Illinois Matrimonial & Family Law

Military Pensions

by Wes Cowell, Updated 27 September 2015 -- suggest a correction

 

Military pensions and retirement benefits are divisible in Illlinois divorce courts — even if you've been married less than 10 years.  Some technical requirements apply, but they're no more technical than in non-military cases.  Need advice?  Call, leave your info, or scheduleschedule a consultation.

 

Military retirement benefits are a special breed, but there's nothing particularly complicated or scary in dividing them.  They are more involved because, besides state and federal law, you'll be dealing with military regulations.  In 1981, the U.S. Supreme Court determined when married military personnel and their spouses should look to federal law and when to look to state law in dividing military retirement benefits.  McCarty v. McCarty, 453 U.S.210 (1981).  Congress responded in 1982 by passing The Uniformed Services Former Spouse Protection Act of 1982 which allows Illinois courts to treat military retirement benefits under state law.

 

Illinois courts can divide military retirement benefits if the court has personal jurisdiction over the military member.  The big difference is that in order to qualify to have payments made directly to the non-military spouse, the marriage and pension must satisfy the ten-year-overlap rule.  Failing that, the pension can still be divided by the Illinois judge, but the non-military spouse will have to rely on the former military spouse to timely and accurately send the payments each month.  That can be a huge problem and should be avoided at all costs if other assets allow it.  Illinois judges prefer, when possible, to completely sever the financial ties between former spouses.  They loathe financial relationships that link the parties long after the divorce is over.  Maintaining a situation where a retired military spouse pays a share of retirement benefits to his or her former spouse for a number of years (or decades) presents plenty of opportunity for abuse.  The recipent spouse may have to chase down payments all over the country or the globe and will undoubtedly become a burden to the post-decree court (which is exactly what the judge is hoping to avoid). In cases where the DFAS will not make such a division and will instead make all payments to the retired military spouse, Illinois judges are much more likely to assign the entire retirement benefit to the retired military spouse and to give the non-military former spouse an award of property that will offset his or her share in the retirement plan.

 

Military Pension Division Orders (MPDOs):  Like all 401(k)s and qualifying pensions which are divided between divorcing spouses by a QDRO under ERISA, military pensions may be divided by the court by a Military Pension Division Order (an MPDO).

 

Whose In Charge, Here, Anyway?:  MPDOs for the four military branches (Army, Navy, Air Force and Marine Corps) are serviced by the Defense Finance and Accounting Service.   Members of the Coast Guard and commissioned personnel of the Public Health Service and the National Oceanic and Atmospheric Administration are serviced by the Coast Guard Pay and Personnel Center.

 

What It Takes to Qualify:  Military pensions may be divided between divorcing spouses, with direct payments to the non-military spouse if:

 

1. the former spouse had been married to the military member for at least 10 years and 10 years of marriage overlaps with the years of military service (this is the "10 x 10 Rule" or the "10-Year-Overlap Rule" -- if you don't meet this requirement it's no big deal, the payments will be "indirect" instead of "direct;" that is, the retired military member will write checks each month to the non-military spouse)

2. the non-military spouse may not receive more than 50% of the divided retirement benefits – in the case of a second or third divorce, the first wife comes first – 50% of the retirement benefit is set aside for the retired military member and that portion may not be paid out former spouses directly by the DFAS;

   1. disability pay is not subject to division as property – it is, however, considered "income" for purposes of support and maintenance;

3. when child support and maintenance are figured in, along with property division, the ceiling on the extent to which retirement pay may be used is raised to 65% for all three – property division, child support, and maintenance combined may not exceed 65% of the retirement benefit.

 

Taxes:  Property division between spouses incident to ta divorce is not a taxable transaction under section 1041 of the IRS Code (26 USC 1041).  Any amount received as maintenance, however, is taxable income to the recipient and a tax deduction for the payor.  As far as the IRS is concerned, under section 71 of the IRS Code, payments from one former spouse to the other are maintenance if:

 

1. the payments are made as cash as opposed to some in-kind payment;

2. are made pursuant to language in a divorce decree or MSA;

3. The divorce decree or MSA language does not designate the payments as non-includable within gross income under section 71 and non-deductible under section 215;

4. the parties are not members of the same household;

5. the payments can not continue beyond the death of the recipient.

26 USC 71(b)(1)(b)

 

If you pass the 10-year-overlap rule and your case qualifies to allow DFAS to directly divide the pension between spouses, and the payments qualify as alimony under IRS Code section 71 . . .  there's no problem.  DFAS sends out two checks each month and sends each spouse a 1099-R at the end of the year.

 

Missed Payments:  Sometimes a military retiree will retire and not notify his former spouse.  In other cases a couple will divorce and the attorney in charge of preparing the MPDO doesn't do it right away.  In all cases, it takes the DFAS several months to get the payments divided; and in the interim the retired military former spouse must pay the non-military former spouse as each monthly payment is received.  When this happens, taxes are withheld on the payment made to the former military member.  As the retired military former spouse pays a share each month to the non-military former spouse, they're supposed to count the payments as alimony on their taxes.  That's right, no matter what the court papers say, the payments are a tax deduction for the retired military former spouse and taxable income for the non-military former spouse.  The IRS says any payments between spouses that divide military pensions are alimony and are a tax deduction to the payor and taxable income to the payee -- regardless of the language in the judgment or the MSA..  Baker v. Commissioner, T.C. Memo 2000-164; Pfister v. Commissioner, 359 F.3d 352 (4th Cir. 2004), affirming T.C. Memo 2002-198; Proctor v. Commissioner, 129 T.C. 12 (2007); Mitchell v. Commissioner, T.C. Summary Opinion 2004-160; Weir v. Commissioner, 82 T.C.M. 281 (2001); Mess v. Commissioner, T.C. Memo 2000-37, Eatinger v. Commissioner, T.C. Memo 19990-310.