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VA 'Retro Pay' Begins

Tom Philpott | September 14, 2006

A small group of disabled military retirees this month will be the first of 133,000 to receive lump-sum back payments, which are tied to start-up challenges for two “concurrent receipt” programs enacted since 2003, say officials with the Defense Finance and Accounting Service (DFAS).

The trickle of back payments in September will become a small geyser at the end of October. By then, officials say, another 40,000 retirees will see their catch-up payments deposited electronically in their bank accounts by either the Department of Veterans Affairs (VA), DFAS or by both.

Back payments will vary in size from several hundred dollars up to $10,000 or more. The average payment, by one estimate, will be $3700.

Almost all retirees in line for the back pay served 20 or more years and all have disabilities that made them eligible for Concurrent Retirement and Disability Pay (CRDP) or Combat-Related Special Compensation (CRSC).

Pat Shine, DFAS' deputy director for operations, said from Indianapolis that a majority of the back payments will be made within the next six months, with DFAS focusing first on older cases. He said it could take up to six more months to calculate and pay the most complex retro pay file. These involve multiple VA rating adjustments since CRSC and CRDP began, shifts by retirees between these two types of payments, ex-spouse pay entitlements and any other issues that requires lengthy record searches.

DFAS officials are calling the $500 million back pay effort the “VA Retro Pay Project.” Retirees don't need to apply. A “VA Retro Award hotline” has been set up to field questions from CRSC and CRDP recipients who believe they might qualify. That toll free number is 1-877-327-4457.

By late next week, DFAS officials hope to post a detailed explanation of the back pay program on its website at: www.dod.mil/dfas

Thomas J. Pamperin, assistant director for policy with VA's Compensation and Pension Service in Washington D.C. , said he and his staff have been working with DFAS for almost 18 months. The back pay issue, he said, is “something where neither one of us can do it by ourselves. We need a lot of information exchanged.”

DFAS and VA now are “testing files that have been transferred back and forth between us,” he said. “We are going to have a final test the last week in September to make sure that all the [software] logic is working” to identify eligible retirees and calculate retro payments.

VA figures to pay 80 percent of money owed. Some retirees will receive two checks, one from the VA and another from DFAS. Before payments are deposited, affected retirees will get letters explaining reasons for the back pay and how the amounts were calculated, Pamperin said.

Most of the shortfalls resulted from VA withholding too much disability compensation after CRSC and CRDP began. Traditional VA and DFAS rules on withholding failed to take account of changes to concurrent receipt law.

“What we are talking about here is a situation where people's entitlement to disability pay had a [start] date prior to the date we actually started paying it,” Shine said.

The pay shortfalls can be blamed in part on the considerable complexity of CRDP and CRSC. Congress designed the programs to alleviate, but only for certain career retirees, a century-old ban on concurrent receipt of both military retirement and VA disability compensation.

Until CRSC began on June 1, 2003 , and CRDP began on Jan. 1, 2004 , all military retirees with service-related disabilities had to accept a dollar-for-dollar reduction in taxable retired pay in order to receive tax-free VA compensation for their service-related injury or illness.

CRSC allows retirees with at least 20 years of service to receive tax-free pay to replaces any offset in taxable retired pay required on receipt of VA disability compensation. For CRSC, retirees must have combat-related injuries or ailments and apply to their service to establish eligibility.

CRDP, on the other hand, is paid automatically if the retiree served 20 years and has service-related disabilities rated 50 percent or higher by VA. The full CRDP is being phased in for most of its 170,000 recipients, adding another layer of complexity to the back payment effort. Retirees can be eligible for both CRSC and CRDP but can receive only one.

Before these programs took effect, Shine said, VA and DFAS didn't need to worry about tracking retroactivity of payments. When a retiree's VA rating was approved or raised, VA knew to withhold the additional compensation from the retiree until it got word from DFAS that military retirement had been reduced. This avoided government overpayments.

Retirees impacted by such withholding simply notified the IRS, on their next tax return, to treat any portion of their retired pay received after their VA benefits kicked in as non-taxable compensation.

This arrangement between VA and DFAS no longer worked – and indeed it created compensation shortfalls -- after CRSC and CRDP took effect. Of 220,000 retirees now drawing one of these payments, 60 percent are owed back pay, and most can of that be traced to over withholding by VA.

Retirees who received retroactive pay this month represent the sampling of files that DFAS and VA used test their revised pay software and data exchange processes. Back payments owed to the remaining 133,000 retirees have been separated by levels of difficulty. The easiest to calculate, using only computers, are 40,000 files prepared for October delivery to VA. Pamperin said VA back payments will be made near the end of the month.

DFAS can make batches of back payments weekly, starting in October.

“Our target is to get the majority of the [back pay] population done within six months,” said Shine. “But we also recognize that, because some of these cases are just a lot more difficult and involved, it could take as much as 12 months to get all payments completely satisfied.”

Sound Off...What do you think? Join the discussion.

Copyright 2006 Tom Philpott. All opinions expressed in this article are the author's and do not necessarily reflect those of Military.com.

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