The Arizona Court of Appeals ruled in Merkley v. Merkley that a federal employee's FERS pension — including post-divorce cost-of-living adjustments (COLAs) and the FERS Annuity Supplement — is divisible community property. The court rejected the husband's claim that the supplement is a protected Social Security substitute, affecting roughly 2.2 million federal workers nationwide who face divorce.
| Item | Detail |
|---|---|
| What happened | Arizona Court of Appeals affirmed that the FERS Annuity Supplement and post-divorce COLAs are divisible community property |
| When | Decided in the recent Merkley v. Merkley appeal, reported by Hildebrand Law |
| Where | Arizona (state appellate court); tension with a late-2025 Federal Circuit ruling |
| Who's affected | ~2.2 million active federal employees under FERS, plus their spouses |
| Key statute | Ariz. Rev. Stat. § 25-318 (division of community property) |
| Impact | Ex-spouses in Arizona can receive a share of the FERS supplement plus future COLAs, not just the base annuity frozen at divorce |
Why this ruling matters legally
The Merkley decision confirms that the entire FERS retirement package earned during marriage is community property subject to equal division in Arizona. The court refused to carve out the FERS Annuity Supplement as an untouchable Social Security equivalent. This matters because the supplement — a temporary benefit paid to certain FERS retirees who leave before age 62 to bridge the gap until Social Security eligibility — can be worth $1,000 to $2,000 per month for several years.
The husband argued that because the supplement approximates what Social Security would pay, and because Social Security benefits are NOT divisible in divorce under federal law (42 U.S.C. § 407), the supplement should be shielded too. The Arizona court rejected that reasoning. Social Security is a separate federal program with anti-assignment protection; the FERS supplement is paid out of the federal retirement system as part of the annuity a federal employee earns through covered service. Because that service occurred during the marriage, the supplement is a marital asset in Arizona.
The ruling also confirms that post-divorce COLAs attach to the ex-spouse's share. This means an ex-spouse's slice of the pension grows over time with inflation adjustments rather than being frozen at the dollar amount fixed on the divorce date. Over a 20- or 30-year retirement, COLAs can increase a monthly benefit by 40% to 60% cumulatively, making this a significant financial win for the non-employee spouse.
The split with the Federal Circuit
Merkley creates a live tension with a late-2025 U.S. Court of Appeals for the Federal Circuit decision that required the FERS Annuity Supplement to be expressly named in the divorce order before the Office of Personnel Management (OPM) will divide it. The Federal Circuit focused on OPM's administrative rules for honoring a court order, while the Arizona court focused on the substantive property-division question under state law.
In practice, these two rulings do not necessarily conflict on outcome — they operate at different stages. Arizona law (the Merkley holding) determines that the supplement IS divisible property. OPM's federal rules (the Federal Circuit holding) determine that the court order must specifically identify the supplement for OPM to pay a share to the former spouse. The practical lesson: Arizona spouses can claim the supplement, but the divorce decree and accompanying Court Order Acceptable for Processing (COAP) must name it explicitly, or OPM may refuse to divide it despite the state-court award.
How Arizona law handles federal pension division
Arizona is a community property state, and under Ariz. Rev. Stat. § 25-318, property acquired during marriage is presumptively community property divided equitably — which in Arizona typically means equally (50/50). Retirement benefits earned through employment during the marriage are community property to the extent they were earned during the marriage, a rule Arizona courts have applied for decades.
Arizona uses the time rule (a coverture fraction) to divide a pension earned partly before and partly during the marriage. The marital share equals the years of service during marriage divided by total years of service at retirement. If a federal employee worked 30 total years and was married for 20 of them, the community share is 20/30 (66.7%) of the annuity, and the ex-spouse typically receives half of that community share — about 33.3% of the total benefit.
Under Ariz. Rev. Stat. § 25-318, the court has authority to divide the base FERS annuity, the survivor annuity election, and — after Merkley — the FERS Annuity Supplement and future COLAs. Division of a federal pension requires a COAP, the FERS equivalent of a QDRO, drafted to OPM's exacting specifications. A COAP that fails to mention the supplement or COLAs may leave those benefits with the employee spouse by default, which is exactly why the Merkley clarification and the Federal Circuit's naming requirement both matter.
Practical takeaways for Arizona divorces
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Name the supplement explicitly. If you are divorcing a FERS-covered federal employee, insist that the decree and COAP specifically identify the FERS Annuity Supplement by name. Merkley confirms it is divisible, but OPM will not divide what the order does not name.
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Capture the COLAs. Draft the COAP so your share receives pro-rata cost-of-living adjustments. Over a long retirement, COLAs can add 40% to 60% to the base benefit, so a frozen-dollar award leaves real money on the table.
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Use the correct order — a COAP, not a QDRO. Federal retirement benefits are divided by a Court Order Acceptable for Processing, not a private-sector QDRO. OPM rejects orders that use the wrong terminology or omit required language.
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Value the supplement in negotiations. The supplement can pay $1,000 to $2,000 monthly for the years between early federal retirement and age 62. Account for its present value when trading assets in a settlement.
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Address the survivor annuity separately. A former-spouse survivor annuity election protects your pension share if your ex-spouse dies first. It must be elected in the decree, and there are strict OPM deadlines for perfecting it.
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Get a federal-pension-savvy drafter. The intersection of Arizona community property law, OPM regulations, and the new Federal Circuit naming requirement is technical. Errors in a COAP can be difficult or impossible to fix after entry.
If you are an Arizona resident divorcing a federal employee — or you are the federal employee — the Merkley ruling and the competing Federal Circuit decision make precise decree language more important than ever. A brief consultation with an Arizona family law attorney who handles federal pension division can help you understand how these rules apply to your specific FERS benefits.
This article discusses recent news and provides general legal commentary. It does not constitute legal advice. Every case is unique. Consult a qualified family law attorney for advice specific to your situation.