Congress and the Bush administration have agreed to a $22.1 billion deal over 10 years that will pare back dramatically a century-old ban on receiving both military retired pay and tax-free disability compensation for injuries or illnesses traced to time in service.

Up to 200,000 disabled retirees with 20 or more years of service, including those receiving reserve and National Guard annuities, will see their incomes rise, for many by hundreds or even thousands of dollars a month.

The deal, expected to be passed as part of the 2004 defense authorization bill, targets those with combat-related disabilities and the most severely disabled with non-combat injuries or illnesses. In effect, they no longer will see retired pay reduced by amounts they receive in disability compensation from the Department of Veterans Affairs.

Congressional leaders announced the agreement Oct. 16 at a Capitol Hill press conference after weeks of negotiations between senior House Republicans, the White House and, finally, with Senate Republican leaders.

The deal, outlined here last week, effectively divides 550,000 disabled military retirees with 20 or more years of service into three categories and boosts the monthly income of two of them. They are:

Combat-related disabled: Retirees with combat-related disabilities, regardless of severity, would become eligible Jan. 1 for Combat-Related Special Compensation.

The special compensation is not retired pay but replaces retired pay lost when retirees begin drawing VA disability compensation. Unlike retired pay, however, special payments are tax exempt.

Disabilities will be judged combat-related if resulting from armed conflict, combat training, hazardous duties or an "instrumentality of war," which can include Gulf War illnesses and ailments from exposure to Agent Orange, radiation or mustard gas. People suffering from post-traumatic stress disorder also can be eligible if it’s shown to be combat-related.

Seriously disabled: Retirees with disabilities rated 50 percent or higher would see reductions in retired pay from accepting VA compensation restored over 10 years.

The first installment, on Jan. 1, was expected to be $750 a month for 100 percent disabled, $500 for 90 percent, $350 for 80 percent, $250 for 70 percent, $125 for 60, and $100 for 50 percent. Disabilities do not have to be combat-related. Indeed, retirees with a mix of combat-related and non-combat disabilities will have to choose whether to accept tax-free special compensation for combat-related ailments alone, or allow retired pay to be restored. They will not be able to receive payments under both programs.

Steve Strobridge, director of government relations for the Military Officers Association of America, said it’s too early to know how Defense officials will administer the programs. Retirees certainly will get help in determining whether they are better off applying for special pay or accepting dual payments. But some having a mix of combat and non-combat related disabilities could see the better choice change from year to year, particularly during the 10-year phase-in, and as disabilities are reevaluated and tax income rises or falls. Perhaps retirees will be allowed to select what program they want to be under from year to year, he said.

Limited ban remains: Left out are retirees with no combat-related disabilities and their other VA disabilities below 50 percent. They will continue to see retired pay reduced by an amount to match VA disability pay.

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