Category: Reserve Component

Categories
Paying for Education/College Reserve Component

GI Bill for Guard and Reserve

Book on a table with some coins & a graduation cap stacked on it highlighting GI Bill for Guard and Reserves

Navigating the many GI Bill For Guard and Reserve options

I have been a member of the Air National Guard for almost 25 years at the time of writing this article. During that time, I have served as a Drill Status Guardsmen, a Title 32 Dual Status Federal Technician, and now as an Active Guard Reserve (AGR). Each status has had an impact on the education benefits I was eligible to receive. I’ve used the G.I. Bill towards my own education. I served several years as a Retention Office Manager where I helped unit members apply for, use, and transfer G.I. Bill benefits. Now I talk to military members and veterans about ways to optimize the GI Bill for Guard and Reserve benefits as part of a holistic Financial Plan. If you are in the reserve (guard) component it is important for you to understand what you may be eligible for and how to weigh those unique options.

Which chapter of GI Bill for Guard and Reserve are you on?

When I strike up a conversation about education benefits, service members will often proudly claim “I have THE G.I. Bill”, and get confused when I ask, “Which G.I. Bill?” Many folks are unaware of just how many different G.I. Bill options exist.  The genesis of the G.I. Bill began with a single program known as the Servicemen’s Readjustment Act of 1944 following World War II that sunset in 1956. Congress has since created many new programs of educational benefits for veterans under Title 38 of the United States Code with each unique program found in its own Chapter, enough to fill an entire book! You can go right to the source at the VA site but I’ll give you a brief overview.

Chapter 1606 Montgomery G.I. Bill for Selected Reserve

  • This is a free benefit that members of the Guard and Reserve become eligible for with a 6-year service commitment.
  • A tax-free monthly stipend is paid directly to the member based on course load. Rates can be found here, currently $439.
  • Can be stacked with an additional “Kicker” offered by the service component if eligible.
  • Use or lose. Once you separate you can no longer use this benefit and will lose it forever after a one-year break in service.
  • You can still obtain eligibility for this benefit if you started your career on Active Duty and then transferred to a reserve component and agree to the service commitment.

Chapter 1607 Reserve Educational Assistance Program (REAP)

  • Another no-cost benefit, the precursor to the Post 9/11 GI Bill
  • Tax-free monthly stipend for reserve members that served on Title 10 orders after September 11th, 2001.
  • Rates were based on CH 30 MGIB and length of service:
    • 40% of MGIB for 90 days up to 1 year.
    • 60% of MGIB over 1 year but less than 2 years
    • 80% of MGIB for anything over 2 years on orders
  • Could be stacked with Kicker if the member already established eligibility.
  • This program was closed to new enrollments in 2015 and sunset for current enrollments in 2019.

Chapter 30 Montgomery G.I. Bill Active Duty (MGIB-AD)

  • Eligibility is based on Active Duty, AGR status, or lengthy mobilizations, after at least 2 years, with some unique other requirements.
  • Sorry, this one will cost you $100 per month for a year ($1,200).
  • A much more generous tax-free monthly stipend is paid directly to the member. Rates can be found here, currently $2,210.
  • You can supercharge this benefit with an additional “buy up” with an 800% ROI!
    • $20 will get you an additional $5 per month ($180)
    • $600 will get you an additional $150 per month ($5,400)
  • Can be combined with a Kicker incentive.
  • You could continue to use this benefit after you are separated from service for up to 10 years.

Chapter 31 Veteran Readiness and Employment

  • Eligible for benefits with a service-connected disability rating of 10% or more as a veteran or 20% or greater while still serving.
  • Up to 48 months of entitlement to the various programs.
  • This does not diminish entitlement from any other chapter of the GI Bill you may still have, but the use of other VA education programs is deducted from CH31 VR&E entitlement.
  • Provides a suite of rehabilitation programs found here.
  • Dependents may qualify for benefits as well.
  • Also provides a subsistence allowance, rates can be found here.

Chapter 32 Veterans Educational Assistance Program

  • This one is for the old timers, who must have entered active duty between 1977 and 1985.
  • The government matches $2 for every $1 contributed from military pay, up to $2,700.

Chapter 33 Post 9/11 Veterans Educational Assistance Act of 2008

  • Andrea Clark, CFP®, AFC® published a great, in-depth post about this benefit here.
  • A free benefit with tiered payments based on the cumulative amount of qualifying active-duty time after 9/11/2001.
  • Tuition and Fees up to 100% for public in-state institutions, paid directly to the school.
  • Basic Allowance for Housing (BAH) based on the school’s zip code or separate rate for online-only programs.
  • Tax-free book stipend paid to users up to $1,000 per year.
  • Additional coverage under the Yellow Ribbon program for participating schools once the 100% tier is reached.
  • The only benefit you can transfer to dependents, but is limited by time in service requirements and incurs a service obligation.

Chapter 35 Survivors’ & Dependents’ Educational Assistance Program or Fry Scholarship

  • Eligibility is for dependents based on the 100% service-connected disability or line of duty death of the veteran after 9/11/2001.
  • DEA is paid directly to the dependent.
  • Fry Scholarship is similar to CH 33 Benefits.
  • You cannot use this benefit as a servicemember, but make sure your family is aware of this program in the unfortunate event they become eligible.

Chapter 36 Mars Colonist College Fund 

  • Ok, I made this one up! The point is, you never know when a new program might be implemented based on the needs of the DoD that could be more valuable than the one you may be using now!

Wait, 36 + 36 + 36 = 48?

Each chapter of the GI Bill you establish eligibility for comes with 36 months of entitlement. In my case, I was eligible for three different chapters of the GI Bill (and could have bought into a fourth), so I could have amassed 108 months (or 144) right? Unfortunately, you cannot collect them like baseball cards so each time you apply for a new chapter of the GI Bill you must relinquish (permanently) the current version of the GI Bill you are using. The good news, you can start over with up to 36 months of the new GI Bill. The bad news, you cannot exceed 48 months of total entitlement when the different chapters are combined.

This limitation is one of the key planning factors when you run a scenario analysis for what GI Bill benefits to use, how much to use, and when to use it. I’ll show you a very personal example.

My story

A young 17-year-old Sam Lewis joined the Delaware Air National Guard (DANG) in 1999. At the time of my enlistment the State of Delaware paid up to 100% of in-state tuition for Delaware National Guard members to attend public schools and an equivalent amount for private schools. I was eligible for Chapter 1606 GI Bill ($276 per month) once I graduated from Basic Military Training. About a year into my contract the Kicker was introduced, and I agreed to extend (basically restarted my 6-year commitment) and would now earn another $350 tax-free per month. So, I was getting my school bill paid 100% plus $626 a month tax-free plus my regular drill weekend checks. Somehow, I always found a way to spend all of it. It can’t get any better than that right? 

I ended up getting activated in 2004 and spent just shy of a year on orders including a deployment to Iraq. When I returned to civilian life and school I was now eligible for Chapter 1607, so I relinquished my remaining 14 months of benefits under Chapter 1606 and now received $690 per month, still topped off with the $350 Kicker, 100% Tuition Reimbursement, and now E-5 monthly drill check. Somehow, I always found a way to spend all of it. It can’t get any better than that right?

I used 13 months of benefits to finish my bachelor’s degree in 2007 and did not give much thought to the remaining months of entitlement. I was unmarried and childless and not giving adequate thought to future planning. I also became a full-time Title 32 Dual Status Federal Technician that year. Although I worked full-time and wore the uniform every day, I was not eligible for the Chapter 30 GI Bill at the time based on my status, although some folks I worked alongside were. I heard mention of the Post 9/11 Veterans Educational Act of 2008, but it sounded like an Active Duty program or a benefit for folks that had deployed much longer than I had, and in my naivete, I did not investigate further.

In 2012 I became a Title 32 AGR and had to make an election within the first two weeks on a DD 2366 on whether I wanted to buy into Chapter 30 MGIB or not. I had no immediate plans to return to school and did not want to pay $100 a month for a limited benefit that I may never use, so I declined it.

In 2013 I was selected for a promotion to a new position as the Retention Office Manager (ROM) for my wing. I would help members with career irritants, explore their career change options, pay them large sums of bonus money, and help them understand and access their educational benefits. I quickly had to become the resident expert on all things GI Bill. I also married the love of my life in 2013, and quickly had to become a future planner!

The more I learned about the GI Bill the greater appreciation I had for how rewarding the benefits could be.  In 2011, the DoD made the determination that Title 32 AGR would now count towards establishing Chapter 33 Post 9/11 GI Bill benefits. This is the only benefit that could be transferred to my dependents, known as the Transfer of Education Benefit (TEB). With my current AGR time and prior periods of mobilization, I would be eligible at the 100% tier. I quickly made the election to relinquish my remaining months of CH 1607 for CH 33. Sadly, I would only have 11 months of entitlement remaining before I reached the 48-month limit. 

Since I was already at 14 years’ time in service, I quickly transferred all 11 months to my wife as soon as she was enrolled under me in DEERS. She is a law school graduate with no plans to go back to school but I wanted to start the four-year service obligation as soon as possible to get it over and done with. We welcomed our twin daughters into the world in 2016. Again, as soon as they were enrolled under me in DEERS I “took back” 10 months of benefits from my wife (she agreed) and gave each daughter 5 months of benefits. There is no new service commitment required, that is a one-time obligation. I now have the flexibility to transfer months between each daughter, my wife, and myself as we play the GI Bill shell game to best meet our needs. Do not wait until your dependent needs to use the benefits. Consider transferring now, even if you are not positive your dependent will use it, you can always pull it back until it is used.

In our fire safe at home, in the “personnel file” for each child I have a copy of the Defense Manpower Data Center letter verifying my approval for the transfer of benefits and obligation end along with my Certificate of Eligibility from the VA documenting my entitlement for 100% tier of CH 33 payments. These are filed right next to their birth certificates and 529 account information for safekeeping until they graduate high school. Again, putting on my ROM hat, don’t just say you’ve transferred your benefits to your dependents – be able to prove it!

What do I wish I could have done differently? Obviously, I look longingly at months of CH 1606 and CH 1607 I used on myself that would be much more valuable had I saved those for CH 33 and transferred them to my kids. Had I known then, I would have paid more out of pocket.  As Brian P. O’Neill, CFP®, often says, “My crystal ball was cloudy” so I made the best decision I could, based on the information I had at the time.

What questions do you need to ask?

If you first enter the military as an enlisted member, CH 1606 is probably the first GI Bill you get familiar with. If you commission after paying for college under your own steam, you could still be eligible for this benefit with a six-year commitment but it might not be as heavily touted – so ask!

If you contemplate your career beyond the initial six, you should start to ponder:

  • Do I anticipate still needing this benefit to achieve my goals? 
  • Will I be able to afford my education plan if I lose access to these benefits upon separation?
  • Do I anticipate accruing active duty periods that might make me eligible for increased benefits under other chapters?

Generally, you can use up to 12 months of this benefit without cutting into the months of entitlement of other programs in the future, so don’t leave money on the table unnecessarily.

If you have deployed or been hired as an AGR you may wonder:

  • Do I need to convert and begin using CH33 now or should I wait until I accrue more duty towards a higher tier?
  • What tuition assistance do I have access to now that will allow me to save up on my VA benefits?
  • Is it a smart play to use months of CH33 while I’m still on orders and receiving BAH?

If you establish eligibility for CH33 and have dependents:

  • How do I think these benefits will be used by my spouse and children?
  • Should I give at least one month of benefit to each dependent to make sure they will have access if our plans change?
  • Will I need to use these benefits for my own use to further my career?
  • Will an even better GI Bill be coming out in the future?

How Do I Explore The Right Strategy For Me? 

As you can see, no two service members will have the same GI Bill scenario 100% of the time. There are a lot of variables that come into play based on the educational goals of you and your family, the benefits you have earned, outside resources, and other planning factors. 

If you need more help understanding how your benefits incorporate into your financial picture and deciding which path is right for you reach out and connect with an advisor at the Military Financial Advisors Association!

 

Categories
Reserve Component

Understanding the Reserve Component SBP Decision

Understanding your Reserve Component SBP Decision

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.

 

 

Categories
Military Retirement Reserve Component Taxes

What is Concurrent Retirement and Disability Pay?

Concurrent Retirement and Disability Pay

Understanding Concurrent Retirement and Disability Pay

If you are currently serving in the military and receiving disability pay, you are probably familiar with the fact that you cannot receive your disability payment for time you are being paid for military service.  What you may not know, is that this regulation is also applied when you receive your military pension, as the law states that you cannot receive military retired pay and VA compensation at the same time.
There is an exception to this, as in 2004, the Concurrent Retirement and Disability Program (CRDP) was put into place.  In this article we will talk about what CRDP is, who qualifies, and go through some examples to help explain the program.  We will also discuss Combat Related Special Compensation; what it is, how it relates to CRDP, and how to choose when you qualify for both.

Who Qualifies for CRDP?

You are eligible for CRDP if:

  • You are a regular retiree, with a VA Disability rating of 50% or higher, or
  • You are a Reserve retiree with 20 or more qualifying years of service, have a VA Disability rating of 50% or higher, and have reached retirement age, or
  • You retired under the Temporary Early Retirement Act (TERA) with a VA Disability rating of 50% or higher, or
  • You are a disability retiree who earned entitlement to retired pay under any provision of the law other than solely by disability and you have a VA Disability rating of 50% or higher.

Do I Need To Apply For CRDP?

No, no application is necessary, if you fall into one of the categories we discussed above, you will automatically be enrolled.

How Does CRDP Work?

CRDP is a restoration of your retired pay that was not paid to you because you received Disability Pay.  Let’s look at an example.
SFC Smith is a retiree that receives $2,000 per month in retired pay and $142 per month in disability pay.  She has a 10% disability rating from the VA.  SFC Smith’s monthly payments will look like this:

  • Disability pay $142 (non-taxable)
  • Retirement Pay – $1,858 (taxable, her $2,000 retirement pay is reduced by the amount of her disability payment)
  • Total Monthly Payment – $2,000

That is how it worked prior to CRDP, and how it still works for anyone receiving disability pay with a rating less than 50%.
Now, let’s make SFC Smith’s disability rating 60%, with a monthly disability payment of $1,131.  Since SFC Smith is a regular retiree and has a disability rating greater than 50%, she will receive CRDP.   SFC Smith’s payments will look like this:

  • Disability pay $1,131 (non-taxable)
  • Retirement Pay – $869 (taxable, her $2,000 retirement pay is reduced by the amount of her disability payment)
  • CRDP – $1,131 (taxable, restores her retirement pay withheld)
  • Total Monthly Payment – $3,131

As you can see, a pretty nice benefit, that can really add up over years of payments for those that qualify.  For CRDP recipients, they will receive two payments per month; their retirement pay which will include the CRDP amount and the disability payment.

Is CRDP the Same Thing as Combat Related Special Compensation?

No, Combat Related Special Compensation (CRSC) is a separate program from CRDP.  While CRDP is a restoration of retirement pay withheld, CRSC is an entitlement that you are paid, thus reimbursing you for all or a part of the retired pay withheld.  Since it is not considered retirement pay, CRSC is non-taxable.

CRSC Eligibility

To be eligible for CRSC you must:

  • Be entitled to and or receiving military retired pay
  • Be rated at least 10% by the VA
  • Waive your VA pay from your retired pay
  • File a CRSC application with your branch of service

Some pretty big differences here between CRDP and CRSC.  First, the disability rating is lowered from 50% to 10%, however, the disability must be related to combat service.  Secondly, while CRDP will be automatically paid if you are eligible, you must apply for CRSC.  You apply for CRSC on DD Form 2860, which is sent to the specific branch of service that you were in.  Documents you will need to complete the 2860 include your DD-214, VA Determination Letter, Medical Records, and Orders.

How Does CRSC Work?

SFC Smith is a military retiree who receives $2,000/month in retired pay.  As a 20% rated disability recipient, SFC Smith also receives $281 in monthly disability payments.  SFC Smith applied for and receives CRSC and 100% of her disability rating is directly related to combat.  Here is a breakdown of the payments SFC Smith will receive:

  • Retirement Pay – $1,719 (taxable, her $2,000 retirement pay less her $281 disability pay)
  • Disability Payment – $281 (non-taxable)
  • CRSC Payment – $281 (non-taxable)
  • Total Monthly Payment – $2,281 ($1,719 taxable and $562 non-taxable)

In this example, 100% of SFC Smith’s disability was determined to be combat-related.  Let’s also look at an example where that isn’t the case.
SFC Smith is a military retiree who receives $2,000/month in retired pay.  As a 20% rated disability recipient, SFC Smith also receives $281 in monthly disability payments.  SFC Smith applied for and receives CRSC and 50% of her disability rating was determined to be directly related to combat.  Here is a breakdown of the payments SFC Smith will receive:

  • Retirement Pay – $1,719 (taxable, her $2,000 retirement pay less her $281 disability pay)
  • Disability Payment – $281 (non-taxable)
  • CRSC Payment – $140.50 (non-taxable)
  • Total Monthly Payment – $2,140.50 ($1,719 taxable and $421.50 non-taxable)

As the example shows, CRSC will only compensate you for the portion of the retirement pay you waived in order to receive disability payments that were determined to be combat-related.

If You Qualify For Both, Which Should You Choose?

If you qualify for both CRSC and CRDP, DFAS will pay you the amount that will result in a higher monthly payment in the initial year you qualify, which will remain the case until the first CRDP/CRSC Open Season.  During the Open Season, DFAS will mail you an election form where you can choose to receive either CRDP or CRSC.  During subsequent years, you will not receive an election form.  You can still change your choice during the Open Season, but you will need to request the change yourself.
There are two big factors you should consider when choosing whether to receive CRDP or CRSC.

What Percentage of Your Disability is Combat Related?

CRDP will pay 100% of your retirement pay withheld, while CRSC will only pay the percentage related to combat disabilities.  Where this factor really comes into play is if your disability rating changes over time.  For example, let’s say you are rated 50% by the VA and 100% of that rating is combat-related, CRSC will pay 100%, so you elect CRSC.  Five years go by and you file a new claim with the VA for a non-combat rated disability and get assessed as 70%.  Now, you may be receiving only 71% of your withheld retirement pay through CRSC, where CRDP would pay 100%.  It may be more beneficial for you to elect the change.

Taxes, Taxes, Taxes

As with most financial decisions, we have to factor in the effect of taxes.  CRDP is taxable, while CRSC is non-taxable.  This could lead to scenarios where electing CRDP may give you a higher monthly payment, but because it adds to your taxable income, you may be better off electing to receive the non-taxable amount provided by CRSC.
Now that you have a better understanding of CRDP and CRSC, there are multiple variables at play.  As you can see, the decision may not always be black and white.  Working with a member of the Military Financial Advisors Association, who understands the VA and military financial system can help to walk you through your options and recommend the one best suited for you.

Do you have questions or wonder whether CRDP or CRSC is the better option for your situation? Contact one of our advisors to get your free consultation!

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Categories
Reserve Component Taxes

Deducting Reserve Expenses

Understanding when you can deduct Reserve expenses

While for many of our National Guard and Reserve servicemembers, traveling to monthly Battle Assemblies right now is not an option, we do hope that in the near future we will be back to meeting together, in-person, as a unit. When the stop order movement is lifted, it is important that all servicemembers are aware of the tax rules around being able to deduct your out of pocket expenses for travelling to drill.

What is the Regulation?

The Tax Cuts and Jobs Act, which passed in 2017, suspended the ability of taxpayers to claim miscellaneous itemized deductions that exceed 2% of their Adjusted Gross Income, which included work expenses. However, the law still allows those tax-payers that fall into four categories to continue to deduct their expenses; Armed Forces reservists, qualified performing artists, fee-basis state and local government employees, and employees with impairment-related work expenses. In this article, we will focus on the Armed Forces Reservists; who qualifies, what expenses they can claim, and how to claim them on your tax return. We will also give some tips on how to best track your expenses throughout the year to make it easier on you come tax time.

What Service Members Can Claim the Expense Deduction?

Not all service members can claim the expense deduction, to qualify the Soldier must meet a couple tests; all of these questions must be a “yes” in order for you to claim your expenses.
  • Test 1: Were you employed as an Armed Forces Reservist who traveled more than 100 miles from your tax home to complete Reserve related duty? (For IRS purposes, a Reservist is a member of the Military Reserves, National Guard, or Public Health Service)
  • Test 2: Did you have job-related business expenses?
  • Test 3: Are your deductible expenses more than the total of your reimbursements for those expenses?
  • If you can answer yes to all three of these questions, then you are eligible to claim your expenses on your tax return.

What Expenses Can You Claim?

Vehicle Expenses
  • If you regularly drive over 100 miles to your Battle Assembly, you can claim vehicle expenses
  • The rate you can claim (For 2019) is 58 cents per mile driven
  • For example, if your Reserve Center is 100 miles away from your tax home, each month that you drive to your duty would create a deductible expense of $116
    • 100 miles times .58 = $58
    • $58 X 2 (round trip) = $116
  • Alternatively, instead of claiming the miles, you do have the option to claim actual expenses
  • Under actual expenses, you will keep detailed track of your auto related expenses such as gas, oil, repairs, insurance and then multiply this total amount by the percentage of miles driven for reserve duty versus non-reserved duty throughout the year
    • For example, if you spent a total of $5,000 on vehicle expenses and the percentage of overall miles driven for reserve duty versus all miles driven is 1%, you could claim $50 as vehicle expenses for the year
    • $5,000 times 1% = $50
  • It is important to note that if you are using the standard mileage rate, you must do so in the first year you use the vehicle for reserve travel, you can always switch to the actual expense method in later years
Parking Fees, Tolls, and Transportation that didn’t Involve Overnight Travel
  • If you drove to and from military duty on the same day without staying overnight, you can deduct parking fees, tolls, and transportation costs, to include train, bus, etc.
Travel Expenses for Overnight Stays
  • These expenses include lodging, airfare, car rental, etc.
  • Do not include meals in this category
  • You can include incidental expenses, which covers items such as fees and tips; instead of tracking actual incidental expenses, you can use the alternate method of $5/day, but you can only use this alternate method if you are claiming no meal expenses for the same day
Meals
  • You can deduct meal expenses for travel that keeps you away from your tax home overnight
  • You can use actual expenses or claim the standard meal allowance, which for most locations is $51/day, but may change based on the specific location of duty
  • Even if you are using the standard allowance, you still must keep records showing the time, place, and purpose of your travel
  • For deduction purposes, you will be able to claim 50% of expenses related to qualified meals

How Do You Claim the Deduction?

  • To claim the expenses on your tax return, you will need to file IRS Form 2106 with your return
  • You will use Form 2106 to report your expenses, reimbursements, and to calculate the total amount you can deduct
  • Once you or your tax preparer have completed Form 2106, it will give you a value that you can ultimately transfer to your 1040, reducing your tax liability for the year
Best Practices
  • Trying to figure out your expenses for the previous year when you do your taxes will be a time consuming and frustrating experience
  • To make this easy, you must build a process for tracking these expenses as you incur them, to help with this, I’ve shared a tracker that you can easily update and adapt to fit your specific needs here
  • Document, document, document…keep your receipts, they are your way of proving to the IRS that you incurred them and that you are accurately reflecting them on your return
  • Don’t confuse the tax deduction with your Inactive Duty Training (IDT) Travel reimbursement, they are two separate things, with two separate rules and regulations
    • For example, the mileage rate you can claim and be reimbursed for on your IDT local voucher is 17 cents per mile, in contrast with the 58 cents per mile you can claim on Form 2106
  • You can’t “double-dip!” If the military reimburses you for those expenses, keep track of that as well as you will need to report the reimbursements on Form 2106

Deducting Reserve Expenses Example

CPT Smith is a US Army Reservist, who lives in Boston, MA but is assigned to a unit that is based in Fort Dix, NJ.  He passes all three tests, allowing him to be able to deduct his reserve travel related expenses; his specific expenses are below for 2019.
Expense Category Raw Numbers Total Expense Reimbursed Amount Unreimbursed Expense
Vehicle 5000 miles drive $2,900 (.58/mile) $2,900 $0
Transportation (non-overnight) N/A $0 $0 $0
Overnight Travel Costs $1,400 $1,400 $800 $600
Meals $750 $750 $300 $225 (1/2($750-300)
Total $4,675 $4,000 $825
As you can see from this example Form 2106, CPT Smith would be able to claim a $825 deduction on his 2019 return based on his reserve related travel expenses. Being a citizen Soldier isn’t easy and you have to make many sacrifices to continue serving, so at the same time you owe it to yourself to use the tax code to help ease some of the financial burden you incur in your service.  While this may seem daunting to track and calculate all of this, in the end it can pay off, but don’t feel you have to do it alone.  We make it our mission here to understand those tax issues that specifically affect members of our military so that we can best serve you.  If you have questions about reserve related travel expenses or any other military finance related issue, do not hesitate to contact me or any of the financial advisors that belong to the Military Financial Advisors Association.

Do you have questions about your reserve pay expense deductibility? Contact one of our advisors for a free consultation!

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