APRIL 28, 2023 – After repealing the widow’s tax in 2019 and gradually phasing it out over the past three years, Congress has authorized a once-in-a-generation open enrollment period for the Survivor Benefit Plan (SBP). These circumstances have created a unique and valuable opportunity for veterans and their families to adjust their retirement plan for greater security and peace of mind.
How Did We Get Here?
Military retirees are entitled to a pension for the rest of their life, which is calculated based on a number of factors, including years served, highest pay while serving and more. However, that retired pay ends when the retiree dies, which can introduce financial challenges for a surviving spouse who is relying on the veteran’s income to pay bills and fund other essential living expenses.
In 1972, Congress created the SBP to help military retirees provide for their families after their death. Married retirees who enroll contribute 6.5% of their retired pay to ensure their surviving spouse receives an SBP annuity equal to 55% of their pay, which will continue until the spouse’s death. If the spouse predeceases the veteran, all money paid into the SBP is forfeited.
Access to SBP annuity payments is essential for some military couples who rely on the veteran’s retired pay, particularly later in life. Despite this, the decision to enroll has historically only been available to service members at the time of retirement, when long-term financial needs are rarely top of mind. The decision is also irrevocable – servicemembers who declined SBP enrollment when they retired normally cannot enroll at a later date. Currently 68 percent of military retirees with families have opted into SBP.
Another benefit that often comes into play when a veteran is considering their finances at retirement is the Department of Veterans Affairs (VA)’s Dependency and Indemnity Compensation (DIC). If a servicemember dies on active duty or from a documented service-related condition, spouses will receive a tax-free monthly payment from the VA. If a veteran with one of these conditions also enrolled in SBP at retirement, their spouse can be eligible for payments through both.
However, for spouses of retirees who died of service-related conditions, the government offset the amount of their DIC payment from their SBP, which was called “the widow’s tax.” This tax and resulting smaller SBP payments made that benefit less attractive to veterans eligible for DIC and led some retirees not to choose not to enroll in SBP at retirement.
Understanding a Historic Opportunity
Retirees who made the one-time decision to decline SBP enrollment need to be aware of its repeal and the new, increased value of the benefit. Without the widow’s tax, surviving spouses can receive full payments through both DIC and SBP.
With so many veterans locked into financial decisions made years or even decades ago, Congress initiated a historic Open Season for SBP in 2023 following the end of the widow’s tax. Retirees are now able to buy into SBP by paying all previous payments since retirement, plus interest. Then, until they’ve paid in for a full 30 years, the 6.5% premium will be taken from their retired pay. Back premiums can be paid either as a lump sum or in installments with interest over a 12-month period. The SBP annuity a surviving spouse receives will also increase with annual cost of living increases without requiring additional contributions from the retiree.
Choosing a Path Forward
These back payments required to “buy in” can be significant, but so can the benefits for the retiree’s family. For example, the AAFMAA team recently assisted a Lieutenant Colonel who retired over 30 years ago who did not select SBP. His retired pay is approximately $6,200 per month, which will end when he dies. He requested his buy in letter from DFAS, which specified that to make up for the six and a half percent that he would have been paying every month for the past 30 years plus interest, he would need to pay $180,000. That is a huge sum, but by buying in to SBP, his widow would receive about $3,400 each month. If his widow outlives him by just 52 months, she will have received more than the $180,000 buy in cost. Moreover, the amount of the widow’s annuity should keep pace with inflation because retired pay and the corresponding SBP annuity will increase with annual COLA increases, with no additional contributions from the retiree.
With so many variables in play, it’s even more important for retirees to consider all financial, health and family circumstances before making a decision. Any significant changes to these factors since retirement or changes anticipated in coming years are good enough reasons to think seriously about taking advantage of open season and enrolling.
The Defense Finance Accounting Service (DFAS) has created a special open season landing page where veterans can complete a letter of intent to begin the process and receive their buy-in number from DFAS. Length of service and time since retirement can weigh heavily on buy in costs and payment amounts. The buy-in number can be used to calculate the payment a surviving spouse would receive and identify how long it may take for those payments to reach and exceed the amount of the lump sum paid to enroll. Again, it’s essential to consult a financial professional who is familiar with the nuances of military pay and benefits to ensure your unique circumstances and future plans are being accounted for in this decision.
This once-in-a-generation open season has been several years in the making and offers a unique opportunity for retirees to plan and protect their legacies. It’s imperative that veterans seek out resources to make an informed decision and even more important that federal and private-sector financial agencies are prepared to support them through this transition.
Michael Meese is a retired Army Brigadier General and is President of the American Armed Forces Mutual Aid Association (AAFMAA).