Action in Congress

Dec. 1, 2004

SBP Reform Tops Personnel Gains

The biggest plum in the Fiscal 2005 National Defense Authorization Act passed by Congress in mid-October is a sharp rise over several years in Survivor Benefit Plan (SBP) annuities for 270,000 beneficiaries age 62 and older. The bill also contains an array of other improvements to military pay and benefits.

The new law directs a four-step phaseout of what critics call the “widow’s tax,” a drop in benefits when most surviving spouses first become eligible for Social Security. Payments at 62 typically fall from 55 percent of covered retired pay down to as low as 35 percent. Under a provision in the 2005 bill, that drop will be erased with an increase to 40 percent next October, to 45 percent in April 2006, to 50 percent a year later, and to 55 percent in April 2008.

Retirees who pay special premiums for an SBP supplement to protect their survivors from any drop in benefits at 62 saw those higher premiums stop Oct. 28, the day President Bush signed the NDAA. Supplemental SBP coverage, however, will continue at least until the age-62 offset ends in 2008.

House-Senate conferees rejected a Senate plan to phase out the age-62 reduction over 10 years, but they did accept the Senate provision that will discourage current retirees from enrolling in the improved SBP. During a year-long open season, to begin next October, retirees who had declined SBP will be able to “buy in” to the plan, but they must pay all missed premiums plus interest from the time they last turned down coverage. House members had pushed for a far smaller penalty for delayed enrollment.

Here are other personnel highlights of the defense authorization act for Fiscal 2005 (H.R. 4200):

  • Pay Raise. A 3.5 percent increase in basic pay Jan. 1, 2005, for active duty and reserve members.
  • BAH Raise. The last in a series of above-average increases in Basic Allowance for Housing to close a long-standing gap between Stateside housing allowances and average off-base rental costs. Individual BAH raises will vary by pay grade, dependency status, and assignment area.
  • Full CR for 100 Percent Disabled. Almost 15,000 retirees with 20 or more years of service and disability ratings of 100 percent will see their military retired pay fully restored on Jan. 1. The law, in effect, accelerates for this group alone removal of a century-old ban on concurrent receipt of both military retirement and disability compensation. The Congressional Budget Office estimates the 10-year cost for funding this measure at just over $900 million.

    Last year, Congress voted a 10-year phaseout of the CR ban for retirees with disabilities rated 50 percent or higher. That longer phaseout schedule remains in effect for 20-year retirees with disabilities of 50 to 90 percent, including those drawing compensation at the 100 percent rate because they are deemed “unemployable.”

  • Reserve Education Benefits. National Guard and Reserve members mobilized for at least 90 days are in line for better education benefits. Currently, reservists under contract to serve six years in a drill status receive education benefits of $288 a month for 36 months.

    Under the new law, reservists activated since Sept. 11, 2001, will receive increased education benefits—$402, $602, or $803 a month for 36 months if the reservist remains on continuous active duty service for at least 90 days, one year, or two years, respectively. The legislation stipulates that benefits will be raised annually to keep pace with inflation. Reservists can use both old and new benefits but are limited to a total of 48 months of education payments.

    The typical mobilized reservist will see education benefits rise by about 50 percent under the plan, which was pushed by the Bush Administration.

  • Transition Tricare. The new law makes permanent last year’s temporary authority to provide 180 days of Tricare coverage to reserve component members and their families, after the reservist returns from mobilization, to ease the return to civilian life.
  • Drilling Reserve Tricare. Following deactivation, reservists can buy additional Tricare Standard coverage if they are willing to pay premiums set at 28 percent of program costs and if they remain in the drilling Guard or Reserve. Members can buy a year’s worth of coverage for every 90 days of mobilization.
  • Deactivation Physicals. The services are directed to give reservists complete medical physicals before deactivation to identify and treat service-related injuries or ailments.
  • Reserve Disability, SBP Awards. The legislation provides a formula that is more fair in setting disability retirement payments for reservists injured while on active duty and also for setting survivor benefits for families of reservists who die on active duty.

    This change, pushed by defense officials, affects members who entered service on or after Sept. 8, 1980, and therefore fall under what’s called a High-3 retirement formula. High-3 annuities are calculated using a member’s highest three years of basic pay on active duty. For mobilized reservists, calculating three years of active service requires a look back many years to when basic pay was far below current rates. That can dampen significantly the size of a reservist’s disability retirement pay when compared to that provided to active duty colleagues.

    The new law directs that reserve disability retirements awarded on or after enactment of the Fiscal 2005 NDAA be computed using the high 36 months of basic pay as though members had served the last three years on active duty. This will only apply to reservists who are retired for disability on or after Oct. 28, the day the bill became law.

    The favorable change to High-3 calculations also affects SBP for survivors of reservists who die on active duty and extends back to Sept. 10, 2001. The hitch there is that most surviving spouses forfeit SBP anyway to accept tax-free Dependency and Indemnity Compensation from the Department of Veterans Affairs. There is a small population of survivors who can gain from the High-3 formula change, those whose spouses died on active duty on or after Nov. 24, 2003. On that date, the law provided that a service Secretary could elect “child only” SBP on behalf of the spouse even though there was an eligible surviving spouse. As a result, when a member dies on active duty, the spouse can receive DIC payments and the child can receive an SBP annuity. Child-only SBP is not subject to offset from DIC, so these payments could rise as a result of the High-3 change.

  • Academy Disabled. Compensation paid to military academy students was redefined as “basic pay,” so that midshipmen or cadets who suffer disabilities at an academy can be entitled to disability retirement or separation pay.
  • Housing Money. The 2005 bill eliminates the $850 million ceiling on the total value of contracts and investments allowed under the military housing privatization program. Lifting the cap clears the way for DOD to secure 50,000 more units in 2005. >
  • BRAC Round. The final NDAA drops a House provision that would have delayed for two years next year’s round of base realignment and closure actions.

    Retiree COLA Increases

    Military and federal civilian retirees, Social Security recipients, survivor benefit annuitants, and veterans drawing disability compensation will see a 2.7 percent raise effective Dec. 1. Payments will begin in January 2005.

    The cost-of-living allowance (COLA) reflects inflation over the past year for a market basket of goods and services. The government uses the Consumer Price Index for Urban Wage Earners and Clerical Workers to measure average prices paid during the third quarter of 2003 against the average price paid during the third quarter of 2004.

    The difference supports the largest government COLA in four years. In January 2001, government entitlements rose by 3.5 percent.

    Employer Tax Credits, Almost

    By threatening to block passage of a $137 billion corporate tax bill, Sen. Mary Landrieu (D-La.) in late October won Senate approval of tax credits for civilian employers who volunteer to make up pay losses suffered by workers who mobilize with the Guard or Reserve. Landrieu said 41 percent of reservists deployed to Iraq and Afghanistan suffer a pay loss.

    Under her legislation, those private sector employers whose reservist workers are activated longer than six months would get tax breaks for closing a gap between civilian salaries and military pay. The tax credits would be worth 50 percent of wages paid to an activated employee, though total credits could not exceed $15,000 ($30,000 in wage disparity). Small businesses would get another $6,000 in tax credits for each temporary employee hired to replace their mobilized workers.

    As part of a Senate compromise, Landrieu pulled her provision from the corporate tax bill and combined it with the House-passed Guardsmen and Reservists Financial Relief Act (H.R. 1779), introduced by Rep. Bob Beauprez (R-Colo.). However, because the Senate made changes to the Beauprez measure, which would allow mobilized members to make penalty-free withdrawals from individual retirement accounts if mobilized six months or more, it must go back to the House for another vote.

    There was no indication whether the new vote would take place this year or next.

    Senate Promises Action

    The Senate Banking Committee has promised action next year to stop companies from using misleading or abusive sales tactics on military bases. Such practices have led some service members—typically young ones—to purchase high-priced securities and questionable life insurance products.

    The House in early October passed a preventive measure, dubbed the Military Personnel Financial Services Protection Act (H.R. 5011); however, the Senate ran out of time to consider companion legislation this year. (See “Action in Congress: ‘Too Offensive,’ ” November, p. 23.) It is on the banking committee agenda for 2005, said Andrew Gray, committee spokesman.

    Meanwhile, Sen. Richard C. Shelby (R-Ala.), committee chairman, and ranking Democrat Paul S. Sarbanes (Md.) have asked the Government Accountability Office and the Securities and Exchange Commission to review on-base investment marketing practices.

    “We are going to do our part to ensure that military persons have access to the best financial products and are protected from abuse,” said Gray. “Once we have a clear picture of the problem, we will be able to move quickly. This is a priority for us.”

    The House bill, sponsored by Rep. Max Burns (R-Ga.), likely will need to be passed again by the new Congress. It would ban the sale of contractual-plan mutual funds and insurance packages pitched as investments, mandate that state insurance laws be enforced on military property, require agents selling insurance on base to inform clients of alternative low-cost government-subsidized insurance, and establish a DOD-wide registry of insurance agents barred from bases for abusive practices.

    Sens. Hillary Rodham Clinton (D-N.Y.), Michael B. Enzi (R-Wyo.), Chuck Hagel (R-Neb.), and Charles E. Schumer (D-N.Y.) introduced an identical bill in the Senate.