Cost of Living Adjustments and Military Pensions
Earlier this year the Appellate Court of Maryland (formerly the Court of Special Appeals of Maryland) heard the case Martinez v. Lopez, No. 835-2021 (April 7, 2023). The issues addressed pertained entirely to an award to the Wife of the Husband’s military pension benefits. While some of the holdings are reiterations from other cases, others are new and help clarify how to treat these pensions.
The 10/10 Rule is only a limitation for the former spouse to receive benefits directly from DFAS. What is the 10/10 rule? The parties must be married for 10 years, during which the member serves 10 years in the military, qualifying for retirement credit. In this case, the parties were married for a little over 5 years, so this requirement has not been met. It is important to remember that this limit does not impact state law and the divisibility of marital property. It only prohibits the former spouse from receiving the benefits directly from DFAS – meaning that the member must pay the former spouse directly each month for the spouse to receive the benefit.
An award of a Survivor Benefit to the former spouse is entirely within the Court’s discretion in Maryland. Check your state’s laws to see if the survivor benefit is treated as a part of the pension or as a separate asset. If your state treats it as a separate asset, be sure to discuss it separately in any agreement and request it separately in any pleading.
The adjustment of a direct payment of retirement benefits for tax purposes is within the court’s discretion. When the member receives their military pension payment, it is taxable income to the member. A payment after that made directly to the former spouse from the member would necessarily be made post-tax. A party can request that the direct payment amount be adjusted since the member is paying the income tax for the former spouse in this scenario. However, this case confirms that such an adjustment is at the discretion of the court to award.
Cost-of-Living Adjustments are automatically applied in payments to a former spouse when the payment comes from DFAS. It is not necessarily the case in direct payments. The Court discusses a Department of Defense Financial Management Regulation that states in a case where the National Defense Authorization Act for Fiscal year 2017 is applicable (i.e.: divorce of most military members occurring after December 23, 2016), COLAs will be applied to the benefit paid to the former spouse, regardless of what is stated in the court order. However, if benefits are being paid directly from the service member to the former spouse, the court has discretion whether to award COLAs on such payment amount and, if so, how they would be measured. In Maryland, the person seeking the marital property is burdened to evidence its value. According to Martinez v. Lopez, such analysis is important when seeking COLAs on a direct payment of these pension benefits.
Additionally, the court was asked whether it is within the trial court’s discretion to make one party solely responsible for the costs to prepare a domestic relations order to divide the retirement asset. It was determined the issue in this matter was moot, so it was not addressed. However, this author hopes there will be an answer one day.
Please call us at 240-396-4373 or click here to contact us if you have a divorce matter involving a military pension.
