Dividing pensions in divorce is complex enough, but military retirement pay (military pensions) adds another layer of complexity. There is a lot of confusion about the “disability” portion of a military pension, whether it’s completely off limits or is divisible just like the rest of the marital portion of the pension.
The Uniformed Services Former Spouses Protection Act (USFSPA), found at 10 USC §1408, was created in 1982 to protect former spouses of service members. It allows the division of the marital portion of military retirement pay upon divorce. A share of “disposable retired pay” can be paid (pursuant to a court order) for as long as the retired service member receives monthly payments. It can be paid either directly from the service member to the former spouse or directly from the Defense Accounting and Finance Service (DAFS).
“Disposable retired pay” is the portion of monthly pay which a retired service member is entitled, less VA disability pay, federal debt repayments, fines, forfeitures and Survivor Benefit Plan payments. The court can only divide the marital portion of the payments. The martial portion is the portion of the retired pay earned while married. The portion of the pension earned prior to marriage or after the Date of Separation (in NC) is separate, non-divisible property that belongs to the service member only. Usually, no more than 50% of the disposable retired pay can be payable to a former spouse. Federal law, specifically the USFSPA, exempts VA disability payments from division upon divorce. It is not considered marital property that can be divided upon divorce.
The law requires that a military retiree waive a portion of their gross DoD retired pay, dollar for dollar, by the amount of their Department of Veterans Affairs (VA) disability compensation pay; this is known as the VA waiver (or VA offset). These benefits are paid to retirees who are disabled by an injury or disease that occurred while on active duty, active duty for training, or was made worse by active military service. VA disability payments are tax-free benefits. (Some retirees who receive VA disability compensation may also receive CRDP or CRSC payments that make up for part or all of the DoD retired pay that they waive to receive VA disability pay, but that is beyond the scope of this article.)
Receiving VA disability pay directly reduces the “normal” military retirement pay (pension) that is divisible upon divorce. Divorcing spouses and former spouses should take special note of the service member's ability to exchange retirement for disability pay because retirement pay that can be divided is reduced. Disability pay cannot be divided as part of a divorce. The advantage of VA disability pay is that those payments are tax-free.
If the service member gives up retirement pay for VA disability pay after the divorce, the ex-spouse may be in for a big surprise when he or she finds out how much the retirement pay has been reduced. It is important when you divorce to include language in a court order dividing military retirement pay that should the servicemember elect to reduce his retirement pay for disability pay, the service member should “make-up” the reduction by paying the former spouse directly. Since the disability pay is tax-free, the total after-tax amount the service member receives when he or she elects disability pay is more than if it was not elected, so the service member will have more after-tax retirement pay to share with the former spouse. Under a Supreme Court ruling, you cannot go back later to the court to ask that the reduced payments be made up.