Military Update: Retirees get second chance at SBP, but it won't be cheap
More than 800,000 military retirees who declined the Survivor Benefit Plan at retirement will get another chance to buy into a much-improved program, starting this fall. But delayed enrollment won’t be cheap, particularly for retirees who left service during the last six years.
Congress voted last year not only to raise SBP benefits, by phasing out a sharp drop in payments that surviving spouses saw at age 62, but also to allow a yearlong “open season,” which will begin Oct. 1.
Under SBP, retirees forfeit 6.5 percent of monthly retired pay as plan premiums. In return, surviving spouses, ex-spouses or dependent children receive an annuity when retirees die. Surviving spouses, for example, get 55 percent of “covered” retired pay until age 62, when benefits drop as low as 35 percent.
Congress voted to end the age-62 benefit drop in four steps. Monthly SBP for 270,000 older beneficiaries will climb to 40 percent of covered retired pay in October, to 45 percent next April, to 50 percent in April 2007 and to 55 percent in April 2008. The value of the added benefits is about $6.8 billion over 10 years.
Retirees who turned down SBP at retirement have a better plan to consider. They can buy in for a lump-sum payment and future premiums. The buy-in must include all missed premiums since retirees’ initial SBP eligibility, plus interest of 6.25 percent a year, the same rate Department of Defense actuaries use to calculate the “normal cost” of sustaining the military retirement fund to protect future benefits.
Congress directed that buy-in premiums include a third element, an actuarial increase, if the open season would add “risk” to the retirement fund. The actuaries decided the simple buy-in formula is fine for members retired at least seven years. But those retired six years or less will have to pay more. Their lump-sum payments are to be set high enough that they wipe out any government subsidy for SBP these retirees would have received had they elected coverage at retirement. The subsidy recently has been 17 percent of SBP costs. Now the only costs the government will cover of these newer retirees will be the added benefits payable after age 62.
Steve Strobridge, director of government relations for the Military Officers Association of America, called the buy-in premiums for recent retirees “ridiculously high.”
A member retired less than a year will face a buy-in equal to 38 months of premiums. A retiree who left more than a year ago but less than two years ago will face an SBP buy-in equal to 48 months of premiums.
“It’s just an inordinate penalty,” said Strobridge. “For a guy who’s been retired one year, they are making him pay four years’ worth of premiums. That just doesn’t make sense.”
Air Force Lt. Col. Ellen G. Krenke, a press officer for DOD pay officials, said the higher charges for delayed enrollment by recent retirees reflect the fact that SBP premiums “are front-loaded” as with whole-life insurance. Retirees with more premium years to pay back will have larger buy-in obligations, Krenke said. The bigger the buy-in, the smaller the risk that a retiree will draw more in benefits that he or she pays in premiums. For members retired seven years or more, there is no risk to the retirement fund, and therefore no need to end their government subsidy of SBP.
MOAA and other service associations had backed the House plan to impose any delayed-enrollment penalty as a monthly premium add-on rather than an imposing lump-sum payment. The Senate plan prevailed, however, and it’s “a significant deterrent” to enrollment, Strobridge said. Those penalized, he said, “are spouses and future widows who won’t be covered because [retirees] can’t bring themselves to put that much cash up front.”
The lump-sum premium is in addition to monthly premiums which start with enrollment. Despite its name, the lump-sum buy-in can be paid in 24 equal installments. Other details of the SBP open season are found in 27-pages of guidelines and charts released this month and distributed to service retired affairs offices and military associations.
Service associations are torn between criticizing the higher buy-in premium for newer retirees and encouraging retirees who previously turned down SBP to take a close look at a vastly improved benefit. Both regular and reserve retirees who declined SBP at retirement are eligible. So are all retirees who elected less than maximum coverage. Those with child-only plans can add spouse or former spouse coverage and the reverse is true.
Retirees who were enrolled but later terminated SBP are ineligible to re-enroll. SBP coverage becomes void if a retiree dies within two years of their election. Premiums will be refunded to the designated survivor.
Enrollees must complete DD Form 2656-9, available electronically at: www.dtic.mil/whs/directives/infomgt/forms/eforms/dd2656-9.pdf Help with the form should be available at retiree activity offices.
MOAA and the Fleet Reserve Association offered other examples of buy-in premiums. An O-5 who retired two years ago and elected full SBP will have a buy-in premium of $12,041 and a monthly premium of $211. The same officer, retired five years, will pay $16,276 in a lump sum and monthly $196.
If a retired E-7 with 26 years in service elected SBP coverage on $2,000 a month in retired pay, the lump-sum premium would be $15,470 and the monthly premium would be $130. The same member, if he retired 20 years ago, would pay have a lump-sum buy-in of $46,150.