determine for your matter which formula applies to an Active Member (not in Reserve):

Final Pay Formula: DIEMS date prior to September 8, 1980

High-3 Formula: DIEMS date later than September 8, 1980, but before August 1, 1986, or DIEMS on or after August 1, 1986, but elected not to participate in Career Status Bonus and REDUX retirement system

CSB/REDUX: DIEMS date on or after August 1, 1986. In many cases the member will be a participant in the High 3 Formula Plan.
*although likely it is best to confirm participation in this system.

Final Pay Formula:

  • Benefits accrue at the annual rate of 2.5%. The member’s “retirement multiplier” is the number of years of military service multiplied by 2.5%. Hence, a member retiring after 22 years of service will have a retirement multiplier of 55%. The maximum multiplier is 75% (30 years of service). This multiplier is then multiplied by the member’s final basic pay (allowances and special pay are not included in “basic pay”). For example, a member retiring with:
  • twenty-two years of credited service,
  • multiplier of 55%
  • basic pay (annual) of $55,000.00

The calculation is as follows:
22 * 2.5% * $55,000.00 = $30,250.00 or a monthly benefit of $2,520.83
*this symbol is used to express “multiplication”

Post Retirement Cost of Living Adjustments (COLA) are available provided there is an increase in the Consumer Price Index (CPI) for the referencing year. For this System the COLA is equal to the annual CPI.

High-3, RETIREMENT SYSTEM.
Alert:
It is easy to confuse this Retirement System with the “Final Pay” Plan, since the basic
formula is very similar to the High-3 Plan. The key difference is the pay used to
determine the members benefit.

The Plan’s Formula:

  • Benefits accrue at the annual rate of 2.5%. The member’s “retirement multiplier” is the number of years multiplied by 2.5%. Hence, a member retiring after 22 years of service will have a retirement multiplier of 55%. The maximum multiplier is 75% (30 years of service). This multiplier is then multiplied by the member’s average basic pay for his or her highest 36 months of career basic pay (allowances and special pay are not included). For example, a member retiring with:
  • twenty-two years of credited service,
  • multiplier of 55%
  • average basic pay (36 months) of $50,000.00

The calculation is as follows:
22 * 2.5% * $50,000.00 = $27,500.00 or a monthly benefit of $2,291.67

Plan formulas for members with a DIEMS date beginning on or after August 1, 1986.
Option I.
Elect the High-3 Retirement Formula.

Option II.
CSB/REDUX Formula
Prerequisite to eligibility to this formula is the member’s electing at his or her 15th year of service to receive a $30,000.00, Career Status Bonus (CSB).
Then the REDUX Formula.
Each year of service up to 20 years accrues at the annual rate of 2%.
Thereafter each year of service accrues at the annual rate of 3.5%
For example:
After 20 years the member’s “multiplier” would be:
20 years * .02 = 40%

If the member continues and has five additional years of service:
20 years * .02 = 40%
5 years * .035= 17.5%
Total Multiplier: 57.5%

If the member continues and has ten additional years of service:
20 years * .02 = 40%
10 years *.035= 35%
Total Multiplier: 75%
Caution:
Beyond the scope of this article are the adjustments that occur to the CSB/REDUX formula upon the member’s attaining age 62 (when a benefit recomputation is made). Simply note that at age 62, the REDUX and High-3 retirement salaries become equal. However, this feature is offset by the fact that REDUX COLAs thereafter are paid at the CPI rate less 1%.

Reserve (Non-Regular) Military Retirement System

Qualifying Years.
To better understand eligibility for Reserve Retirement, it is necessary to understand the difference between “Anniversary year” and “Qualifying year”. As a reserve member he or she is required to attain in an anniversary year (begins on date member enters reserve) at least 50 points to achieve a “qualifying year”. Any anniversary year in which the member accumulates less than 50 points is not treated as a “qualifying year”. Fifty points equals one “qualifying year”. For Reserve Retirement a member must have twenty qualifying years. Upon attaining twenty qualifying years a Reserve member is eligible to retire at age 60.

All Reserve component members completing the required years of service to become eligible for retired pay at age 60 receive a “20-year letter”, which is his or her written notification of eligibility. The member typically receives this letter notification during the year following his or her qualifying retirement year (generally 90-120 days after the retirement year ending date).

Note the Reserve Component member is not eligible to retire upon attaining twenty qualifying years. Retirement eligible has two criteria:

  • Twenty Qualifying Years
  • Attaining Age 60

Let us examine how points toward retirement are earned in order to determine whether special or unique factors are involved. The following is not all inclusive but is representative of how points are attained.

  • One point for each day of active service; or full-time service while performing annual training duty or while attending a prescribed course of instruction at a school designated as a service school by law or by the Secretary concerned
  • One point for each attendance at a drill or period of equivalent instruction that was prescribed for that year by the Secretary concerned and conformed to the requirements prescribed by law
  • Points at the rate of 15 a year for membership in a reserve component of an armed force, or in the Army or the Air Force without component
  • One point for each day on which funeral honors duty is performed for at least two hours

Clearly, the basic criteria for point accumulation toward qualifying years does not call for unique action on the part of the member.

Retirement Point History.
Prior to discussion of the computation of a member’s Reserve Retirement pension benefit, the practitioner must become familiar with a document termed “Chronological Statement of Retirement Points”. This is a detailed year by year statement of the “retirement points” accumulated by the member. For each branch of the military the “paper format” has been discontinued, however, the member’s point history is available online to each member. In the course of a divorce action it will be necessary to compute the reserve member’s monthly accrued retirement benefit up to an agreed date (assuming retirement at age 60) when the settlement format is Immediate Offset. Alternatively, in Deferred Distribution Settlements it is necessary to express that portion of the member’s retirement benefit that has been assigned to a former spouse in a format that is acceptable to the military (Defense Finance Accounting Service [DFAS]).

Calculation of Reserve Member’s Retirement Benefit (Immediate Offset).

Step I.
By reference to the member’s Chronological Statement of Retirement Points (available on line) determine his or her total point accumulation as of the end of marriage date.

Step II.
By reference to the same form determine his or her marital point accumulation as of the end of marriage date. For ease of discussion we will assume that all points were accumulated during the marriage.

Step III.
For benefit calculations, points must be converted into years. To make this conversion:
Divide the total accumulated points by 360. The quotient of this calculation will give accumulated “years” of service.

For example:
Total Points: 3,000
Thus: 3,000 ÷ 360 = 8.33 years

Step III.
Multiply the years computed at Step II by 2.5%.
2.5% * 8.33 years = 20.83%

Step IV.
From the Pay Chart for the applicable year locate the member’s monthly pay.
Assumed Pay Grade Compensation: $4,150.00

Then multiply the monthly pay by the Step III product.
Thus, $4,150 * 20.83% = $864.58

We do not advance this part of the discussion to the issue of how to compute the present cash value of the member’s marital monthly accrued benefit as this is not relevant to our discussion of the Barr decision which had a Deferred Distribution Settlement format.

Based on the above scenario the Barr decision is without impact on an Immediate Offset Pension Evaluation. However, this is not true for a Deferred Distribution Settlement calling for a Military Domestic Relations Order.

Prior to the process to be delineated in the Military Order to express the award to a former spouse of a portion of a member’s Reserve Retirement Pension, let us provide some of the known Barr data. At this point the writer is relying on the decision for facts, nothing beyond the reported facts were known by the author at the time of this writing.

Data Gleaned from the Barr Decision.
In the Barr matter it appears that the military member was in the reserve for the period beginning on or about April 20, 1987 through to his retirement in April 2006. Thus, from the data currently available it appears that it took the member more than eighteen years to rise from a Captain (0-3) to a Major (0-4). Also as a “Reserve” member, Major Barr accumulated “points” and “longevity*” pay increases toward his retirement each year.
* Raises for time in service within one rank. Longevity raises generally are given every two years.

Unless, the record for Major Barr is unique or incomplete, it does not appear that his points as acquired for his “qualifying years” are other than routine. Naturally, this is subject to rebuttal based on documentation to be provided by Major Barr. The sum of Major Barr’s points are available from his DD214. From what is known of this matter he accumulated eleven years of credited service during the marriage. To convert his Regular Component service to Reserve “points”:

Multiply 11 (years) by 365.

The product of this calculation is 4,015 points. The decision did not reveal the total accumulated points for Major Barr. For this discussion let us assume, based on the fact that the award to the former spouse was 42% of the benefit that the post-divorce point accumulation was approximately 764 points. This would have resulted in a Coverture Fraction of approximately 84% and conforms to the award to Ms. Barr of 42%.
Marital Points: 4,015
Post-Marital Points: 764
Total Points: 4,779
Coverture Fraction: 84%
To Former Spouse: 42%

Now, let us examine the pay policy of the military to see if Major Barr’s compensation was the result of special efforts on his part. Absent compelling documentation to the contrary, I do not believe this to be the case. Essentially, military pay increases are the result of acts of Congress, not the unique efforts of an individual soldier. It is the intent of Congress that annual pay raises for all ranks (basic pay and drill pay), are designed to keep pace with overall wage growth in the private sector. By law, the minimum raise must match the annual change in the Employment Cost Index, which is a Department of Labor measurement of private-sector wage growth. Absent documentation by Major Barr to the contrary, his salary progression was not extraordinary.

Since the Marx decision (March 1993) Troyan, Inc. of Sarasota, Florida has prepared many thousands of Domestic Relations Orders in the state of New Jersey. Based on the language of the settlement, it is our view that the trial judge correctly applied a “Marx” formula to this matter. The Barr court did not agree and opined as follows:

…As noted, the terse provisions of the parties' agreement afforded plaintiff a fifty percent interest in defendant's pension benefits "attributable to his 11 years in the military service only." It included no specificity as to the applicable formula to calculate or the vehicle used to deliver plaintiff's interest…

…We disagree with the determination of the trial court that the PSA language is unambiguous, and determine the language is subject to "two reasonable alternative interpretations," Chubb Custom Ins., supra, 195 N.J. at 238, as evidenced by the parties' two positions. The modifier "only" limiting plaintiff's interest "attributable to his 11 years in the military service" -- reasonably could mean only that portion of the asset defined by the time of the marriage, eleven years, or only that interest representing defendant's active duty service, also eleven years…

Yet there is ample reason to conclude that the trial court fully understood the terms of settlement. A conclusive determination of this position in support of the trial court awaits further examination of relevant facts. Moreover, what the Barr court was attempting was simply not available under the DFAS. Why? Because the military recognizes only two formulas for the division of a member’s net disposable pay. As stated above these are:
An award expressed as either:

  • Fixed Dollar Amount
  • Percentage of “Disposable Retired Pay” [10 U.S.C 1408(a)(4)].

Based on the available data, what I believe the intent of the trial court was is delineated in a somewhat more detailed expression of an allocation formula acceptable to DFAS and consistent with the known facts of this matter.

Suggested trial court allocation of Major Barr’s Reserve Component Pension.

The procedure to determine the property interest of the Former Spouse in the Member’s disposable military retired pay is as follows:
Step 1:
The System shall determine the total retired pay of the Member at the Member's date of retirement.
Step 2:
The Former Spouse must be paid a percentage of the Step 1 benefit, computed as follows: Let A = the Step 1 benefit
Let B = a fraction. The numerator of such fraction shall be 4,015 points and the denominator of the fraction shall be the total points credited to the Member at the Member's date of retirement.
Let C = 50%
The benefit to be paid to the Former Spouse is the product of A*B*C. The "*" symbol means multiplied by.
The monthly interest of the Former Spouse shall be paid directly to such Former Spouse.

It is my view that upon review of relevant data the above formula will be found to be fully consistent with the intent of the parties Property Settlement Agreement.

Practical Considerations:
In the great majority of military matters, the member is not retired at the time of divorce, hence the Property Settlement Agreement is not able to anticipate the future status of the Reserve member. That the member could be advanced due to unique and outstanding personal effort was not ascertainable at the time of crafting the Property Settlement Agreement. To mandate language anticipating such special service recognition in the Military Order is cause for rejection of such Order as it clearly does not come within the ambit of either of the above referenced formulas. Moreover, as is clear from military promotion policies there is a standard policy for advancement and pay advances are based on time served and rank. Longevity increases are uniformly applied. Promotion records are not available to the public. Then there are at least the following questions:
How swift should advancement be to justify the view that it is the result of unique and outstanding personal effort?

  • Is a rise from E-3, Airman First Class to E-6, Technical Sergeant over a seven year period, over a 10 year period sufficient to change the dynamic from traditional to extraordinary?
  • If pay growth is a result of ongoing Acts of Congress is this a basis to change the dynamic from traditional to extraordinary?
  • What constitutes for a military person a unique and outstanding personal effort that merits reconsideration of the traditional “Marx Coverture Fraction”?
  • What would be inserted at Item #3 of DD Form 2293 if Barr was followed?

What should be evident from Military Promotion policies is that advancement in rank that is the result of unique and outstanding personal effort is infrequent, difficult to document and highly subjective. Thus, the choice of the military for the example of unique and outstanding personal effort subsequent to divorce was not optimal. Yet, even when such a circumstance did occur the ERISA or Military formulas to implement such projections do not exist.

William M. Troyan
Consultant to Troyan, Inc.