If you are being medically retired from the military due to being found unfit for service, then you will need to choose what pay to receive, disability compensation from the VA or medical retirement pay from the Department of Defense (DOD). Under Title 38 of the United States Code, Sections 5304 and 5305, you cannot receive both. Often what happens is that the amount of medical retirement pay you are owed will be deducted from any disability compensation you are eligible for through the Department of Veterans Affairs (VA). This is called the VA disability offset to military retirement pay.
Military retirement pay is calculated based on your military disability rating and your years of service. Disability compensation is determined by your VA disability rating and your number of dependents.
The reasoning behind this scenario is that the purpose of DOD pay is to compensate a service member for their career being ended early, while the purpose of VA compensation is to compensate for your loss of civilian earnings after service and to pay you for your functional loss resulting from your disability.
You can choose whether to waive your disability retirement pay from the military or your disability compensation benefits from the VA. Since disability compensation does not get taxed and retirement pay does, it often makes sense to waive the DOD pay and accept the VA compensation. But this is not true in all cases.
Even if you waive your DOD pay, you and your dependents will still receive medical benefits from the DOD, as long as your disability has been rated at least 30%.
In some circumstances, you might actually receive more money by opting out of VA disability compensation and taking retirement pay. This could happen if the military has given you a higher disability rating than the VA has. It can also be true if you are eligible for Concurrent Retirement and Disability Pay (CRDP) or Combat Related Special Compensation (CRSC).
If you have served more than twenty years at the time you are medically retired, if you are eligible, you can have minimize the loss of retirement pay through Concurrent Retirement and Disability Pay (CRDP). In addition to twenty years of service, eligibility for CRDP also requires that you have a service-connected medical condition rated at least 50%.
CRDP is calculated based on the percentage rating of your service-connected disability. Like military retired pay, CRDP benefits are taxable. Your CRDP benefits can’t exceed the amount your retirement pay would have been if your retirement pay was based only on your years of service. For more information about the amount you can receive, call the Defense Finance and Accounting Service at 800-321-1080 or visit the DFAS website.
See Nolo's article on Concurrent Retirement and Disability Pay to learn more.
If you are eligible for Combat Related Special Compensation, you can get the loss of retirement pay restored. If you are eligible for both CRDP and CRSC, you have to choose which program to use to restore the reduction in your pay, because you cannot receive both.
You are eligible to have the offset to your military pay restored through CRSC while also receiving your VA disability compensation if you were injured while in a combat zone serving in the line of duty or while performing your duties in a combat-related operation (as determined by the Secretary of Defense). This is commonly called "concurrent receipt" of benefits. You must have a combat-related disability rated at 10% or more by the VA to be eligible.
Your total compensation after CRSC restores any military pay that was reduced to offset VA disability compensation payments cannot exceed the military retired pay you would have been eligible for based on years of service.
Unlike military retired pay and CRDP, CRSC payments are not taxable. CRSC is also protected from creditors as well as from garnishment for alimony or child support. CRSC is not available as a survivor benefit.
See Nolo's article on Combat Related Special Compensation to learn more.
If your years of service are few, and your military disability rating low, you could potentially receive higher compensation through the VA than the DOD.
If you have not served at least twenty years, then you don't have the option of using the CRDP program to restore your offset compensation, and unless you have a combat-related condition rated at 10% or more, you are also ineligible for CRSC. In this scenario, it is possible you would be better compensated by the VA than the DOD.