Military retirees have a once-in-a-generation chance to revise their Survivor Benefit Plan decision and better meet the needs of their family. Congress has authorized an “SBP Open Season” during 2023, which is an important opportunity that many of our nation’s two million military retirees should consider.
Military retirees normally receive a generous pension, but the problem for their survivors is that retired pay ends when the retiree dies. At the time of retirement, retirees can enroll in SBP and pay 6.5% of their retired pay, so that when they die, their surviving spouse would receive an SBP annuity equal to 55% of the retiree’s pay. Based on the latest Department of Defense statistics, 68% of military retirees with families have opted into SBP.
Challenges and Opportunities
The challenge of SBP is that if the spouse dies first, the total amount paid in is forfeited, which is one reason almost one-third of those eligible for SBP have declined it. Another reason that some veterans declined SBP is because of the “widow’s tax.” If a veteran dies of a service-connected illness, the Department of Veterans Affairs (VA) will pay their spouse Dependency and Indemnity Compensation (DIC), which is a tax-free benefit usually equal to $1,563 per month.
Previously, there was an SBP-DIC offset, known as the “widow’s tax,” in which a spouse’s SBP annuity was reduced by the amount of the DIC payment. Congress phased out the widow’s tax over the past three years, making SBP more valuable. Because of this, the 2023 SBP Open Season provides a unique opportunity for military retirees to revisit their SBP decision, which would otherwise be irrevocable.
If retirees would now like to enroll, they can “buy in” to SBP. To do so, they must pay all previous payments that they have missed since they retired, plus interest, and start paying the 6.5% premium from their retired pay going forward, until they have paid in for a full 30 years. At the retiree’s request, the Defense Finance and Accounting Service (DFAS) will calculate the cost of enrolling in SBP, and the retiree can then decide whether to enroll. If they do enroll, they must pay the back premiums either in a lump sum or in installments over 12 months – plus installment interest. Unlike regular SBP premiums that do reduce taxable retired pay, the payment of back premiums does not reduce the retiree’s taxable income.
The back payments required to “buy in” can be significant, but so can the benefits for the retiree’s family. For example, a Lieutenant Colonel who retired over 30 years ago has retired pay of approximately $6,200 per month, which will end when he dies because he did not enroll in SBP. He requested his buy-in letter from DFAS, which specified that to make up for the premiums 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 will 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. 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.
Military retirees who enrolled in SBP at retirement have a one-time chance during open season to permanently discontinue SPB premiums. If they discontinue SBP, they will not receive any refund of funds already paid into SBP and their family will not receive any annuity when they die. In most cases, they will have to get the concurrence of their spouse or other beneficiaries to disenroll.
Obviously, enrolling or disenrolling from SBP is a significant financial decision that retirees and their families need to make carefully. The cost of the “buy in” enrollment may not be as high as the $180,000 example, especially if someone retired more recently. Anyone who has had financial, health or family circumstances that have changed since they retired should carefully examine this unique opportunity. To take the first step toward considering enrollment, military retirees should go to the special DFAS page where they can complete a letter of intent to enroll. DFAS will then reply with exactly what the “buy in” to SBP would cost. Retirees should consult with qualified financial professionals who understand military benefits and can carefully consider what is in their family’s best interests in the context of a comprehensive financial plan.
Michael Meese is a retired Army Brigadier General and is President of the American Armed Forces Mutual Aid Association (AAFMAA).
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