Understanding the Reserve Component SBP Decision
In a previous post, I detailed the importance of an active duty servicemember’s Survivor Benefit Plan (SBP) decision. For members of the Guard and Reserve, the Reserve Component Survivor Benefit Plan (RCSBP) decision is also one of the most important decisions you’ll make, but what differs is the timing of your decision and the options available for you to choose.
This blog dives into the key differences between the active duty SBP and the reserve component SBP, as well as the important similarities. We’ll start with a quick refresher on the basics of SBP.
What is the Survivor’s Benefit Plan?
The most important fact to know about the amazing military pension you’ve earned during your 20+ years of service is that it ends at your death. The only way to ensure your spouse and/or your dependents continue to receive a portion of your retired pay is to sign up for the Survivor Benefit Plan.
In the event you pass away before your spouse or your dependent children, SBP continues to pay an inflation adjusted monthly benefit, known as an annuity payment, to your survivors.
If you’re married and/or have dependent children, chances are they rely on your military pay or pension for a portion of their monthly living expenses. As difficult as it is to imagine, you need to ask yourself if your family had to live without you, and without your military pension and your civilian income, would they be able to cover their essential expenses? Would your spouse have sufficient income to cover their living expenses well into retirement and old age?
If your family depends on your income, then your Reserve Component SPB decision is critical to your financial plan.
What is the Reserve Component Survivor Benefit Plan?
The Reserve Component SPB is similar to the active duty SPB in that it pays an inflation adjusted annuity to your surviving beneficiaries if you have earned a military pension. Because a reserve member could qualify for a military pension at an age substantially earlier than they would be entitled to receive their reserve military pension, the RCSBP is adjusted to account for this gap in pay typical of a reserve component servicemember, sometimes referred to as a Gray Area Retiree.
Gray Area Retiree. The Department of Defense defines a Gray Area Retiree as a Guard or Reserve member who has qualified for retired pay and completed their military service, but are not yet at the age where they can begin receiving their retired pay.
The key differences between the Reserve Component and Active Duty SBP center around this Gray Area gap. The RCSBP decision includes three related decisions: when you need to make your RCSBP election, which coverage options are available to choose from, and how much it costs to provide this protection for your dependents.
When is the Reserve Component SBP Decision Made?
The first important difference between the active duty and reserve component SPB is when you make your decision. Active duty members make their SBP declaration in the last 90 days before their retirement and the start of their military pension payments known as retired pay.
Because reserve component members might complete their military service years or even decades before they begin receiving their military pension, they are required to make their RCSBP election when they first become eligible for military retirement, without regard for potential continued reserve service or the years before they would be eligible to receive retired pay.
The 20-Year Letter. When a reserve member reaches twenty years of qualified service and becomes eligible to retire, they received an official Notification of Eligibility (NOE), often referred to as the “20-year letter.” The window of opportunity to make an RCSBP decision begins upon receipt of the NOE and lasts for 90 days. Failure to make an election within this 90-day timeframe results in a default election of an immediate annuity (Option C below) based on your full retirement pay. In other words, the default option is the maximum benefit, which is the only option available without spousal consent.
Irrevocable Decision. It is important to remember that your RCSBP decision is an irrevocable election, making this one of the most important decisions you’ll make in your career. If you’re married and decide to decline RCSBP or accept less than the full RCSBP benefit, your spouse will need to sign off on that decision. The rationale behind requiring your spouse’s concurrence is he or she has the most to lose if you decline the RCSBP benefit.
Exit Only. While the decision to decline RCSBP is irrevocable, if you elect to accept RCSBP, you will have an opportunity to discontinue the benefit between your second and third year anniversaries of receiving retired pay. To be extra clear – this window of opportunity to change your mind in your third year of receiving retired pay is a one-way decision – exit only. You can only choose to discontinue RCSBP, you cannot regain access to RCSBP.
When you make your RCSBP election, you are required to make three specific decisions:
- When or if to begin the RCSBP annuity?
- Who will benefit from your RCSBP annuity?
- How much of your retired pay to base the annuity payment on?
What are the Three RCSBP Benefit Options?
Because a reserve member’s retirement from the military and the date they begin receiving their military pension could be decades apart, the RCSBP decision offers three different options for when or if your dependent(s) would begin to receive the annuity in the event of your death. These options use your 60th birthday as a foundational date because the typical reserve retiree must wait until age 60 to begin receiving their military pension.
Reduced Retired Pay Age. Since 2008, reserve members have been permitted to reduce their retired pay age from 60 to as early as age 50 when they have completed sufficient qualifying service on active duty orders in support of contingency operations. Each 90 days of qualifying active duty service reduces their retired pay age by 90 days.
This earlier retired pay start date is known as a Reduced Retired Pay Age (RRPA). For the purposes of the RCSBP, a member’s retirement pay age is either age 60 or their RRPA stated in 90-day increments. As an example, if a reserve member completed two qualifying 365 day active duty activations in support of contingency operations and was able to validate this active duty service with their service, they could reduce their retired pay age by eight 90 day increments. This could reduce their retired pay age from 60 to 58.
There are rare instances where a reserve member might continue to serve beyond their 60th birthday. In these cases, the retired pay age is delayed until they complete their service.
What are the Election Options?
When a reserve member makes their RCSBP decision, they must first decide if or when to provide their beneficiary an annuity.
Option A: Decline
With Option A, a reserve member declines to make an election until reaching age 60 or their reduced retired pay age. In this case, the reserve member declines to accept the Reserve Component portion of SBP and delays their final SBP decision until they apply to begin receiving their military retired pay. Because they have declined the RCSBP, if they die before reaching their retired pay age, their beneficiaries do not receive an annuity.
When they apply to begin their retired pay, they can elect to cover their spouse and/or dependents with the SBP annuity or decline to cover their dependents.
Option B: Defer
With Option B, a reserve member elects to defer the annuity until at least age 60 or their RRPA. In this option, if the member dies before reaching their retired pay age, their beneficiaries will begin receiving the annuity at what would have been their member’s 60th birthday or their RRPA. In this case, the dependents are protected by an annuity, but there is a delay in the start of the payments until the member’s retired pay age.
For example, if a reserve member (who did not reduce their retirement age) dies at age 51, their dependents would begin receiving the annuity when this member would have become eligible for retired pay at age 60.
Option C: Immediate
With Option C, the member elects to begin RCSBP coverage immediately, even if they die before reaching age 60 or their RRPA. In this case, if a reserve member makes this election at age 43 and dies at age 45, their beneficiaries begin receiving the annuity payment immediately without waiting until age 60.
Spousal Concurrence. If a married reserve member selects Option A or Option B, their spouse is required to sign off on their decision prior to the end of the 90 day election window. Spousal consent is also required if the reserve member selects a base amount of less than the full retired pay. In both cases, the DD Form 2656-5, RCSBP Election Certificate, must be signed by the spouse and notarized.
Who Can Be a Beneficiary?
The next decision required during your RCSBP election is to select who will benefit from your military pension annuity. The potential beneficiaries include the following:
Spouse Only: To be eligible, your spouse must be married to you when you receive your 20-year letter, and the date of your death.
Child(ren) Only: Coverage for your children includes unmarried children under the age of 18, or under age 22 if in school pursuing a full-time course of study. This coverage extends coverage beyond these ages if the child is incapable of self-support due to a mental or physical incapacity, provided that incapacity began before reaching age 18 or 22 as described above.
Special Needs: If your RCSBP annuity will support a dependent with special needs you may want to designate a special needs trust to receive your RCSBP benefit instead of directly benefiting the special needs child, so as not to negatively impact their access to other government benefits. If this situation applies to you, you would be well served to work with an attorney who specializes in special needs trusts in advance of making your RCSBP election.
Spouse and Children: This combination of the two previous beneficiary categories benefits the spouse first, then the child(ren) if the spouse becomes ineligible for the annuity due to marriage before age 55 or death.
Former Spouse / Former Spouse and Child(ren): You can elect to provide the annuity to your former spouse or your former spouse and the children of that marriage. If you elect for your former spouse receive the annuity, any current spouse and children from your current marriage are excluded. In other words, you can only cover one spouse and one set of children.
It is possible your former spouse may have a legal claim to a portion of your pension and therefore a court order could require you to obtain SBP coverage.
If your covered spouse or former spouse remarries before age 55, their annuity ends. If they remarry after age 55, the annuity continues.
Insurable Interest: If you are not married and have no dependent children when you receive your 20-year letter, you have the option to make an insurable interest the beneficiary of your RCSBP annuity. This must be a natural person, not a business or other entity, and could be a family member, for example your sibling, a parent, or a cousin. You could potentially designate a business partner or another person who benefits financially from your continued life.
The costs associated with making an insurable interest your beneficiary can be substantial, including the additional requirement to elect your full retired pay as your base amount. For this reason, electing an insured interest beneficiary requires careful consideration.
Beneficiary Changes After Your Initial RCSBP Decision
Life happens and there are a variety of situations where your potential beneficiaries might change after you’ve already made your RCSBP decision. The rules associated with these life changes are complicated and require specific individual counsel from your service.
As a rule, you have one year from the date of your life changing event to change your RCSBP decision. Here are a few of the most common instances where you would be able to change your decision:
If you were unmarried when you made your RCSBP election and you subsequently marry, you have up to one year from the date of the marriage to change your RCSBP election.
If you had no dependents at the time of your RCSBP decision and later add a child to your family, you have one year from the child’s date of birth or date of adoption to change your RCSBP election.
Equally important to understand is that if you were married when you elected to not cover your spouse with RCSBP and you subsequently divorce, then remarry; you cannot change your RCSBP election to cover your new spouse.
The primary instance where the one-year rule is shortened is the case where your insurable interest dies; here you have only 180 days to elect a new insurable interest.
How Much Does the Annuity Pay?
Your election to provide a RCSBP benefit to your dependent(s) ensures they receive an inflation adjusted annuity based on your retired pay. This annuity is calculated as 55% of your elected base amount, which can be as little as $300 up to a maximum of your full retired pay. If you elect a base amount less than your full retired pay, your spouse must consent to the reduced annuity.
How Much Does RCSBP Cost?
Each of the three RCSBP options come with different costs paid in the form of monthly premiums. These premiums start when you begin to draw retired pay, they are not collected during the Gray Area period. The RCSBP premium includes two components, 1) the basic premium associated with the survivor benefit plan and 2) the Reserve Component (RC) add on premium associated with the elected coverage option.
SPB Premium. The basic SBP premium is calculated using the base amount of the retiree’s pay that would be paid to the beneficiary. This is the same premium that a similar active duty retiree would pay for the same benefit. The maximum annuity benefit is 55% of a retiree’s full retired pay.
RC Add-On Premium. The additional RC premium is based on the coverage option selected. When a reserve member elects either Option B (Deferred) or Option C (Immediate), they have secured RCSBP coverage for their dependents before beginning their retired pay and before the payment of any RCSBP premiums.
The coverage provided in this Gray Area period is not subsidized by the Government. To account for this additional coverage before premiums are collected, an additional RC cost is added to the basic SBP premium, this is known as the RC add on premium.
Premiums begin when your retired pay starts, not during the Gray Area Retiree period. The premiums are deducted from your retired pay each month; however, if you die and your beneficiary is a spouse or dependent children, the premiums end. They are not deducted from the monthly annuity paid to your beneficiary. If you selected an insurable interest as your beneficiary, the premiums continue to be deducted from the monthly annuity that your insured interest beneficiary receives.
Pre-tax Premium. It is important to understand that your RCSBP premium is paid before your taxes are calculated, meaning the amount you pay for the premium is lower than stated. The higher your tax bracket, the less your premium costs after taxes.
A Few Examples. Each of the three coverage options has a separate calculation. Let’s look at a couple of examples to help compare the different benefits and the potential premiums associated with them.
In these examples, we’ll assume the following details:
- Reserve member is age 43 when they receive their 20-year letter
- Spouse is age 41
- Retired pay age is 60
- Retired pay is $2500/month
Option A (Decline): The reserve member declines to make a decision at their 20-year point and waits to make an election when they begin to receive their retired pay at age 60. Option A does not have additional RC premium costs associated with it because there is no coverage during the Gray Area period. If at age 60 or the RRPA the reserve member elects to accept the RCSPB, they pay only the SBP premium associated with the level of benefit they’ve selected, generally 6.5% of the elected base amount.
Example: The reserve member and their spouse elect Option A, to decline to make an RCSBP decision until age 60 when the reserve member qualifies for retired pay. When the member reaches age 60, they elect to cover their spouse at the full value of their retired pay.
If the member’s military pension is $2500/month and they elect full coverage for their spouse, their SBP premium would be $162.50/month (pre-tax) for an annuity of $1375/month.
Option B (Defer): The reserve member elects to take RCSBP but defers the start of the annuity until their military retired pay age of 60. With option B, the reserve member pays the basic SBP premium plus a Reserve Component (RC) premium to cover the cost of having covered their beneficiary during the Gray Area period, before premiums could be collected.
The RC add on premium is calculated based on the difference in age between the member and the spouse and/or the age of the youngest child, and the number of years until the reserve member qualifies to begin their retired pay.
Example: The same reserve member and spouse described above elect Option B, a deferred annuity, based on the full retired pay of $2500. Based on the same facts, their SBP portion of the premium is $162.50 plus a RC add on premium of $39.50, for a total premium of $202/month (pre-tax) for the same annuity value of $1375/month.
Option C (Immediate): The reserve member elects to have an immediate annuity paid to their beneficiaries, regardless of their age at death. With Option C, the members pays the basic SBP premium plus a RC premium to cover the additional expense associated with having this coverage during the Gray Area period between completing their military service and receiving their military pension.
Example: The same reserve member and spouse elect Option C, an immediate annuity. The SBP portion of the premium remains $162.50 with a RC add on of $55.75 for a total premium of $218.25/month for an annuity value of $1375/month.
Option C (Immediate) to a Child(ren) Only: The reserve member is a single parent with two children when they make their RCSBP election and they elect to cover their dependent children with Option C, an immediate annuity. Here the RC add on premium is calculate based on the reserve member’s age, their youngest child’s age, and the years until they would qualify for their retired pay.
Example: The reserve member elects Option C for their two children based on their full retired pay of $2500. In this example, the reserve member has qualified to reduce their retired pay age to 55. The SBP portion of the premium is $8.50 with a RC add on of $11.50 for a total premium of $20 for an annuity value of $1375/month.
Insurable Interest: If a reserve member elects to name an insurable interest as their beneficiary, the premiums are calculated differently. The basic SBP premium can be substantially higher and selecting an insurable interest always requires the annuity to be taken at the full monthly retired pay level. The premium starts at 10% of the full monthly retired pay and adds an additional 5% for each five-year age difference when the beneficiary is younger than the retiree. The total cost cannot exceed 40% of the monthly retired pay.
Example: If the same reserve member was unmarried and had no dependent children when they made their RCSBP election. They elect Option C, an immediate annuity for their 10 year younger sibling.
In this case, the SBP premium would be $500 plus a RC add on premium of $66.25 for a total premium of $566.25/month.
In the case of insurable interest beneficiaries, by law a portion of the SBP premium is deducted from the annuity payments for the lifetime of the payments to the insured interest. In this case, the annuity would be reduced to $1100/month.
Some Unique RCSBP Situations
Active Duty Retirement. If a reserve member eventually achieves a full active duty retirement after making their RCSBP decision, the RCSBP decision is invalidated. The member then qualifies under the active duty SBP rules and must make a new declaration when they retire from active duty. This is true whether the reserve member qualified for active duty retirement due to their length of service or for a medical disability.
Active Duty Death. If a reserve member dies while serving in an active duty status, their RCSBP election defaults to the same SBP annuity that an active duty member would receive in this situation. Their dependents would receive an immediate annuity for the full 55% of their retired pay.
Concluding Thoughts on RCSBP
The decision to accept or decline RCSBP is unique to each reserve member and their family. The potentially long and uncertain gap between when they receive their 20 year letter and when they reach their retired pay age complicates the RCSBP decision. Further complicating the decision are the multiple options available to either decline, defer or establish an immediate annuity.
The RCSBP decision requires careful consideration of many important variables and potential unknowns. Because the election is largely irrevocable, it is critical to consider all the facts and make an informed decision that best supports your family.
You have to ask yourself – “Which decision helps me sleep at night knowing my family is protected?”
The right answer is unique to each military family. Working with a financial planner who understands your military benefits from firsthand experience can help you frame your decision within the context of your family’s financial plan.
The financial planners at the Military Financial Advisor Association can help you work through the various RCSBP scenarios so you can make the decision that best meets your family’s needs.