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By Barbara O’Neill, Ph.D., CFP®, AFC® [email protected].

Like benefits for surviving spouses of workers who are covered by civilian pension plans, the Survivor Benefit Plan (SBP) provides a monthly stream of income, called an annuity, to military spouses and/or children when a Service member dies during active duty Service or in retirement. Similar to other public or private sector defined benefit (DB) pensions, SBP payments are calculated as a percentage of a Service member’s retired pay.

SBP benefits are paid monthly to a deceased Service member’s surviving spouse or children as an inflation-protected annuity. Coverage amounts are generally elected at the point of qualifying for benefits after 20 years or at retirement. Up to 55% of a Service member’s retired pay can be paid to an eligible SBP beneficiary. SBP coverage for a spouse costs 6.5% of a Service member’s retired pay (e.g., $65 per $1,000 of retired pay).

A long-standing issue with the SPB is the VA DIC offset, a.k.a., the “widow’s tax.” DIC is an acronym for a Department of Veteran’s Affairs (VA) benefit called Dependency and Indemnity Compensation. It is a tax-free benefit paid to eligible survivors of Service members who died in the line of duty or whose death resulted from a Service-related injury or disease. In 2020, the base monthly DIC payment amount was $1,340.14.

Under current rules, spouse SBP annuitants cannot receive full SBP and DIC simultaneously. Rather, DIC benefits are subtracted, dollar-for-dollar, from SBP benefits, resulting in a full or partial SBP offset. If DIC payments exceed SBP payments, SBP stops and spousal premiums paid into the program are refunded. Because of the offset, some injured veterans facing military retirement were advised not to enroll in the SBP.

Recently, as a result of section 622 of the National Defense Authorization Act for the fiscal year 2020 (signed into law on December 20, 2019), the DIC-SBP offset has undergone a change. Starting January 1, 2021, and continuing through January 1, 2023, there will be a phase-out of the DIC-SBP offset until it is completely eliminated in 2023. Thus, dual DIC and SBP beneficiaries may start to see changes (i.e., an increase) in their SBP payments starting in 2021 as they experience less DIC offset and get to keep more of their SBP benefit. Offsets will be completely eliminated with January 2023 benefits payable on February 1, 2023.

Not surprisingly, Service members and military families have many questions about upcoming changes to the DIC-SBP offset. Below are four key points for personal financial managers (PFMs) that were gleaned from VA and Defense Finance and Accounting Service (DFAS) resources:

  • There are no “do-overs” Spread the word that this change does not impact retirees or surviving spouses who previously declined SBP coverage for whatever reason, including the impact of the “widow’s tax” (i.e., DIC offset). An election to reduce or decline SBP coverage at retirement is irrevocable. In addition, the new law does not affect surviving spouses who do not receive DIC benefits and only receive SBP income.
  • Children are impacted- Advise surviving spouses who chose the optional SBP child annuity that the new law impacts a Service member’s children, who can expect to see changes in their payments starting in 2021.
  • Many prior rules stand– Remind military families that many SBP spousal benefit rules remain the same. If a surviving spouse remarries prior to age 55, he or she is ineligible to continue receiving SBP payments. Eligibility for SBP annuities continues, however, if the surviving spouse remarries after age 55. In addition, current DIC-SBP offset rules (described above) remain in effect for the remainder of 2020.
  • Update Contact Information– Advise surviving spouses to keep their contact information up to date with DFAS so they can be contacted easily if needed. They should include an e-mail address as well as a U.S. mail address and cell phone number.

For additional information about the DIC-SBP offset please review the DFAS publication The Survivor Benefit Plan.