Military disability retirement: TDRL, PDRL, Method A vs B and taxes

Not every military retirement comes at 20 years. A service member found unfit for duty because of a disability can be retired by the military years earlier, under what DFAS calls Chapter 61 for disability, and that retirement follows its own rules: a rating from the Physical Evaluation Board, two ways of computing the pay, a temporary list with recurring exams, different rules for getting VA compensation on top, and a tax treatment that depends on when you joined and how you were hurt.

I am on active duty in the Air Force, and medical boards are something many of us see up close, either our own or a coworker's. This guide pulls together what the Defense Finance and Accounting Service (DFAS), the Department of Defense and the IRS publish on the subject, so the whole picture is in one place. The sources are listed at the end. Medical evaluation decisions belong to your branch and the VA, so treat this as a map of the rules, not a prediction of your case.

Retirement or separation: the 30% and 20-year lines

The Physical Evaluation Board assigns a disability percentage, and DFAS explains that this percentage decides whether the disability leads to retirement or separation:

• With less than 20 years of active service, a rating of 30% or higher qualifies you for retirement. A rating below 30% results in separation.
• With 20 or more years of active service, retirement is recommended regardless of the rating.
• If the disability existed before you entered the armed forces, you will be recommended for discharge without benefits.

The 30% line is the one that matters most for a mid-career member. A 20% rating at 12 years of service ends in separation, not retirement; a 30% rating at the same point is a retirement, with monthly retired pay and the retiree status that comes with it.

Retiree status is not a small thing. DFAS states that a member of either disability retired list is a retired member of the armed forces, entitled to all rights and privileges of a military retiree. It lists participation in the Survivor Benefit Plan, voluntary and involuntary allotments from retired pay, and disability compensation from the Department of Veterans Affairs, and notes that retirees who meet additional requirements may also qualify for Combat-Related Special Compensation (CRSC) or Concurrent Retirement and Disability Pay (CRDP), both covered below.

The two lists: TDRL and PDRL

Your branch places you on one of two lists: the Temporary Disability Retired List (TDRL) or the Permanent Disability Retired List (PDRL). Which one depends on whether the condition is expected to change.

Temporary Disability Retired List

If you are found unfit to perform your duties because of a disability that may not be permanent, you may be placed on the TDRL. Being on it comes with conditions:

• Exams at least every 18 months. A physical examination is required at least once every 18 months. DFAS warns that if you fail to report for it, your branch will remove you from the TDRL and your retired pay will be suspended until the examination has been completed.
• A time limit. If you were placed on the TDRL on or after January 1, 2017, you can remain on it for up to three years, provided your condition does not change. Members placed on the TDRL before January 1, 2017, could remain for up to five years.
• Return to duty is possible. If at any time you are found fit for duty, you may be removed from the TDRL and returned to active duty.

When the condition stabilizes, one of two things happens:

• If it is rated at 30% or greater, you are transferred to the PDRL.
• If it is rated below 30% and you do not have 20 years of service, you are discharged from the TDRL with severance pay.

Permanent Disability Retired List

If your disability is found to be permanent and is rated at 30% or greater, or you have 20 or more years of service, you are placed on the PDRL. If you moved from the TDRL to the PDRL, DFAS recalculates your retired pay using your most current disability rating.

How disability retired pay is computed: Method A and Method B

Disability retired pay starts from the same formula as any other military retirement, a retired pay base times a multiplier. For members who entered service on or after September 8, 1980, the retired pay base is the average of the highest 36 months of basic pay (the High-36 plan; the military retired pay guide covers how that base works). What changes is the multiplier. DFAS describes two methods and pays whichever is more beneficial to you:

• Method A uses your disability percentage.
• Method B uses your years of active service.

The Department of Defense spells out the multiplier: it is the higher of the disability percentage assigned by your service at retirement, not to exceed 75%, or your years of service times your retirement plan's multiplier, such as 2.5% per year for High-36 or 2.0% per year for the Blended Retirement System (BRS).

Two details change the math:

• The 75% cap. A 90% or 100% rating does not produce 90% or 100% of the base in retired pay. The disability percentage counts only up to 75%.
• The TDRL minimum of 50%. While you are on the TDRL, Method A uses a minimum of 50% for payment purposes. For a member rated 30% or 40% and placed on the TDRL, Method A counts as 50% while on the list, and the pay is recalculated at the current rating on transfer to the PDRL.

Three worked examples

The examples below use a hypothetical retired pay base of $6,000 a month and the High-36 multiplier of 2.5% per year, to show how the rules interact. They are illustrations of the formula, not estimates for any real grade.

The pattern is worth noticing. For a short career, Method A almost always wins, because the disability percentage is larger than the years of service would give you. For a long career with a modest rating, Method B wins, and the member is paid what a regular retirement would have paid. That second case matters later for VA compensation, because the law treats the part of disability retired pay that a regular retirement would have paid differently from the rest.

The figures in the table are gross. A Survivor Benefit Plan election, allotments, federal tax withholding (if any applies; see the tax section below) and the VA waiver all come out of it. The military retirement pay calculator handles the years-of-service side for your own base, and the SBP calculator shows the premium on any amount you choose to cover.

Adding VA disability compensation

A disability retiree almost always has a VA rating too, and this is where Chapter 61 retirees face different rules from everyone else. The VA's rating and the military's rating are separate decisions; DFAS directs questions about the VA rating to the VA at 800-827-1000.

The general rule: the VA waiver

DFAS states the general rule: a military retiree may not receive both VA disability compensation and military retired pay at the same time. The retiree instead waives military retired pay, dollar for dollar, to receive VA compensation, under Title 38 of the U.S. Code, sections 5304 and 5305. The total does not go down, but you do not receive both in full. Two programs restore some or all of the waived amount, and the CRDP vs CRSC guide covers both in depth. Here is how each applies to a disability retiree.

CRDP for Chapter 61 retirees: only with 20 years

For a member retired under Chapter 61 for disability, DFAS lists three requirements for concurrent receipt:

• Completed 20 or more years of service creditable under 10 U.S.C. § 1405, or 20 years of service computed under 10 U.S.C. § 12732 (the Reserve computation), at the time of retirement;
• Entitlement for any month to both military disability retired pay and VA disability compensation; and
• A service-connected disability, or combination of disabilities, rated by the VA at not less than 50%.

A Chapter 61 retiree with less than 20 years of service is not eligible for CRDP. DFAS is explicit that such members remain under the general rule and the dollar-for-dollar waiver. For a member retired at 12 years with a 60% rating, CRDP is not an option; CRSC may be.

Even with 20 years, CRDP is limited for a disability retiree. DFAS explains that the member must still waive retired pay to receive VA compensation. The waiver is the amount by which the disability retired pay exceeds what the member would have received if retired under another law, such as a regular retirement based on years of service. Put simply, CRDP lets you keep, alongside the VA payment, the amount a regular retirement would have paid; anything above that stays subject to the waiver.

Reserve and Guard members have one more rule. A member who received the Notification of Eligibility for Retired Pay at Age 60 (the 20-year letter) and is later retired under Chapter 61 with immediate retired pay cannot receive concurrent retired pay until reaching the age at which regular Reserve retired pay would have started. DFAS needs the retirement orders, the eligibility age and the creditable service from the branch, so DFAS asks those members to contact their branch to make sure the concurrent pay starts on time.

CRSC: open to disability retirees without 20 years

Combat-Related Special Compensation was created, in DFAS's words, for disability and non-disability military retirees with combat-related disabilities. To qualify you must be entitled to or receiving military retired pay, be rated at least 10% by the VA, waive your VA pay from your retired pay, and file a CRSC application with your branch of service. DFAS lists the disabilities that may be considered combat related as injuries incurred as a direct result of armed conflict, hazardous duty, an instrumentality of war, or simulated war.

Unlike CRDP, CRSC does not require 20 years, which makes it the main route for a Chapter 61 retiree with a shorter career. It is paid monthly along with retired pay, and DFAS describes it as tax-free. CRSC is not automatic; you apply through your branch.

Back pay works differently for disability retirees. CRSC retroactive payments can reach back as far as June 1, 2003, but DFAS notes that disability retirees with less than 20 years of service are automatically limited to a retroactive date of January 1, 2008, as required by legislation effective in 2008. The start date can also be limited by the CRSC start date your branch awards, Purple Heart eligibility, your retirement date and the law you retired under.

You cannot receive both

A retiree who qualifies for CRDP and CRSC receives one or the other. In the first year of joint eligibility, DFAS automatically applies whichever is more beneficial based on the gross amount of each and sends an election form; you have 45 days to return it if you want the other one. After that, you make the choice yourself during the open season, which DFAS says usually takes place in January.

Is military disability retired pay taxable?

Publication 525, the IRS's guide to taxable and nontaxable income, has a section on military and government disability pensions. The version used here is the one for preparing 2025 returns. The short answer is that some disability retired pay is excluded from income and some is not, and the line depends on dates, on how the injury happened, and on how the pay was computed.

When disability payments are excluded

The IRS says you may be able to exclude amounts received as a pension, annuity or similar allowance for personal injury or sickness resulting from active service in the armed forces of any country (as well as the National Oceanic and Atmospheric Administration, the Public Health Service and the Foreign Service). The payments are not included in income if any one of these conditions applies:

• You were entitled to receive a disability payment before September 25, 1975.
• You were a member of one of those services or its reserve component, or under a binding written commitment to become a member, on September 24, 1975.
• You receive the payments for a combat-related injury: a personal injury or sickness that results directly from armed conflict, takes place while you are engaged in extra-hazardous service, takes place under conditions simulating war (including training exercises such as maneuvers), or is caused by an instrumentality of war.
• You would be entitled to receive disability compensation from the VA if you filed an application for it. The IRS limits this exclusion to the amount you would be entitled to receive from the VA.

For anyone who joined after September 1975, the first two conditions will not apply, so the exclusion rests on the combat-related test or on the amount the VA would pay.

When the pay is based on years of service

If your disability pension is based on years of service (Method B in the examples above), the IRS says that in most cases you must include it in income. But if the pension qualifies for the service-connected exclusion, you do not include the part you would have received had the pension been based on a percentage of disability. Only the rest is taxable.

VA compensation and CRSC

VA disability compensation itself is not taxable: Publication 525 says not to include in income any veterans' benefits paid under any law, regulation or administrative practice administered by the VA. Combat-Related Special Compensation can also be excluded; the IRS notes that other portions of military or disability retired pay may still be taxable. This is one reason the CRDP-or-CRSC choice can affect your tax bill, not only your gross pay.

A retroactive VA rating can bring a refund

If you retired based on years of service and the VA later gives you a retroactive service-connected rating, the IRS says your retired pay for the retroactive period is excluded from income up to the VA benefits you would have been entitled to. You claim the refund by filing Form 1040-X for each prior year in that period, with a copy of the official VA determination letter showing the amount withheld and the effective date.

The IRS also extends the deadline. Normally a refund claim must be filed within three years of filing the return. After a retroactive service-connected determination, the period is extended by one year starting on the date of the determination, but it does not apply to any tax year that began more than five years before that date. The IRS's own example: a member who retired in 2019 receives, on August 3, 2025, a determination retroactive to 2019. The member can claim refunds for 2022, 2023 and 2024 under the normal rule, and for 2021 under the special rule if filed by August 3, 2026, but not for 2019 or 2020.

Severance pay

For members discharged with severance pay instead of retired, Publication 525 draws a line: if you receive a lump-sum disability severance payment and are later awarded VA disability benefits, you exclude 100% of the severance payment from income. A lump-sum readjustment or other nondisability severance payment received on release from active duty stays taxable, even if you are later given a retroactive VA rating.

Federal taxes are only half the question. Many states do not tax military retired pay at all; see which states tax military retirement pay for each state's rule.

Social Security disability and Medicare are separate programs

A military disability retirement and a VA rating do not, by themselves, start any Social Security benefit. Social Security runs its own disability program, with its own medical rules and its own application. The Social Security Administration's publication for service members says it pays benefits to you and your family if you develop a disability, and it points members who developed a disability while on active duty on or after October 1, 2001, to ssa.gov/woundedwarriors for expedited processing of the claim. When you apply, SSA asks for proof of military service (the DD Form 214) or information about Reserve or National Guard service.

Social Security disability also leads to Medicare before 65. The Centers for Medicare & Medicaid Services explains that once you have received disability benefits from Social Security or the Railroad Retirement Board for 24 months, you are signed up for Medicare automatically; people with ALS have no 24-month wait. If you also have other coverage at that point, such as TRICARE or an employer plan, the who pays first checker shows which one pays first. Your own Social Security record, built partly from your military earnings, is explained in the Social Security and military service guide.

A checklist for a member going through a medical board

None of this replaces the counselors your branch assigns during the process, but these are the questions the rules above point to:

• Where does my rating fall against 30%? Below 30% with less than 20 years is separation with severance, not retirement.
• TDRL or PDRL? If TDRL, note the 18-month exam schedule and the three-year limit, and never miss an exam: pay stops until it is done.
• Method A or Method B? Compute both against your own retired pay base. Remember the 75% cap and, on the TDRL, the 50% minimum.
• Do I have 20 years? Without them, CRDP is not available and the VA waiver applies in full; look at CRSC if any condition is combat related.
• Is any disability combat related? That affects CRSC eligibility and the federal tax exclusion, and the definitions are similar but not word for word the same.
• Did the VA rating arrive later? Check the extended refund window with Form 1040-X and the VA determination letter.
• Survivor Benefit Plan. Disability retirees can participate, so look at the premium and the annuity before you retire.

Where to get answers

DFAS handles retired pay and takes questions online or at 800-321-1080, Monday to Friday, 8:30 a.m. to 4:30 p.m. Eastern. Questions about the VA rating go to the VA at 800-827-1000. CRSC applications and anything about creditable service, Reserve points or your eligibility age go through your branch of service. DFAS itself notes that its pages explain typical situations, and that the laws, financial management regulations and instructions govern the details and exceptions.

If you take one thing from this guide, make it this: the military rating, the VA rating and your years of service each change a different part of the outcome. Write all three down before you make decisions such as SBP, and run the pay both ways, Method A and Method B.