Medical Discharge and Debt: What the Military Doesn't Tell You
A medical discharge is probably not the way most U.S. troops ever envision leaving military service when they first take the Oath of Enlistment. After a seemingly endless slew of appointments and paperwork before they ever see the medical board, there’s the long wait for the government to decide what happens next.
As if that wasn’t disappointing enough, when all is said and done, the recently discharged might end up with crushing debt. Yeah, it’s true. On top of whatever condition made a veteran suddenly unfit, they could also owe a ton of money. Thank you for your service.
Just wait until DFAS gets into the details.
Severance vs. Retirement
With a standard honorable discharge, you usually just leave the military (assuming you aren’t leaving because of any disciplinary action). One day you’re in uniform, the next is “Thanks from a grateful nation.” Medical discharges don’t just happen like that, because there are a lot of financial considerations around a medical discharge.
It starts with a referral from a military doctor or command. Troops believed to be medically unfit for duty (for whatever reason) submit to a process called the Disability Evaluation System. Evidence is presented, commanders are consulted, the Medical Evaluation Board reviews records, and then the Physical Evaluation Board makes its ruling. Appeals are made. Troops lawyer up. It can be a drawn-out ordeal.
It would be heartwarming to think of this process as something designed to take care of people, but it’s hard not to think of it in terms of government accounting when you hear about the end of the process. Depending on how a medical discharge case is decided, a veteran could leave with severance pay instead of a retirement, or with retirement pay that later gets reduced once VA compensation enters the picture.
Veterans with fewer than 20 years of active duty service need at least a 30% disability rating to qualify for medical retirement. Anyone with 20 years or more will be recommended for retirement, regardless of disability rating. Those with less than 30% and fewer than 20 will be medically separated. The difference can hit budgets hard.
The medically separated receive a one-time lump-sum severance payment calculated by multiplying base pay by years of service times a multiplier of two, but only if the condition is service-connected, after which they are fully discharged from the military with an honorable or general under honorable conditions. But they can still apply for VA compensation and benefits.
Medical retirement, also known as Chapter 61, comes with lifetime monthly retirement pay based on the more beneficial number between disability percentage or years-of-service multiplier applied to your base pay, along with full TRICARE family health coverage. Retirees can also pursue VA benefits.
Any Chapter 61 disability retirees with fewer than 20 years are still subject to the general rule requiring a dollar-for-dollar waiver of military retired pay to receive VA disability compensation.
It’s important not to treat that money like it’s already in the bank, because not only are the terms of a medical discharge not the same, the final paycheck isn’t normal either. DFAS audits the pay accounts of every military member before they get their final check, and if the accountants find debts of any amount, it can take 120 days or more to get paid.
Even small debts can hold things up, including tuition debts, travel overpayments, property loss, and minor pay adjustment debts. If you don’t believe how cheap these guys really are, the official DFAS website uses free clipart of a soldier wearing some military’s uniform, but it sure isn’t the United States military. Just pay for a decent photo, DFAS.
The Debt Sneaks In
So you might have been expecting to be paid a certain amount on your way out the door, but military life is messy. You might have had a travel voucher that never reconciled, a balance on your government travel card, or maybe you’ve been in a really long time and forgot to turn your canteen into the CIF. Your local bank might show some understanding, but DFAS only cares about numbers.
As if paying $12 for a plastic canteen setup wasn’t humiliating enough, that $12 was part of the money you were mentally using for a security deposit, a car payment, moving expenses, or a civilian wardrobe that isn’t centered around a brown t-shirt. The military is very good at numbers when it’s on their ledger, but doesn’t like to talk about money when it comes to paying you on time.
The Recoupment Rule
Severance is full of surprises. And surprises ain’t great when it comes to a federal bureaucracy that thrives on the mundane. A service member leaving on medical grounds may think severance pay is a clean break, like a parting handshake from an Uncle Sam who no longer wants you. Sometimes it’s more like an advance from a loan shark.
Defense Department Financial Management Regulations state that if a service member later receives VA disability compensation, recoupment can come out of that compensation in an amount tied to the gross taxable separation pay, less the federal income tax withheld, subject to important exceptions. Members who separate before retirement eligibility may receive separation or severance pay, but those payments can later be tied to recoupment rules.
If you didn’t catch all that because it sounds like a word salad. It’s okay, me too. What the rules are saying is that veterans who received a lump-sum payment when leaving the military may see future disability checks withheld by the VA to pay that money back.
Here, the government is trying to keep veterans from “double-dipping.” That one-time cash payment was based on a medical condition or the type of discharge the veteran received. Later, if the VA awards them monthly disability compensation for that same condition, the law says they can't keep both the lump sum and the monthly pay indefinitely for the same issue.
So, VA will take that monthly disability payment until the amount of the original lump sum is fully repaid. Once that debt is settled, full monthly benefits will start flowing normally.
And then there’s taxes, because of course there are. And if you thought the military bureaucracy was insane, can you imagine the bureaucracy the U.S. military would outsource to? If you paid taxes on Disability Severance Pay, you could be due a refund, but if you want DFAS to issue the refund directly, the request has to be submitted before December 15 of the same year the DSP was paid.
For prior tax years, DFAS will tell you to contact the freaking IRS instead. Veterans will have to include their DD-214, VA award letter, separation orders, and PEB paperwork.
There are exceptions for combat-related injuries (you try explaining to the American people why the VA is taking money from a Purple Heart recipient. The VA sure isn’t gonna), service-connected conditions unrelated to the severance pay, and other special programs.
While this isn’t technically a debt in the traditional sense, it sure leaves a veteran and their family vulnerable to debt, especially for those who were really relying on those funds to pay for living expenses, home modifications, or to pay off ongoing medical bills for conditions the VA wouldn’t connect.
Debt Debt. DFAS Debt.
So what happens if offsetting separation pay, retirement pay, or taking your VA disability doesn’t cover what you owe? Then you have a debt in the traditional sense. Debt debt. Real debt. It sounds like a lot of money, but we wouldn’t be talking about this if it had never happened to anyone. DFAS will claw back bonus pay, voluntary separation adjustments, and even years of accounting errors, even if it’s their fault.
And don’t worry, they’ll let you know.
Veterans who owe DFAS money will get a letter explaining the debt, the reason, the amount, and their rights to appeal or dispute the debt (within 60 days). Veterans are allowed to have DFAS verify the debt as well. Luckily, this isn’t like getting an LES overpayment: DFAS has many of the same means to help veterans pay the debt the VA does, including waiver requests (debt forgiveness) and payment plans.
If any of this sounds overwhelming, you aren’t alone. Veteran Service Officers can sit you down and go over the problem with you, along with explaining your options and helping with the paperwork necessary to solve it. And that help is free.
Medical discharges are a whole-life change. It changes your income, life rhythm, benefits, tax situation, and (above all) margin for error. So keep track of all the paperwork. Ask the hard questions about recoupment and refunds. Find out if it affects your VA disability. The military is just processing paperwork. It assumes you’ve been briefed on all this, so get briefed.
