9157 / What types of disability benefits are available to retired servicemembers?

Some retirees from the armed services also receive compensation from the Veterans Affairs Administration for disabilities related to their military service along with traditional retirement pay. There are a variety of service-related disability programs within the VA system, but the scope of this paper will cover those that coincide with traditional retirement pay.

Historically, a retiree’s monthly pension benefit was docked by the amount the veteran received in service-related disability pay by the VA.¹ This was referred to as the VA waiver program.² The premise of the VA waiver program was that receiving pay for a disability incurred during military service and receiving retirement pay for military service was a prohibited form of double-dipping from government compensation. The phaseout of that aspect of the VA waiver program began in 2004, and it was completely phased out in 2014.

There are two primary systems that disabled retirees can use to receive their full retirement defined benefit as well as VA disability pay concurrently. The first system is the Concurrent Retirement and Disability Pay (CRDP) program, and the other system is the Combat-Related Special Compensation (CRSC) program. The programs have several similarities, and veterans can qualify for both, but they may only participate in one.³

As the names indicate, CRDP allows retirees who receive both traditional retirement pay and VA disability pay at the same time. To be eligible for the program, a veteran must be eligible to receive traditional retirement pay from his or her branch of service. Additionally, the veteran must be rated as 50 percent or more disabled by the VA.⁴ If a veteran is eligible for only CRDP, then he or she will be automatically enrolled in the program. If a veteran is eligible for both, then he or she must select which program to participate in.⁵

As an example of how the CRDP program works, a retired veteran who was diagnosed with sleep apnea requiring a CPAP machine is generally entitled to a 50 percent disability rating which triggers enrollment in CRDP. If the retired, disabled veteran has a 50 percent disability rating, a spouse, and two minor children, then he would receive $1,086.43 in disability pay from the VA that is not subject to federal income taxation.⁶ The veteran would also receive his full monthly retirement pay, and it would be fully taxable for federal income tax purposes.

The CRSC program is similar to CRDP, but it has some key differences. The first is that the retired veteran must be at least 10 percent disabled from combat-related injuries, as determined by the VA.⁷ Only the combat-related portion of the overall disability rating is eligible for CRSC. For instance, if a veteran had an overall disability rating from the VA of 70 percent, but only 40 percent of the rating was due to combat-related disabilities, then the veteran would be eligible to have 40 percent of his disability pay included.

Like the CRDP, the veteran must be eligible to receive traditional retirement benefits from the armed services. Rather than supplanting the VA waiver, the CRSC reimburses the veteran for the amount that the VA waiver reduces the veteran’s regular retirement check. The reimbursement through the CRSC is with federal income tax-free dollars.⁸ The veteran in this scenario receives three monthly checks. The first check is from the VA for the disability pay. The second check is from the Defense Finance and Accounting Service (DFAS) for the monthly retirement benefit minus the VA waiver deduction for the disability pay. The third check is from the CRSC program with a federal income tax-free reimbursement of the VA waiver deduction.⁹

As an example of how the CRSC works, a retired veteran who has a 50 percent combat-related disability with a spouse and two minor children receives $1,086.43 in VA disability benefits that are free from federal income tax. If the veteran was entitled to $3,000 per month in traditional retirement pay benefits, then his check from DFAS would be $1,913.57 ($3,000-$1,086.43), and it would be countable as ordinary income for federal income tax purposes. The veteran would also receive a check from the CRSC for the VA waiver amount of $1,086.43 that is also free from federal income taxation.

The CRDP and CRSC programs are available for both active and reserve component retirees. CRSC must be applied for by the servicemember and approved by the service branch. The CRDP is an automatic enrollment for eligible retirees. Reserve component retirees begin their participation when they reach their full retirement age, presumably age 60 but may be sooner if active duty reductions apply. Active duty retirees begin their participation when they begin receiving their defined retirement benefit pay.