Current law requires that military retirement pay be reduced (“offset”) by the amount of VA disability benefits received. In 1891, Congress passed legislation to prohibit what it regarded to be dual compensation for either past or current service or a disability pension. Despite the reduction in military retirement pay, it is often to a retiree’s advantage to receive VA disability compensation in lieu of military retirement pay. These VA benefits provide an after-tax advantage because they are not subject to federal income tax, as military retirement pay generally is. In addition, the disability compensation VA pays can be increased if medical reevaluation of the retiree’s condition is found by VA to have worsened. Because VA disability compensation is based on the severity of the disability and not on actual earnings (as is military retirement pay), the VA benefit may, in some instances, be larger than the amount of military retirement pay.

For certain retirees with serious disabilities, the National Defense Authorization Act of 2000 provides cash benefit that is less than what they would have received through concurrent receipt of their military retirement pay and VA disability compensation. The statute states that these special compensation payments are not military retirement pay. As such, they are not subject to Federal or State Income Tax, and the legislation did not change the statute that prohibits concurrent receipt. The special compensation payments were reauthorized in 2001 and 2002.

Monetary benefits, called disability compensation, are paid to veterans who are disabled by injury or disease incurred or aggravated during active military service in the line of duty. The service of the veteran must have been terminated through separation or discharge under conditions that were other than dishonorable. Monetary benefits are related to the residual effects of the injury or disease. The amounts of the benefits, which are not subject to federal or state income tax, are set by Congress. Disability compensation is paid in monthly payments. Rates effective December 1, 1993:
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Disability compensation is a monetary benefit paid to veterans who are disabled by injury or disease incurred or aggravated during active military service. The service of the veteran must have been terminated through separation or discharge under conditions that were other than dishonorable. Disability compensation varies with the degree of disability and the number of dependents, and is paid monthly. The benefits are not subject to federal or state income tax. The payment of military retirement pay, disability severance pay, and separation incentive payments known as SSB and VSI (Special Separation Benefits and Voluntary Separation Incentives) also affects the amount of VA compensation paid.