A five-decade financial burden known as the Widow’s Tax is finally gone

In 2020, Congress repealed something known as the Survivor Benefit Plan – Dependency and Indemnity Compensation offset. Better known as the Widow’s Tax, it disappeared after a three-year phase-out ending earlier his year. Mike Meese, president of the American Armed Forces Mutual Aid Association, calls the situation a once-in-a-generation opportunity for veterans. Federal Drive with Tom Temin talks to him in this podcast.

Interview transcript:

Tom Temin So the SBP-DIC offset, what was it and what happened to it?

Mike Meese Well, it is a mouthful, but what we’re talking about is the benefits for the survivors, the spouses of military retirees. And right now, there’s over 2 million people that are military retirees. And so presumably most of them have 2 million spouses, and your military retired pay ends when you pass away. Congress passed a law back in 1972 allowing a survivor benefit plan so that you can pay part of your retired pay in so that your widow or widower would receive 55% of your pay, and that’s the survivor benefit plan. The challenge was that if you also died of something that was related to your military service, you would also be eligible for dependents, indemnity compensation from the Veterans Administration. And Congress, the previous law, would offset that dollar for dollar. So that was called the Widows Tax, where Congress thought that it wasn’t fair that people who died of the service connect condition would also then have their retired annuity reduced.

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Tom Temin Got it. So the dependency and indemnity compensation came from VA, and that would offset the survivor benefit plan that would otherwise come from the Defense Department.

Mike Meese Exactly. In the Defense Authorization Act of 2020, Congress recognized that was not fair. And so, as you mentioned, phased that out over three years. So that now the survivor benefit plan is actually more valuable than it was before, because it used to have an offset. Some people may not have opted in to taking the survivor benefit plan, because they thought they would get a disability payment. Now that you could get both the disability payment, if you die of a service connected condition and your retiree benefits, people have the opportunity if they want to, for a one time ability to opt into the survivor benefit plan. But it’s only available to military retirees during this year, the year 2023, and they have to apply to it. And I can describe that a little bit more.

Tom Temin Yeah. What do they specifically have to do then?

Mike Meese Well, any military retiree would have to go to the Defense Finance and Accounting website, dfas.mil. And it’s easy there, click on the retiree. And then on the bottom left hand side, there’s a big tab that says, SBP 2023 open season. And it explains the instructions there, It is a little bit complicated, let me just explain it in case anybody is interested in it. If you have not opted in to the survivor benefit plan and you want to do that, then you click on that link and you fill out a form. Of course, the government has forms, and said that into [Defense Finance and Accounting Service (DFAS)]. DFAS will then tell you how much you would have to pay in to buy into the survivor benefit plan. Again, had you opted in as you retired from the military, you would have been paying up to six and a half percent of your retired pay. So they will calculate what would six and a half percent of your retired be, let’s say you retired 20 years ago. For the last 20 years, how much would you have to pay in a lump sum? Or they’ll allow you to pay it over 12 months so that you can then have that opportunity to buy into the survivor benefit plan?

Tom Temin Right. So the result will be that if you render your spouse a widow or widower, that person would then continue to get the full benefit of your pay, had you lived.

Mike Meese Almost, they would end up getting 55% of your retired pay. So if your retired pay is, let’s say, $1,000, just to make the math easy, they would get a check for $550 for the remainder of their life.

Tom Temin We’re speaking with Mike Meese. He is president of the American Armed Forces Mutual Aid Association. So, in other words, you can retroactively get that coverage for this one time period.

Mike Meese That’s right. Normally, you have to make an irrevocable decision at the time of retirement. And so people who opted out and didn’t choose SBP may find themselves 20 years later in a different circumstance. Let me just describe to you what those circumstances may be. 20 years ago, somebody may have said, well, gee, my wife, if they’re a male, my wife is substantially older than me, or maybe she has more illnesses than me and I don’t want to opt in, because I don’t think that would make sense. Well, you may have had a health condition or you may have some reason why you may think that you may predeceased your spouse earlier. And so consequently, your health conditions may have changed from the time that you made that decision in retirement. And again, when you made that decision, it was an irrevocable decision. Now, this is the one time in your lifetime where you may be able to revisit that decision, which may be applicable for some retire military members so that they could opt in now.

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Tom Temin And how does the dependency and indemnity compensation payment, how does that figure into the whole equation? How do you get that from VA?

Mike Meese Yeah, it’s a it’s a very good question. Dependent indemnity compensation is paid to you if you die either on active duty or from a service connected condition. And so obviously, dying on active duty, it’s obvious the VA will continue to pay that to you. But we end up, nowadays, several people are dying who served in the Vietnam War. And if they served at any point in Vietnam, the VA presumes that they were exposed to Agent Orange. And there’s a list of 13, now up to 16 conditions that are presumptively related to Agent Orange, everything from dementia to prostate cancer to other diseases. So if you die and those diseases contributed to your death, that is just as if you had died in Vietnam or on active duty and your spouse would be eligible for tax free dependent indemnity compensation from the VA, which right now is valued at, or it’s $1563 per month. And that goes up every year by a cost of living increase.

Tom Temin Right. So that could also potentially apply to the burn pit people from Iraq and Afghanistan.

Mike Meese Exactly. My view is burn pits are going to be my generation’s equivalent of Agent Orange exposure. I served, I was over in Iraq and Afghanistan for about 32 months. And you can hear some of the hoarseness in my voice. I have no idea whether this is going to get worse, but I probably will for myself or my contemporaries. And so that’s why that DIC is very important. And if you have a survivor benefit plan, your spouse is going to be eligible for both SBP from DFAS and the DIC from the VA.

Tom Temin So in your case, it’s not that box of Dutch masters every month. But it’s something from over there. And so the year, getting back to the applying for that benefit under the survivor benefit plan, the year ends this calendar year?

Mike Meese That’s exactly right. And it’s a two step process. You apply to the DFAS, the Defense Finance and Accounting Service. They do the calculations, they send that back to you. And then you have to buy in, either in a lump sum or paid over 12 months. In order to get this, you would be getting retired pay anyway. People will have this deducted from their retired pay, so that it’ll be a financial crunch this year, but it may provide substantial benefits for your spouse. Again, if and only if the military member dies prior to the spouse.

Tom Temin Right. And do we know what a payment might look like, say, someone that’s going to retire is just to pick a mid-grade, their lieutenant colonel.

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Mike Meese Yeah, a lieutenant colonel. A lot depends upon how long ago you retired. It’s amazing when you think about how much of the retired pay is. We had one individual who retired about 30 years ago, so they’ve missed 30 years of payments. That payment’s going to be over $100,000 that they would have to make to be in there. On the other hand, if their spouse outlives them by five or six or seven years, the spouse will get well over that amount back in the payments. Now, if you only retired five years ago, obviously there’s much less to pay in. And then they would just take the six and a half percent out of your retired pay going forward.

Tom Temin So like any insurance type of decision, there is a risk management process here. It’s insurance as much as a benefit in some ways.

Mike Meese Yeah, that’s exactly right. In fact, here at AAFMAA, we provide whole life insurance and that kind of thing, we’d love to compare it with insurance. The big difference with the Survivor benefit plan annuity is it increases based upon Congress’ authorization of [Cost-Of-Living Adjustment (COLA)] going forward for retirees. Whereas, if you got an insurance plan that, again, I would be happy to sell you, if that’s a $500,000 policy, that’ll be a $500,000 policy. Even 20 years from now, it will not go up with inflation, which is one of the advantages of it and why many people select the survivor benefit plan. If they’re family is financially dependent upon them.

Tom Temin And by the way, selling whole life, that makes you almost like the Last of the Mohicans.

Mike Meese There’s not a lot to do that. What we really do is focus on survivor benefits. So that’s why talking with you and advising people so that if anybody does have any questions, they can go to our website AAFMAA.com or give us a call. That’s AAFMAA.com. And we can answer any questions they have, or if they’ve got a financial advisor who knows military issues, we definitely recommend that people talk with a qualified financial advisor who can give them the right kinds of analysis that they need for this.

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