[Federal Register Volume 69, Number 247 (Monday, December 27, 2004)]
[Proposed Rules]
[Pages 77578-77593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28161]



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Part VI





Department of Veterans Affairs





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38 CFR Part 5



Elections of Improved Pension; Old-Law and Section 306 Pension; 
Proposed Rule

  Federal Register / Vol. 69, No. 247 / Monday, December 27, 2004 / 
Proposed Rules  

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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 5

RIN 2900-AL83


Elections of Improved Pension; Old-Law and Section 306 Pension

AGENCY: Department of Veterans Affairs.

ACTION: Proposed rule.

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SUMMARY: The Department of Veterans Affairs (VA) proposes to reorganize 
and rewrite in plain language its regulations relating to its ``old-
law'' and ``section 306'' pension programs, as well as its regulations 
concerning elections of improved pension. These revisions are proposed 
as part of VA's reorganization of all of its compensation and pension 
regulations in a logical, claimant-focused, and user-friendly format. 
The intended effect of the proposed revisions is to assist readers in 
locating and understanding these regulations.

DATES: Comments must be received by VA on or before February 25, 2005.

ADDRESSES: Written comments may be submitted by: mail or hand-delivery 
to Director, Regulations Management (00REG1), Department of Veterans 
Affairs, 810 Vermont Avenue, NW., Room 1068, Washington, DC 20420; fax 
to (202) 273-9026; e-mail to [email protected]; or, through 
http://www.Regulations.gov. Comments should indicate that they are 
submitted in response to ``RIN 2900-AL83.'' All comments received will 
be available for public inspection in the Office of Regulation Policy 
and Management, Room 1063B, between the hours of 8 a.m. and 4:30 p.m., 
Monday through Friday (except holidays). Please call (202) 273-9515 for 
an appointment.

FOR FURTHER INFORMATION CONTACT: Bill Russo, Chief, Regulation Rewrite 
Project (00REG2), Department of Veterans Affairs, 810 Vermont Avenue, 
NW., Washington, DC 20420, (202) 273-9515.

SUPPLEMENTARY INFORMATION: The Secretary of Veterans Affairs has 
established an Office of Regulation Policy and Management (ORPM) to 
provide centralized management and coordination of VA's rulemaking 
process. One of the major functions of this office is to oversee a 
Regulation Rewrite Project (the Project) to improve the clarity and 
consistency of existing VA regulations. The Project responds to a 
recommendation made in the October 2001 ``VA Claims Processing Task 
Force: Report to the Secretary of Veterans Affairs.'' The Task Force 
recommended that the compensation and pension regulations be rewritten 
and reorganized in order to improve VA's claims adjudication process. 
Therefore, the Project began its efforts by reviewing, reorganizing and 
redrafting the regulations in 38 CFR part 3 governing the compensation 
and pension (C&P) program of the Veterans Benefits Administration 
(VBA). These regulations are among the most difficult VA regulations 
for readers to understand and apply.
    Once rewritten, the proposed regulations will be published in 
several portions for public review and comment. This is one such 
portion. It includes proposed regulations regarding elections of 
Improved pension benefits as well as regulations concerning two prior 
pension programs, Old-Law pension and Section 306 pension.

Outline

Overview of New Part 5 Organization
Overview of Proposed Subpart F Organization
Table Comparing Current Part 3 Rules with Proposed Part 5 Rules
Background of Prior Pension Programs
Overview of Proposed Regulation Changes
Content of Proposed Regulations
    Choosing Improved Pension over Certain Other VA Pension 
Programs: Veterans and Survivors
    5.460 Definitions of Certain VA Pension Programs
    5.461 Electing Improved Pension Instead of Old-Law or Section 
306 Pension
    5.462 Right of Surviving Spouses Receiving Spanish-American War 
Death Pension to Elect Improved Death Pension
    5.463 Effective Dates of Improved Pension Elections
    5.464 Multiple Pension Awards Not Payable
    Continuing Entitlement to Old-Law or Section 306 Pension: 
Veterans and Survivors
    5.470 Reasons for Discontinuing or Reducing Section 306 or Old-
Law Pension
    5.471 Annual Income Limits and Rates for Section 306 and Old-Law 
Pension
    5.472 Evaluation of Income for Section 306 and Old-Law Pension
    5.473 Counting a Dependent's Income for Section 306 and Old-Law 
Pension
    5.474 Deductible Expenses for Section 306 Pension Only
    5.475 Gaining or Losing a Dependent for Section 306 and Old-Law 
Pension
    5.476 Net Worth for Section 306 Pension Only
    5.477 Effective Dates for Section 306 and Old-Law Pension 
Reductions or Discontinuances
    5.478 Time Limit to Establish Continuing Entitlement to Section 
306 or Old-Law Pension
Explanation of Additional Proposed Removals from Part 3
Endnote Regarding Removals from Part 3
Paperwork Reduction Act
Regulatory Flexibility Act
Executive Order 12866
Unfunded Mandates
Catalog of Federal Domestic Assistance Numbers
List of Subjects in 38 CFR Part 5

Overview of New Part 5 Organization

    We plan to remove the compensation and pension benefit regulations 
from 38 CFR part 3 and relocate them in new part 5. We also plan to 
reorganize the regulations so that all provisions governing a specific 
benefit are located in the same subpart, with general provisions 
pertaining to all compensation and pension benefits also grouped 
together. We believe this reorganization will allow claimants and their 
representatives, as well as VA personnel, to find information relating 
to a specific benefit more quickly.
    The first major subdivision would be ``Subpart A--General 
Provisions.'' It would include information regarding the scope of the 
regulations in new part 5, delegations of authority, general 
definitions, and general policy provisions for this part.
    ``Subpart B--Service Requirements for Veterans'' would include 
information regarding a veteran's military service, including the 
minimum service requirement, types of service, periods of war, and 
service evidence requirements. This subpart was published as proposed 
on January 30, 2004. See 69 FR 4820.
    ``Subpart C--Adjudicative Process, General'' would inform readers 
about types of claims and filing procedures, VA's duties, rights and 
responsibilities of claimants, general evidence requirements, and 
general effective dates for new awards, as well as revision of 
decisions and protection of VA ratings.
    ``Subpart D--Dependents and Survivors of Veterans'' would inform 
readers how VA determines whether an individual is a dependent or a 
survivor of a veteran. It would also provide the evidence requirements 
for these determinations.
    ``Subpart E--Claims for Service Connection and Disability 
Compensation'' would define service-connected compensation, including 
direct and secondary service connection. This subpart would inform 
readers how VA determines entitlement to service connection. The 
subpart would also contain those provisions governing presumptions 
related to service connection, rating principles, and effective dates, 
as well as several special ratings. This subpart will be published as 
three separate Notices of Proposed Rulemaking (NPRMs) due to its size. 
The first, concerning presumptions related to service

[[Page 77579]]

connection, was published on July 27, 2004. See 69 FR 44614.
    ``Subpart F--Nonservice-Connected Disability Pensions and Death 
Pensions'' would include information regarding the three types of 
nonservice-connected pension: Improved pension, Old-Law pension, and 
Section 306 pension. This subpart would also include those provisions 
that state how to establish entitlement to Improved pension, and the 
effective dates governing each pension. The portion concerning Old-Law 
and Section 306 pension and elections of Improved pension is the 
subject of this document. A subsequent NPRM will cover Improved 
pension.
    ``Subpart G--Dependency and Indemnity Compensation, Death 
Compensation, Accrued Benefits, and Special Rules Applicable Upon Death 
of a Beneficiary'' would contain regulations governing claims for 
dependency and indemnity compensation (DIC); death compensation; 
accrued benefits; benefits awarded, but unpaid at death; and various 
special rules that apply to the disposition of VA benefits, or proceeds 
of VA benefits, when a beneficiary dies. This subpart would also 
include related definitions, effective-date rules, and rate-of-payment 
rules. This subpart will be published as two separate NPRMs due to its 
size. The portion concerning accrued benefits, special rules applicable 
upon the death of a beneficiary, and several effective date rules, was 
published as proposed on October 1, 2004. See 69 FR 59072. The portion 
concerning DIC benefits and general provisions relating to proof of 
death and service-connected cause of death will be the subject of a 
separate NPRM.
    ``Subpart H--Special and Ancillary Benefits for Veterans, 
Dependents, and Survivors'' would pertain to special and ancillary 
benefits, including benefits for children with various birth defects.
    ``Subpart I--Benefits for Certain Filipino Veterans and Survivors'' 
would pertain to the various benefits available to Filipino veterans.
    ``Subpart J--Burial Benefits'' would pertain to burial allowances.
    ``Subpart K--Matters Affecting Receipt of Benefits'' would contain 
provisions regarding bars to benefits, forfeiture of benefits, and 
renouncement of benefits.
    ``Subpart L--Payments and Adjustments to Payments'' would include 
general rate-setting rules, several adjustment and resumption 
regulations, and election-of-benefit rules.
    The final subpart, ``Subpart M--Apportionments and Payments to 
Fiduciaries or Incarcerated Beneficiaries'' would include regulations 
governing apportionments, benefits for incarcerated beneficiaries, and 
guardianship.
    Some of the regulations in this NPRM cross-reference other 
compensation and pension regulations. If those regulations have been 
published in this or earlier NPRMs for the Project, we cite the 
proposed part 5 section. We also include, in the relevant portion of 
the Supplementary Information, the Federal Register page where a 
proposed part 5 section published in an earlier NPRM may be found. 
However, where a regulation proposed in this NPRM would cross-reference 
a proposed part 5 regulation that has not yet been published, we cite 
to the current part 3 regulation that deals with the same subject 
matter. The current part 3 section we cite may differ from its eventual 
part 5 replacement in some respects, but we believe this method will 
assist readers in understanding these proposed regulations where no 
part 5 replacement has yet been published. If there is no part 3 
counterpart to a proposed part 5 regulation that has not yet been 
published, we have inserted ``[regulation that will be published in a 
future Notice of Proposed Rulemaking]'' where the part 5 regulation 
citation would be placed.
    Because of its large size, proposed part 5 will be published in a 
number of NPRMs, such as this one. VA will not adopt any portion of 
part 5 as final until all of the NPRMs have been published for public 
comment.
    In connection with this rulemaking, VA will accept comments 
relating to a prior rulemaking issued as part of the Project, if the 
matter being commented on relates to both NPRMs. VA will provide a 
separate opportunity for public comment on each segment of the proposed 
part 5 regulations before adopting a final version of part 5.

Overview of Proposed Subpart F Organization

    This NPRM proposes regulations governing elections of Improved 
pension and the requirements for maintaining entitlement to old-law or 
section 306 pension. These regulations would be contained in proposed 
subpart F of new 38 CFR part 5. Although these regulations have been 
substantially restructured and rewritten for greater clarity and ease 
of use, most of the basic concepts contained in these proposed 
regulations are the same as in their existing counterparts in 38 CFR 
part 3. In a future NPRM, we will propose regulations concerning the 
Improved pension program.

Table Comparing Current Part 3 Rules With Proposed Part 5 Rules

    The following table shows the relationship between the current 
regulations in part 3 and those proposed or redesignated regulations 
contained in this NPRM:

------------------------------------------------------------------------
                                            Based in whole or in part on
   Proposed part 5 section or paragraph       38 CFR part 3 section or
                                               paragraph (or ``new'')
------------------------------------------------------------------------
5.460.....................................  3.1(u), (v), (x)
5.461(a) and (b)..........................  3.711
5.461(b)(1) through (b)(3)................  New
5.461(c)..................................  3.711
5.461(d)..................................  3.960(a)
5.462.....................................  3.712(a)
5.463.....................................  3.713(a)
5.464.....................................  3.700(a)(4)
5.470(a)..................................  3.960(b), 3.252(a), (b)
5.470(b)..................................  3.960(d)
5.470(c)..................................  3.960(c)
5.471.....................................  3.28
5.472(a)..................................  3.262(b)
5.472(b)(1) and (2).......................  3.252(c); 3.262(a)
5.472(b)(2)(i) and (ii)...................  3.262(h)
5.472(b)(3)...............................  3.260(g)
5.472(b)(4)...............................  Introduction to 3.260,
                                             3.660(a)(4)
5.472(c)(1)...............................  3.262(a)(2), (3)
5.472(c)(2)...............................  3.262(j)(4)
5.472(c)(3)...............................  3.261(a)(22), 3.262(a)(1)
5.472(d)(1) and (d)(2)....................  3.262(k)(1), (k)(2)
5.472(d)(3)...............................  3.262(a)
5.472(d)(4)...............................  3.262(k)(1)
5.472(d)(5)...............................  3.262(k)(3)
5.472(d)(6)...............................  3.262(k)(4)
5.472(d)(7)...............................  3.262(k)(5)
5.472(e)..................................  3.261(a)(20)
5.472(f)(1)...............................  3.262(c)
5.472(f)(2)...............................  3.262(r)
5.472(f)(3)...............................  3.261(a)(12)
5.472(f)(4)...............................  3.261(a)(13)
5.472(f)(5)...............................  3.261(a)(31)
5.472(f)(6)...............................  3.262(t), (t)(2)
5.472(f)(7)...............................  3.261(a)(20)
5.472(f)(8)...............................  3.261(a)(7)
5.472(f)(9)...............................  3.262(a)(2)
5.472(f)(10)..............................  3.261(a)(26)
5.472(f)(11)..............................  3.261(a)(22)
5.472(f)(12)..............................  3.262(e), (e)(1), (e)(2),
                                             (f), (g), (i)(2), (j)(1),
                                             (j)(2), (j)(3)
5.472(f)(13)..............................  New
5.472(g)(1)...............................  3.262(d), (f)
5.472(g)(2)...............................  3.262(f)
5.472(g)(3)...............................  3.262(k)(1)
5.472(h)..................................  3.262(d)
5.473(a)..................................  3.262(b)(2)
5.473(b)(1)...............................  New
5.473(b)(2)...............................  3.262(b)(2)
5.473(c)..................................  3.252(e)
5.473(d)..................................  3.261(a)(4)
5.474(a)..................................  3.960(a)
5.474(b)..................................  3.262(l), 3.262(l)(1),
                                             (l)(2), (l)(3)
5.474(c)..................................  3.262(n), (p)

[[Page 77580]]

 
5.474(d)..................................  3.262(k)(6)
5.475(a)..................................  3.260(a), (f)
5.475(b)..................................  3.260(f), 3.252(e)(4)
5.475(c)..................................  3.252(d)
5.476.....................................  3.263
5.477(a)..................................  3.660(a)(2)
5.477(b)..................................  3.500, 3.501, 3.502, 3.503
5.478(a)..................................  3.260(b)
5.478(b)..................................  3.660(b)(1)
5.478(c)..................................  3.960(d)
------------------------------------------------------------------------

    Readers who use this table to compare existing regulatory 
provisions with the proposed provisions, and who observe a substantive 
difference between them, should consult the text that appears later in 
this document for an explanation of significant changes in each 
regulation. Not every paragraph of every current part 3 section 
affected by these proposed regulations is accounted for in the table. 
In some instances, other portions of the part 3 sections that are 
contained in these proposed regulations will appear in subparts of part 
5 that are being published separately for public comment. For example, 
a reader might find a reference to paragraph (a) of a part 3 section in 
the table, but no reference to paragraph (b) of that section because 
paragraph (b) will be addressed in a separate NPRM. The table also does 
not include material from the current sections that will be removed 
from part 3 and not carried forward to part 5. A listing of material VA 
proposes to remove from part 3 appears later in this document.

Background of Prior Pension Programs

    ``Old-law pension'' refers to the nonservice-connected disability 
and death pension programs that were available to claimants before July 
1, 1960. These programs were superseded by the ``Veterans' Pension Act 
of 1959.'' Public Law 86-211, 73 Stat. 432. However, section 9(b) of 
that Act protected the right of people receiving pension under the 
``old law'' programs to continue receiving pension under the laws in 
effect on June 30, 1960.
    ``Section 306'' pension refers to the nonservice-connected 
disability and death pension programs that were available to claimants 
on or after July 1, 1960, and through December 31, 1978. Sometimes also 
referred to as ``86-211 pension,'' or ``306 pension,'' Section 306 
pension arose out of Public Law 86-211. VA has adopted the name 
``Section 306'' to refer to these programs because it was section 306 
of the ``Veterans' and Survivors' Pension Improvement Act of 1978,'' 
Public Law 95-588, 92 Stat. 2508, that grandfathered rates paid under 
both section 306 and old-law pension.
    Sections 306(a)(1) and (b)(2) of Public Law 95-588 provide that any 
person entitled to receive VA pension under the prior pension laws as 
in effect on December 31, 1978, can elect to receive Improved pension 
instead. For any individual who is eligible to make an election but 
does not do so, sections 306(a)(2) and (b)(3) grandfather in the 
current rates paid by providing that:

    [Such] person * * * shall continue to receive pension at the 
monthly rate being paid to such person on December 31, 1978, subject 
to all provisions of law applicable to basic eligibility for and 
payment of pension under [such person's pension program], as in 
effect on December 31, 1978, [subject to income limits specified for 
that pension program].

Public Law 95-588, Sec.  306(a)(2). A virtually identical grandfather 
clause is contained in section 306(b)(3).
    Sections 306(a)(3) and (b)(4) go on to provide for automatic 
increases in the annual income limits and the spousal income exclusion 
by the same percentage as the automatic cost-of-living adjustments 
under the Improved pension program.
    A claimant cannot establish new entitlement to either Section 306 
or Old-Law pension; once a beneficiary loses entitlement under either 
of these programs, the only pension program for which VA may consider 
entitlement is Improved pension under Public Law 95-588.
    Before 1998, VA required recipients of Section 306 or Old-Law 
pension to submit annual eligibility verification reports (EVRs) to VA 
under current 38 CFR 3.256. However, VA no longer requires annual EVRs 
from this group of beneficiaries. According to VA's Office of Policy, 
Planning, and Preparedness, as of January 2004, there were 179 veterans 
receiving Old-Law disability pension, 618 surviving spouses and/or 
children receiving Old-Law death pension, 13,523 veterans receiving 
Section 306 disability pension, and 52,832 surviving spouses and/or 
children receiving Section 306 death pension.

Overview of Proposed Regulation Changes

    Several current regulations from which these proposed regulations 
are derived apply to more than one need-based program in effect before 
January 1, 1979. These programs include Old-Law pension, Section 306 
pension, and parents' DIC, as well as regulations for establishing the 
dependency of parents. Because of the benefit-based structure of 
proposed part 5, we propose to divide these current part 3 regulations 
into separate part 5 regulations, each addressing a different type of 
benefit. This NPRM pertains to Old-Law and Section 306 pension and not 
to parents' DIC or establishing the dependency of parents. Future NPRMs 
will address these current part 3 regulations as they pertain to 
parents' DIC and establishing the dependency of parents.

Content of Proposed Regulations

Choosing Improved Pension Over Certain Other VA Pension Programs: 
Veterans and Survivors

5.460 Definitions of Certain VA Pension Programs
    Proposed Sec.  5.460 is based on current Sec.  3.1(u), (v), and 
(x). The current regulation describes various types of VA pensions in 
terms of when the pensions were ``in effect.'' Paragraphs (a) and (b) 
of proposed Sec.  5.460 amend current Sec.  3.1(u) and (v) to describe 
the VA pensions in terms of the time periods during which those 
pensions were ``available to new claimants.'' We believe this is 
clearer because these pensions are still ``in effect'' in the limited 
sense that beneficiaries continue to receive them.
    Proposed paragraph (c) defines ``Spanish-American War death 
pension'' instead of ``service pension,'' which is defined in Sec.  
3.1(x), because to our knowledge there are no surviving veterans of the 
Spanish-American War.
5.461 Electing Improved Pension Instead of Old-Law or Section 306 
Pension
    Proposed Sec.  5.461 is based on current Sec. Sec.  3.711 and 
3.960(a). Proposed Sec.  5.461 includes a parenthetical reference to 
the word ``choose'' immediately after the more technical term ``elect'' 
in the heading to proposed paragraph (a) and the first time that the 
word ``elect'' appears in the regulation text. The parenthetical 
reference provides a plain-language synonym for the technical term, 
``elect.''
    The first sentence of current Sec.  3.711 states that individuals 
who are eligible to elect Improved pension may do so ``under the 
provisions of 38 U.S.C. 1521, 1541, or 1542 as in effect on January 1, 
1979.'' We propose to remove this phrase. Instead, proposed Sec.  5.461 
simply refers to Improved pension. We believe that removing the phrase 
makes the proposed regulation clearer. We note that the regulations 
pertaining to Improved pension would immediately precede the 
regulations pertaining to

[[Page 77581]]

elections of Improved pension in new part 5.
    Current Sec.  3.711 provides that unless the provisions of current 
Sec.  3.714 apply, an election of Improved pension is final when the 
payee or his or her fiduciary negotiates one check for this benefit. We 
propose to remove this reference to Sec.  3.714 because we are 
proposing to remove Sec.  3.714. The proposed removal of Sec.  3.714 is 
described later in this NPRM. We propose to add three circumstances 
under which an election may be canceled. All of these circumstances are 
matters of longstanding VA policy, are reasonable, and are helpful to 
VA beneficiaries.
    First, because the vast majority of VA beneficiaries now receive 
benefits by direct deposit and the current regulation that states when 
an election becomes final is based on negotiation of a check, proposed 
paragraph (b)(1) states that beneficiaries who receive benefits by 
direct deposit may cancel an election of Improved pension if the 
beneficiary informs VA of a desire to cancel the election before the 
financial institution receives the second direct deposit payment.
    Second, proposed paragraph (b)(2) states that if VA later 
determines that the beneficiary was incompetent when he or she elected 
Improved pension, the election can be canceled if the beneficiary or 
his or her guardian cancels the election within one year after the date 
the election became effective.
    Finally, proposed paragraph (b)(3) states that a beneficiary can 
cancel an election within one year after the effective date of the 
election if he or she elected Improved pension based on erroneous 
information that VA provided. However, VA must determine, based on the 
same evidence of record, that it provided the beneficiary with 
erroneous information. One example of this rule's application would be 
if VA mistakenly informed the beneficiary that he or she would be 
entitled to a higher rate upon election of Improved pension and later 
VA determines that this was not the case, based on the same evidence of 
record at the time VA mistakenly informed the beneficiary of his or her 
entitlement to a higher rate.
    Proposed Sec.  5.461(d) is based on Sec.  3.960(a), which currently 
provides that beneficiaries who do not elect Improved pension will 
continue to receive section 306 or old-law pension at the rate payable 
on December 31, 1978, unless that rate must be reduced or discontinued 
as provided in Sec.  3.960(b) and (c). Current paragraph Sec.  3.960(a) 
is incomplete in implying that the reasons provided in paragraphs (b) 
and (c) are the only situations in which a Section 306 pension or Old 
Law pension rate might be reduced. Current Sec.  3.551, for example, 
provides for reductions when certain beneficiaries are hospitalized at 
VA expense. Therefore, proposed Sec.  5.461(d) states that in the 
absence of an election, the December 31, 1978, rate will continue 
``unless that rate must be reduced or discontinued under Sec.  5.470 or 
another regulation in this part.''
5.462 Right of Surviving Spouses Receiving Spanish-American War Death 
Pension to Elect Improved Death Pension
    Proposed Sec.  5.462 is derived from current Sec.  3.712(a). 
Proposed Sec.  5.462 states that the regulations governing finality of 
election under proposed Sec.  5.461(b) also apply to surviving spouse 
beneficiaries of Spanish-American War death pension who elect Improved 
death pension. This is longstanding VA policy. Proposed Sec.  5.461(d) 
does not apply to surviving spouses of Spanish-American War veterans 
because Spanish-American War death pension is not based on income or 
net worth but on the veteran's service only. The proposed regulation 
states that these surviving spouses who do not elect Improved pension 
will continue to receive Spanish-American War death pension.
    We propose to remove the statutory references to 38 U.S.C. 1536 and 
1541, and instead refer to Spanish-American War death pension and 
Improved death pension. We believe that removing these statutory 
references makes the regulation easier to understand.
5.463 Effective Dates of Improved Pension Elections
    Proposed Sec.  5.463 is derived from current Sec.  3.713(a) and 
states that an election of Improved pension will be effective on the 
date that VA receives it.
5.464 Multiple Pension Awards Not Payable
    Proposed Sec.  5.464 is derived from Sec.  3.700(a)(4) without any 
substantive changes.

Continuing Entitlement to Old-Law or Section 306 Pension: Veterans and 
Survivors

5.470 Reasons for Discontinuing or Reducing Section 306 or Old-Law 
Pension
    Proposed Sec.  5.470 is derived from current Sec.  3.960(b) through 
(d). We propose to replace the current word ``terminate'' and all its 
iterations with the word ``discontinue'' and all its iterations. 
Throughout all of part 5, the Project proposes to use the word 
``discontinue'' instead of ``terminate'' in reference to ending VA 
benefits because we believe the word ``terminate'' has an adversarial 
connotation. While one could argue that the word ``terminate'' better 
describes the finality of losing entitlement to prior pension than the 
word ``discontinue,'' we wish to remain consistent in our terminology 
to the extent possible. More significantly, we note that the word 
``discontinuance'' in reference to ending a beneficiary's entitlement 
is statutory. See 38 U.S.C. 5112.
    Proposed Sec.  5.470(c), based on current Sec.  3.960(c), states 
that VA will reduce pension based on the loss of a dependent if the 
dependent was established before January 1, 1979. The regulation need 
only cover dependents established before that date because section 306 
and old-law pension rates are based on calendar year 1978 dependency 
and income. Pension rates under these programs do not increase when a 
dependent is established on or after January 1, 1979. Proposed Sec.  
5.470(c) clarifies that reductions due to the loss of a dependent are 
final and such reduced rates do not increase.
5.471 Annual Income Limits and Rates for Section 306 and Old-Law 
Pension
    The proposed regulation, Sec.  5.471, is derived from current Sec.  
3.28.
    Proposed paragraph (a) informs readers that annual income limits as 
well as historical pension rates are available on VA's Web site, http://www.VA.gov.
    Rather than referring to increasing annual income limits ``by 
reason of the provisions of 38 U.S.C. 5312,'' as current Sec.  3.28 
does, proposed Sec.  5.471(b) refers instead to the cost-of-living 
increase in Social Security benefit amounts. We believe this reference 
is more familiar to readers and incorporates the provisions of 38 
U.S.C. 5312. We note that current Sec.  3.27 refers to the Social 
Security cost-of-living increase rather than to 38 U.S.C. 5312.
5.472 Evaluation of Income for Section 306 and Old-Law Pension
    Current Sec. Sec.  3.261 and 3.262 provide the regulatory framework 
VA uses to determine how to calculate income for purposes of section 
306 pension, old-law pension, dependency of a parent, and parents' DIC. 
Because those sections deal with the evaluation of income in different 
contexts, they are lengthy and complex. As a result, they can be 
difficult to understand and use. We propose to divide the subject 
matter addressed by current Sec. Sec.  3.261 and 3.262 into separate 
regulations pertaining to these three subjects--dependency of a

[[Page 77582]]

parent, parents' DIC, and section 306 and old-law pension. Because 
income determinations for section 306 and old-law pension are similar 
in many respects, we propose to continue to combine the regulations for 
these programs. Proposed Sec.  5.472 deals only with evaluation of 
income for section 306 and old-law pension. Income regulations for 
dependency of a parent and parents' DIC will be addressed in other 
NPRMs.
    Proposed Sec.  5.472(b) states the basic rule that VA must count 
all payments of any kind from any source in determining income. 
Beginning with this basic rule permits simplification of the proposed 
regulation because the all-inclusive nature of the basic rule 
eliminates the need to catalog types of countable income. All income 
counts unless there is a specific exclusion. Therefore, we propose to 
remove the first sentence of current Sec.  3.262(j)(2). A discussion of 
our proposed removal of current Sec.  3.261 and additional removals 
from Sec.  3.262 are later in this NPRM under ``Explanation of 
Additional Proposed Removals from Part 3.''
    Proposed Sec.  5.472(b)(3) clarifies that VA rounds down after 
subtracting deductible expenses from countable income.
    Proposed Sec.  5.472(b)(4) incorporates the introductory language 
of current Sec.  3.260, but clarifies that although VA computes income 
for the year of receipt, VA does not discontinue benefits based on 
income that exceeds the income limit until the beginning of the 
following calendar year.
    While VA counts all income except where there is specific authority 
to exclude it, VA permits deductions from countable income in some 
instances. That is, the amount of income ultimately counted is the 
difference between income and certain deductible expenses directly 
associated with that income. Proposed paragraph (c) lists permitted 
deductions from particular income sources. Deductions from all income 
sources for section 306 pension purposes are contained in a separate 
regulation, proposed Sec.  5.474.
    Proposed Sec.  5.472(c)(1) continues a rule in current Sec.  
3.262(a)(2) that permits the deduction of expenses incident to the 
operation of businesses and professions from income from those sources. 
We propose to clarify that ``business'' includes the operation of a 
farm and transactions involving investment property. Because of this 
definitional change, it is only necessary to state in Sec.  5.472(c)(1) 
that losses sustained in operating a business or profession may not be 
deducted from income from any other source. This is consistent with the 
rule in current Sec.  3.262(a)(3) that states that ``[a] loss sustained 
in operating a business, profession, or farm or from investments may 
not be deducted from income derived from any other source.'' Note also 
that current Sec.  3.262(a)(3) implies that investment income is 
counted and that current Sec.  3.262(k)(5) provides, with respect to 
section 306 pension, that profit from the sale of nonbusiness property 
is not counted. With respect to investments, VA only counts income when 
the investment property is sold and does not constantly adjust income 
based on increases or decreases in the market value of investment 
property due to market fluctuations. Therefore, VA essentially already 
treats investment transactions as business transactions.
    Proposed Sec.  5.472(c)(2) continues a provision in current Sec.  
3.262(j)(4) that permits deduction of related medical, legal, or other 
expenses from sums recovered under disability, accident, or health 
insurance. Of course, the same expenses cannot be deducted twice. 
Therefore, we propose to state in Sec.  5.472(c)(2) that if medical 
expenses are deducted under that paragraph, they cannot be deducted as 
unusual medical expenses under Sec.  5.474.
    Proposed Sec.  5.472(d) provides the rules VA uses to determine 
whether income from property is the income of a pension beneficiary (or 
a veteran's spouse for Section 306 pension purposes). Property 
ownership is an important indicator of the right to income from that 
property, but it is not always controlling. In keeping with 
longstanding VA practice, we propose to state in paragraph (d)(3) that 
if a beneficiary transfers ownership of income-producing property to 
another person or legal entity, but retains the right to that income, 
the income will be counted.
    Current Sec.  3.262(k)(1) provides, in part, that ``if property is 
owned jointly each person will be considered as owning a proportionate 
share.'' The claimant's share of property held in partnership will be 
determined on the facts found.'' Current Sec.  3.262(k)(2) provides, in 
part, that the claimant's share of ``[i]ncome received from real or 
personal property * * * will be determined in proportion to his right 
according to the rules of ownership.'' We propose to combine and 
simplify these provisions in proposed Sec.  5.472(d)(4) by stating: 
``[w]here a pension beneficiary owns property jointly with others, 
including partnership property, each person will be considered as 
receiving an equal share of the income from that property in the 
absence of evidence showing otherwise.'' (Pension beneficiaries may 
submit evidence showing that they receive a greater or lesser share of 
the income.) We believe this will be much easier for beneficiaries to 
understand.
    Proposed paragraph (d)(5), based on applicable portions of current 
Sec.  3.262(k)(3) and (4), provides an exclusion for an old-law pension 
beneficiary's net profit from the sale of a principal residence when 
that profit is used to purchase another principal residence within 
specified time constraints. Current Sec.  3.262(k)(3), provides in 
part:

    In determining net profit from the sale of property owned prior 
to the date of entitlement, the value at the date of entitlement 
will be considered in relation to the selling price. Where payments 
are received in installments, payments will not be considered income 
until the claimant has received amounts equal to the value of the 
property at the date of entitlement.

    Because, under the current regulation, the basis for calculating 
net profit on the sale of a residence is only the value at the date of 
entitlement if the pension beneficiary owned the property before the 
date he or she became entitled to pension, the basis for calculating 
the net profit on the sale of a residence acquired after the date of 
entitlement would be its cost. We propose to clarify that in the 
installment sale provision set out in proposed Sec.  5.472(d)(5)(iii).
    Proposed Sec.  5.472(e) is an exception to our general guideline 
that we list only exclusions and not income that counts. Because there 
are many different VA benefits, most of which are excluded for prior 
pension purposes, we believe it would be simpler in this instance to 
list the VA benefits that count rather than those that don't.
    Although VA insurance payments are excluded from income under 
proposed Sec.  5.472(e) because they may be considered VA benefits, 
proposed paragraph (f)(7) specifically provides that payments under 
policies of Servicemembers' Group Life Insurance, United States 
Government Life Insurance, and National Service Life Insurance do not 
count as income in order to make sure that it is clear that these 
payments are not considered income for VA purposes.
    Most of the income exclusions that apply to both Section 306 and 
Old-Law pension are listed in proposed Sec.  5.472(f). In proposed 
paragraph (f)(3), we propose to change the description from ``six-
months' death gratuity'' as it is in current Sec.  3.261(a)(12), to 
``death gratuity payments under 10 U.S.C. 1475 through 1480.'' The 
phrase ``six-months' death gratuity'' is obsolete. Although the 
gratuity consisted of six-months' pay when Congress originally 
authorized VA

[[Page 77583]]

to pay this benefit (see Public Law 66-99, 41 Stat. 367 (1919)), that 
is no longer the case. Over the years, these death gratuity payments 
have evolved into a fixed sum, rather than an amount equal to six-
months' pay. See 10 U.S.C. 1478.
    Current Sec.  3.261(a)(7) states that VA will not count as income, 
``Rental value of property owned and resided in by claimant.'' The 
intent of the regulation is to make it plain that VA will not impute a 
rental value to a pension beneficiary's own property and count that 
value as income. However, if a beneficiary resides in a duplex, for 
example, VA would count any rent that the beneficiary receives. We 
propose to clarify any potential confusion by stating in proposed Sec.  
5.472(f)(8) that the exclusion is for ``[t]he rental value of a 
beneficiary's use of his or her own real property, such as the rental 
value of the beneficiary's personal residence.''
    Proposed Sec.  5.472(f)(12) combines all of the various Sec.  3.262 
ten percent exclusions in one place. One of these 10-percent 
exclusions, found at current Sec.  3.262(i)(2), is for certain payments 
received from the ``Bureau of Employees' Compensation.'' The Bureau of 
Employees' Compensation was abolished in 1974. See 20 CFR 1.5. Its 
functions are now carried out by the Office of Workers' Compensation 
Programs of the U.S. Department of Labor. See 20 CFR 1.6(b). This 
change would be reflected in proposed paragraph (f)(12)(iv).
    In a future NPRM, we plan to propose a new regulation to be 
contained in proposed subpart L of proposed new part 5. The new 
regulation would list all income sources and assets that are 
statutorily excluded in determining entitlement to all need-based 
programs that VA administers. This separate regulation is the future 
regulation mentioned in proposed Sec.  5.472(f)(13).
    These broad exclusions that will be addressed in a future NPRM are 
therefore not specifically listed in proposed Sec.  5.472. These 
include some of the income exclusions that currently appear in 
Sec. Sec.  3.261 and 3.262. These are Agent Orange settlement payments, 
certain relocation payments, annuity payments elected under the Retired 
Serviceman's Family Protection Plan, restitution to individuals of 
Japanese ancestry, income received by American Indian beneficiaries 
from trust or restricted lands, payments under the Alaska Native Claims 
Settlement Act, payments from certain volunteer programs, Victims of 
Crime Act of 1984 payments, and monetary allowances under 38 U.S.C. 
chapter 18 for certain children of veterans who served in Vietnam and 
Korea.
5.473 Counting a Dependent's Income for Section 306 and Old-Law Pension
    Proposed Sec.  5.473 is derived from those portions of Sec. Sec.  
3.252, 3.261, and 3.262 that pertain to counting income of dependents. 
Other portions of current Sec.  3.252 no longer apply to section 306 or 
old-law pension and we propose to remove them. These removals are 
discussed later in this NPRM under ``Explanation of Additional Proposed 
Removals from Part 3.''
    Proposed paragraphs (a) and (b) of proposed Sec.  5.473 state that 
VA excludes the separate income of a veteran's child for both old-law 
and section 306 pension purposes. This is not a change and is implied 
in the current regulation, although not explicitly stated. However, 
because VA's Improved pension program counts children's income as a 
veteran's or surviving spouse's income in most cases, it is helpful to 
state explicitly that children's income doesn't count for purposes of 
calculating income for veterans who are receiving prior pension.
    Current Sec.  3.262(b)(2) provides that VA presumes that including 
a veteran's spouse's income would not cause hardship to the veteran 
unless there is evidence showing expenses ``beyond the usual family 
requirements.'' Proposed Sec.  5.473(b)(2)(i)(B) provides two examples 
of such expenses'special training for a handicapped child and expenses 
for the prolonged illness of a family member. However, if the spouse's 
income is excluded because it is needed to pay for unusual medical 
expenses, those medical expenses cannot be used as deductible medical 
expenses. This is longstanding VA policy that we propose to include in 
the regulation.
5.474 Deductible Expenses for Section 306 Pension Only
    Proposed Sec.  5.474 is based on the portions of current Sec.  
3.262 that pertain to expenses that may be deducted from all countable 
income. However, these deductions apply only to section 306 pension and 
not to old-law pension.
    Proposed Sec.  5.474(a) states that deductible expenses paid after 
December 31, 1978, can only be used to continue entitlement to section 
306 pension in order to make that fact more clear. They cannot be used 
to increase pension benefits because Public Law 95-588 provides that 
rates paid under the prior pension programs cannot increase. See 
current Sec.  3.960(a).
    Proposed Sec.  5.474(b)(1)(i) describes a ``family member'' for 
Section 306 pension purposes. Currently, Sec.  3.263 cross-references 
Sec.  3.250 for the description of a family member, while paragraphs 
(l)(1) and (2) of Sec.  3.262 use similar language to describe such 
relatives. We therefore propose to incorporate this description of a 
``family member'' for Section 306 pension purposes as ``a relative of 
the beneficiary who is a member of the beneficiary's household whom the 
beneficiary has a moral or legal obligation to support. This includes 
family members who are physically absent from the household for a 
temporary purpose or for reasons beyond their control.''
    In a future NPRM, we plan to propose a new regulation pertaining to 
Section 306 pension to be contained in proposed subpart L of proposed 
new part 5. This new regulation would provide a comprehensive 
explanation of what constitutes a ``medical expense'' for the purpose 
of all VA-administered need-based benefits. Therefore, we propose to 
remove the phrase currently found in Sec.  3.262(l), ``[h]ealth, 
accident, sickness and hospitalization insurance premiums will be 
included as medical expenses * * *.'' Instead, proposed Sec.  
5.474(b)(1)(ii) refers the reader to the new regulation.
    Proposed Sec.  5.474(b)(6) is based on the last sentence of current 
Sec.  3.262(l), which states that VA will estimate future medical 
expenses and then adjust them, if necessary, upon receipt of an amended 
estimate or at the end of the year when the beneficiary files an 
``income questionnaire.'' The income questionnaire was the method of 
income reporting before the advent of Eligibility Verification Reports 
(EVRs) in 1985. However, recipients of Section 306 pension have not 
been required to complete annual EVRs since the end of calendar year 
1997 because on October 6, 1998, VA amended Sec.  3.256(b)(2) so that 
old-law and section 306 pension beneficiaries are not required to 
submit EVRs unless VA determines that doing so is necessary to preserve 
program integrity. 63 FR 53593 (Oct. 6, 1998). Therefore, we propose to 
remove the reference to the income questionnaire, and instead provide a 
cross-reference to the regulation that would replace current Sec. Sec.  
3.256 and 3.660(a), which would state that pension beneficiaries must 
inform VA if there is a change in income.
    Proposed Sec.  5.474(c)(1) defines ``final expenses'' as the amount 
an individual pays for a deceased individual's last illness and burial. 
We believe that having a definition makes the regulation clearer. We 
also propose to state that VA cannot allow the same expense as both a 
final expense and an unusual medical

[[Page 77584]]

expense in order to make this longstanding policy clearer to readers.
5.475 Gaining or Losing a Dependent for Section 306 and Old-Law Pension
    Proposed Sec.  5.475 differs from current Sec.  3.260 because most 
of current Sec.  3.260 no longer applies to pension awards. Paragraphs 
(a)(2) and (b)(3) of section 306, Public Law 95-588, provide that VA 
generally continues to pay the December 31, 1978, rate to beneficiaries 
of section 306 or old-law pension. A future NPRM will address Sec.  
3.260 as it applies to parents' DIC.
    Paragraphs (a) and (b) of proposed Sec.  5.475 explain the steps VA 
takes when a section 306 or old-law pension beneficiary gains or loses 
a dependent. These proposed paragraphs are based on current Sec.  
3.260(f), which pertains to rate changes for pension and parents' DIC. 
However, VA does not generally change section 306 and old-law pension 
rates unless the beneficiary loses a dependent who was established for 
VA purposes before January 1, 1979. In such cases, VA reduces, 
discontinues, or keeps rates the same but does not increase pension 
rates. (VA must also change pension rates when current Sec.  3.551 
pertaining to hospital adjustments applies. Another exception would be 
a hypothetical case in which VA computed 1978 annual income incorrectly 
and amended 1978 income to pay a different ``protected'' rate.)
    Proposed Sec.  5.475(a)(2) states that if a veteran beneficiary of 
section 306 pension gains a spouse, VA will not consider income that 
the spouse received or deductible expenses paid by or on behalf of the 
spouse before the date the person became the veteran's spouse for VA 
purposes. We believe this is fair to claimants and relatively easy to 
administer, while remaining consistent with statutory provisions that a 
spouse's income must be counted. We believe that a spouse's income 
cannot reasonably be assumed to be that of the veteran before the date 
the person becomes the veteran's spouse for VA purposes. The proposed 
regulation is also consistent with longstanding VA practice.
    Proposed Sec.  5.475(b)(1) clarifies that when a section 306 or 
old-law pension beneficiary loses his or her last dependent, the annual 
income limit is lowered. Proposed Sec.  5.475(b)(2) clarifies that if a 
dependent was established before January 1, 1979, VA must recompute a 
new ``protected'' December 31, 1978, rate based on the changed 
dependency status and recomputed 1978 income. Proposed paragraph 
(b)(2)(i) also makes it clearer that VA will continue the December 31, 
1978, rate if a recomputed rate based on a dependency change is higher 
than the previous rate. This could occur if a veteran receiving Section 
306 pension lost a spouse who had income or if a surviving spouse 
pension beneficiary lost a child whose income was counted as the 
surviving spouse's by virtue of current Sec.  3.252(e)(3).
    Proposed Sec.  5.475(c) is based on current Sec.  3.252(d) and 
pertains to spousal estrangement for Section 306 pension purposes. The 
current regulation provides that the ``rates'' provided by 38 U.S.C. 
1521(c) may be authorized to certain married veterans who do not live 
with or are estranged from their spouses. The reference to ``38 U.S.C. 
1521(c)'' is actually to 38 U.S.C. 1521(c) as in effect on December 31, 
1978 (when it was numbered 38 U.S.C. 521(c)), or more simply, the 
``December 31, 1978, rate for a veteran with a spouse.'' However, it is 
not only the rates that apply to such married veterans, but also the 
annual income limits. The proposed regulation would so provide. 
Proposed Sec.  5.475(c) also clarifies the longstanding VA policy that 
the spousal income is not included unless the annual income limit for a 
married veteran applies.
    Current paragraphs (c), (d), and (e) of Sec.  3.260, relating to 
proportional computations, are not included in proposed Sec.  5.477 or 
elsewhere in these proposed subpart F regulations. We propose to remove 
these provisions from regulations governing old-law and section 306 
pension because they pertain to proportional computations for original 
or resumed awards. Proportional computations no longer apply to section 
306 or old-law pension claims because new claims are not allowed, nor 
can these benefits be resumed after they have been discontinued, under 
section 306 of Public Law 95-588. Paragraphs (c) and (d) of current 
Sec.  3.260, as they apply to proportional computations for parents' 
DIC, will be addressed in a future NPRM.
5.476 Net Worth for Section 306 Pension Only
    Current Sec.  3.263 provides the regulatory authority for 
evaluating net worth in determining the dependency of a parent as well 
as entitlement to section 306 pension. Proposed Sec.  5.476 applies 
only to section 306 pension for reasons previously outlined.
    We propose to use the term ``net worth'' only and remove references 
to ``corpus of estate'' because we believe ``net worth'' to be the more 
commonly understood term. The terms ``net worth'' and ``corpus of 
estate'' are defined synonymously in 38 CFR 3.263(b) and 3.275(b) and 
used interchangeably. Sections 1522 and 1543 of title 38, United States 
Code, are both titled, ``Net worth limitation.'' However, the term 
``net worth'' is not used in the text of the statutes. Instead, the 
statutes refer to the ``corpus of the estate'' of an affected 
individual. Although the term ``net worth'' is not used in the text of 
these statutes, there is no indication that there is any intended 
difference between the two terms. In VAOGCPREC 64-91, VA's General 
Counsel confirmed that the terms ``corpus of estate'' and ``net worth'' 
are used interchangeably ``[i]n the context of estate valuation for 
certain need-based veterans' benefits.'' In order to prevent any 
misconception that there is a difference between the two terms, we 
propose to use one term, ``net worth.''
    Proposed Sec.  5.476(a) includes current and longstanding VA policy 
concerning the evaluation of a ``reasonable lot area,'' as being that 
which is reflective of lot sizes in the area. This rule is necessarily 
broad because lot sizes vary from locale to locale. It might be 
reasonable in some parts of the country to retain significant acreage. 
In other parts of the country, the same acreage would constitute a 
sizeable asset and the test of ``reasonableness'' would dictate 
disposal for the beneficiary's maintenance.
    Proposed Sec.  5.476(c) specifies that the income VA must consider 
in a net worth determination is income as determined under Sec.  5.472. 
We propose this specification in order to make it clear that the income 
VA considers in a net worth determination is the same as income 
considered for any Section 306 pension purpose. The law (38 U.S.C. 1503 
as in effect December 31, 1978 (when it was numbered 38 U.S.C. 503)) 
defines ``annual income under this chapter,'' as all payments received 
except for certain kinds of payments specifically excluded or deducted. 
Therefore, we must conclude that the reference to income in the net 
worth statute (38 U.S.C. 1522 as in effect December 31, 1978 (when it 
was numbered 38 U.S.C. 522)) refers to the same definition of income 
because both provisions are in the same chapter.
    At the same time, we propose to state that when VA considers a 
beneficiary's living expenses, VA cannot consider expenses excluded or 
deducted in determining income. This statement clarifies that the same 
expenses cannot be deducted twice. Because we are making this 
clarification concerning income and because we believe that the phrase 
``all of the beneficiary's living expenses'' sufficiently encompasses

[[Page 77585]]

medical expenses, we do not believe it is necessary to specifically 
mention unusual medical expenses in proposed paragraph (c). Therefore, 
we propose to remove the reference to unusual medical expenses 
currently in Sec.  3.263(d).
    Proposed Sec.  5.476 does not incorporate the following phrase 
currently found in Sec.  3.263(d): ``whether the property can be 
readily converted into cash at no substantial sacrifice.'' VA has 
traditionally defined the phrase ``substantial sacrifice'' as meaning 
that benefits should not be discontinued for excessive net worth if the 
beneficiary cannot readily convert other assets into cash. Therefore, 
proposed paragraph (c)(1), provides for consideration of ``[t]he value 
of liquid assets and the current market value of other property the 
beneficiary can readily convert into cash.'' We believe this wording 
would be clearer to beneficiaries, as well as consistent with VA 
practice.
    Finally, proposed Sec.  5.476(d) includes a cross-reference to the 
listing of payment sources that, by statute, VA must exclude from 
consideration in determining entitlement to need-based benefits. As 
previously mentioned, we will propose a regulation in a separate NPRM 
that would list income sources and assets that are statutorily excluded 
from consideration for all of VA's need-based programs. Therefore, the 
following four such sources, currently listed in Sec.  3.263(e) through 
(h), are not included in proposed Sec.  5.476: ``Agent Orange 
settlement payments'; ``Restitution to individuals of Japanese 
ancestry'; ``Monetary allowance under 38 U.S.C. chapter 18 for certain 
individuals who are children of Vietnam veterans'; and ``Victims of 
Crime Act.''
5.477 Effective Dates for Section 306 and Old-Law Pension Reductions or 
Discontinuances
    Proposed Sec.  5.477(a) is based on the first sentence of current 
Sec.  3.660(a)(2), which provides:

    Where reduction or discontinuance of a running award of 
[S]ection 306 pension or [O]ld-[L]aw pension is required because 
dependency of another person ceased due to marriage, annulment, 
divorce or death, or because of an increase in income, which 
increase could not reasonably have been anticipated based on the 
amount actually received from that source the year before, the 
reduction or discontinuance shall be made effective the end of the 
year in which the increase occurred.

    Proposed Sec.  5.477(a) clarifies the actual effective date that VA 
pays a reduced rate or discontinues benefits by stating, ``If required, 
VA will pay a reduced section 306 or old-law pension rate or 
discontinue benefits effective January 1 of the calendar year 
immediately following [certain events].'' Proposed paragraphs (a)(1) 
through (a)(3) then go on to specify those events. We believe that 
stating the effective date in this manner--focusing on the date that 
the new rate begins rather than on the date that the old rate ends--
clarifies the effective-date provisions for reductions and 
discontinuances. We propose similar wording throughout the Project. VA 
intends no substantive change by this rewording.
    Proposed Sec.  5.477(b) provides that if a reduction or 
discontinuance is required for any reason other than the events 
specified in paragraph (a) or in Sec.  5.478(a), VA will apply the 
general effective-date rules. These are currently found in Sec. Sec.  
3.500 through 3.503. A future NPRM will address Sec. Sec.  3.500 
through 3.503.
5.478 Time Limit To Establish Continuing Entitlement to Section 306 or 
Old-Law Pension
    Proposed Sec.  5.478(a) is based on current Sec.  3.260(b), which 
provides that ``[w]here there is doubt as to the amount of the 
anticipated income,'' VA will make its decision concerning payment for 
a particular calendar year based on the best income information it has 
concerning income for that year. If it appears that income exceeds the 
annual income limit, VA will discontinue the benefit. Proposed Sec.  
5.478(a) makes the application of Sec.  3.260(b) to prior pension 
clearer to readers.
    However, proposed Sec.  5.478(b), derived from portions of Sec.  
3.660(b)(1), provides that beneficiaries have until the end of the 
following year to provide evidence to show that income was actually 
below the limit and thereby establish continuing entitlement to 
pension. We propose to include an example as an aid to readers.
    Proposed Sec.  5.478(c), based on current Sec.  3.960(d), clarifies 
further that if no income evidence is submitted or if the evidence 
submitted does not warrant continued benefits, the discontinuance of 
section 306 or old-law pension is final.

Explanation of Additional Proposed Removals From Part 3

    Although all of part 3 would be removed and replaced by proposed 
part 5, we invite public comment concerning rules in current part 3 
that we do not propose to transfer to proposed part 5, i.e., that we 
simply propose to remove. Some of these have already been discussed in 
this NPRM, but others are discussed below.
    We propose to remove Sec.  3.26. Paragraphs (a) through (c) 
describe the annual income limits for old-law and section 306 pension. 
We believe this regulation no longer has value because the statutory 
provisions are obscure to most readers. More importantly, the cited 
statutes set forth the January 1, 1979, income limits only. We believe 
it is more useful to describe how and where to find the current income 
limits, which we have done in proposed Sec.  5.471. Current Sec.  
3.26(d) is redundant of the final sentence of current Sec.  3.28.
    We propose to remove Sec.  3.261. This regulation currently 
contains a table that lists income exclusions and deductions, and 
applicability of net worth, for VA's need-based benefits that existed 
before January 1, 1979: old-law pension, section 306 pension, and 
parents' DIC. The Sec.  3.261 table also lists income exclusions and 
deductions, and applicability of net worth, for VA determinations 
concerning parents' dependency. Most of the entries in the table cross-
reference Sec.  3.262, where the inclusion or exclusion of a particular 
type of income is explained in greater detail. We believe that some 
readers may rely only on the information in the table and fail to refer 
to the specific provisions of Sec.  3.262. Because it is a bedrock 
principle of regulatory construction that a specific provision will 
trump a more general one, we propose to remove all of the paragraphs in 
Sec.  3.261 that cross-reference Sec.  3.262.
    Therefore, when a paragraph from the Sec.  3.261 table has an 
associated cross-reference in the last column of the table, we have not 
included that entry in the derivation table at the beginning of this 
NPRM. For example, Sec.  3.261(a)(6) is not included on the derivation 
table because it would be removed in favor of the more specific 
provision it cross references, Sec.  3.262(c).
    There are currently 13 paragraphs in Sec.  3.261 that do not 
contain associated Sec.  3.262 cross-references. These are paragraphs 
(a)(4), (7), (9), (10), (11), (12), (13), (20), (22), (23), (26), (27), 
and (31). Of these, paragraphs (a)(4), (7), (12), (13), (20), (22), 
(26), and (31) are included in the derivation table at the beginning of 
this NPRM as the source of certain proposed part 5 regulations.
    The ``[a]nnuities'' entry in paragraph (a)(14) of Sec.  3.261 does 
not contain a cross-reference to Sec.  3.262. However, as previously 
discussed in this NPRM in the discussion of proposed Sec.  5.472, this 
entry will be included in a future proposed regulation.
    We propose to remove paragraphs (a)(9) and (27) of Sec.  3.261 
because these paragraphs list included income sources. Under proposed 
Sec.  5.472, VA

[[Page 77586]]

counts all payments unless specifically excluded. For the same reason, 
we propose to remove the ``[r]efund'' entry in paragraph (a)(14). We 
propose to remove paragraph (a)(10), which excludes the ``[r]easonable 
value of allowances to person in service in addition to base pay'' for 
Section 306 child pension beneficiaries. We do not believe there are 
any remaining beneficiaries to whom this exclusion applies.
    We propose to remove paragraph (a)(11) of Sec.  3.261 because 
authority for mustering-out pay was repealed by Public Law 89-50, 79 
Stat. 173.
    We propose to remove paragraph (a)(23) of Sec.  3.261, which 
excludes overtime pay for ``Government employees'' for old-law veteran 
pension beneficiaries. We do not believe there are any remaining 
beneficiaries to whom this exclusion applies.
    Current Sec.  3.261(a)(20) lists VA benefits. As previously 
described in the discussion of proposed Sec.  5.472(e), the portions of 
Sec.  3.261(a)(20) that pertain to section 306 and old-law pension 
would be described in proposed Sec.  5.472(e) in terms of those VA 
benefits that count. We propose to remove the portion of current Sec.  
3.261(a)(20) that lists the subsistence allowance under Chapter 31 of 
38 U.S.C. as a countable payment because we do not believe that any of 
the remaining veteran beneficiaries of old-law pension receive these 
vocational rehabilitation payments. We also propose to remove the 
portion of Sec.  3.261(a)(20) that lists veterans' educational 
assistance under 38 U.S.C. chapter 34 because VA no longer pays this 
benefit.
    We propose to remove the second sentence of Sec.  3.262(j)(3), an 
income exclusion that applies only to old-law death pension 
beneficiaries, for payments equaling lump-sum amounts based on the 
death of a veteran. We believe that all such payments have already been 
received because the veteran must have died before July 1, 1960, in 
order for a beneficiary to be receiving old-law death pension.
    Current Sec.  3.262(e)(1) provides in part that:

    Where the retirement benefit is based on the claimant's own 
employment, payments will not be considered income until the amount 
of the claimant's personal contribution (as distinguished from 
amounts contributed by the employer) has been received. Thereafter 
the 10 percent exclusion will apply.

    Similarly, current Sec.  3.262(e)(2) provides in part that:

    Where a person was receiving or entitled to receive pension and 
retirement benefits based on his or her own employment on December 
31, 1964, the retirement payments will not be considered income 
until the amount of the claimant['s] personal contribution (as 
distinguished from amounts contributed by the employer) has been 
received. Thereafter the 10 percent exclusion will apply.

    We propose to remove these two provisions. It is extremely unlikely 
that an old-law pension beneficiary's contributions to retirement plans 
or a Section 306 pension beneficiary's contributions to retirement 
plans based on employment on December 31, 1964, were not recovered long 
ago.
    We propose to remove references to the following effective dates in 
current Sec.  3.262 for exclusion of particular income types: July 1, 
1959 (paragraph (g)(2)); January 10, 1962 (paragraph (k)(4)(iii)); 
January 1, 1965 (paragraphs (e)(1) and (2), (j)(1), and (k)(5)); 
October 7, 1966 (paragraphs (i)(2), (j)(2), and (j)(4)); and January 1, 
1971 (paragraphs (k)(1) and (k)(6)). Although current section 306 and 
old-law pension rates are based on 1978 income, it is highly unlikely 
that VA will process a retroactive adjustment to a prior pension award 
effective more than 30 years in the past; therefore, we believe these 
effective dates are no longer necessary.
    We propose to remove current Sec.  3.262(m), which concerns 
deducting the veteran's final expenses and just debts from death 
pension awards. Current Sec.  3.262(p) specifies that VA allows final 
expenses as a deduction during the year of the veteran's last illness 
and burial or during the year the beneficiary paid the expenses. 
Because the last date that a surviving spouse or child could establish 
entitlement to Section 306 pension was December 31, 1978, these claims 
were made long ago. If a case should arise in which a surviving spouse 
or child claims to have paid final expenses or just debts many years 
previously which were claimed but remained unprocessed due to an error, 
the statute would govern the decision.
    From paragraphs (n)(2) and (p) of Sec.  3.262, we propose to remove 
the references to ``spouse'' on the same basis as our proposal to 
remove Sec.  3.262(m). Spouses of veterans who die after December 31, 
1978, may only be considered for Improved pension. This is true even if 
the veteran was in receipt of section 306 or old-law pension.
    We propose to remove Sec.  3.270. This regulation currently 
introduces specific section numbers for regulations that govern 
entitlement to Section 306 and Old-Law pension and parents' DIC, and 
for making dependent parent determinations. All of the regulations 
referenced in current Sec.  3.270 are to be moved to various other 
regulations that are specific to the benefit indicated. Therefore, 
current Sec.  3.270 would no longer be necessary.
    We propose to remove several provisions that pertain to initial 
entitlement to certain pension programs. First, we propose to remove 
paragraphs (a)(1), (b)(1), and (b)(2) of current Sec.  3.3. These 
paragraphs pertain to initial entitlement to Spanish-American War 
service pension for veterans, Indian war death pension, and Spanish-
American War death pension, respectively. Although new claims for these 
pensions are theoretically possible, they are unlikely in the extreme. 
As of September 2003, there was one surviving child beneficiary of an 
Indian war veteran, and there were approximately 400 surviving spouse 
and child beneficiaries of Spanish-American War veterans. VA RCS 20-
0221, September 2002. To our knowledge, no veterans of either war 
survive. Therefore, we believe removal of these provisions is 
warranted. In the unlikely event of a new claim, the applicable statute 
would control. For the same reason, we propose to remove Sec.  3.16, 
which pertains to computing service for service pension.
    Second, we propose to remove current paragraphs (a)(2) and (b)(3) 
of Sec.  3.3, which pertain to initial entitlement to Section 306 
pension. As previously outlined in this NPRM, new entitlement to 
Section 306 disability or death pension is not possible and has not 
been possible since January 1, 1979. We note that there are no 
regulations in current part 3 pertaining to initial entitlement to old-
law pension. The governing statutes would control if VA discovers an 
old claim for Section 306 pension that has not been processed due to 
error or oversight.
    We propose to remove Sec.  3.314, which pertains to basic pension 
determinations. The provisions in this regulation are either obsolete 
or redundant of other regulatory provisions. Paragraph (a) pertains to 
establishing basic eligibility for service pension, which we propose to 
remove for the reasons stated above in relation to current Sec.  
3.3(a)(1) and (b)(2). Paragraph (b) describes when rating decisions are 
required for nonservice-connected disability pension, which we believe 
is a procedural matter that should not be included in new part 5. 
Paragraph (b)(1) is redundant of Sec.  3.3(a)(2)(iii) and (b)(3)(ii). 
The first sentence of Sec.  3.314(b)(2) is redundant of Sec.  3.342(a). 
The second sentence of Sec.  3.314(b)(2) pertains to new entitlement

[[Page 77587]]

to Section 306 pension, which we are removing for the reasons stated 
above in relation to current Sec.  3.3(a)(2). Current Sec.  3.314(b)(3) 
pertains to increased old-law or section 306 pension because of the 
need for aid and attendance or the housebound rate. This provision is 
obsolete because section 306 and old-law pension cannot increase; the 
veteran must have established the need for aid and attendance or 
eligibility for the housebound rate before January 1, 1979.
    We propose to remove Sec.  3.17, which pertains to computing 
wartime service for nonservice-connected disability and death pension 
purposes. Because new entitlement cannot be established to section 306 
or old-law pension, this regulation no longer pertains to those 
programs. The regulation still pertains to the Improved pension 
program; however, it is redundant of current Sec.  3.3(a)(3)(i) through 
(iv).
    We propose to remove Sec.  3.401(i), which is an effective-date 
provision for an award of increased pension to a veteran who attains 
the age of 78. With the enactment of Public Law 95-588, 92 Stat. 2497, 
Congress removed the ``age of 78 rule.'' This provision does not apply 
to the Improved pension program. Section 306 pension rates have been 
frozen since December 31, 1978. They may be reduced or discontinued 
under limited circumstances, but they cannot increase. In order for the 
``age of 78 rule'' to apply to section 306 pension beneficiaries, the 
beneficiary must have attained age 78 before January 1, 1979. Current 
38 U.S.C. contains no statutory authority for the ``age of 78 rule.''
    Similarly, we propose to remove current Sec. Sec.  3.400(j)(2) 
through (6) and 3.401(f). These are effective-date provisions for 
Spanish-American War service pension and the other prior pension 
programs. Because we are proposing to remove the regulations pertaining 
to new entitlement to Spanish-American War service pension, section 306 
pension, and old-law pension, we propose to remove the applicable 
effective dates.
    We propose to remove Sec.  3.712(b) as obsolete. This is a special 
provision that applies to surviving spouses in receipt of Spanish-
American War death pension who require aid and attendance. Current 
Sec.  3.712(b) provides that these surviving spouses will receive 
either the Spanish-American War aid and attendance benefit of $149 
monthly or the aid and attendance rate for section 306 death pension, 
whichever is greater. Current Sec.  3.712(b) further provides that the 
section 306 death pension rate is based on current income. In the early 
years following the introduction of improved pension, it was 
occasionally the case that section 306 death pension would pay more 
than Spanish-American War death pension or improved death pension. 
However, with each passing year, this has become less and less likely 
as Improved pension maximum annual pension rates increase while section 
306 pension rates remain frozen. Now, it is a virtual impossibility. In 
order for a surviving spouse with no dependents to be entitled to more 
than $149 per month under section 306 death pension, the surviving 
spouse's annual income would have to be less than $1,900 per year in 
2004. If that were the case at this time, such a surviving spouse would 
almost certainly elect Improved death pension. (A surviving spouse 
eligible for aid and attendance who has no dependents and an annual 
income of $1,900 per year is entitled to $725 monthly in 2004 under the 
Improved pension program, unless he or she is in a nursing home and 
Medicaid is paying for care.) If a case arises in which a surviving 
spouse beneficiary of Spanish-American War death pension claimed that 
section 306 death pension should have been paid but was not paid due to 
error or oversight, the governing statute, 38 U.S.C. 1536(d)(2), would 
control.
    We propose to remove Sec.  3.713(b) as obsolete. Current paragraph 
(b) creates a special exception to the general effective date in 
paragraph (a) for beneficiaries who were entitled to receive either 
section 306 or old-law pension on December 31, 1978, and who elected to 
receive improved pension before October 1, 1979. (Section 3.713(b) does 
not apply to Spanish-American War death pension). If a pension 
beneficiary were to claim entitlement to an earlier effective date 
based on the filing of an election before October 1, 1979, which VA 
somehow did not recognize as such at the time, the claim would be 
processed under section 306(d) of Public Law 95-588, 73 Stat. 432, the 
governing statute.
    We propose to remove Sec.  3.252(e)(1) as obsolete. Current Sec.  
3.252(e)(1) provides that if a veteran's child is born after the 
veteran dies, the surviving spouse cannot claim the child as a 
dependent until the child is born. Because the last date a surviving 
spouse could establish eligibility to old-law pension was June 30, 
1960, and the last date a surviving spouse could establish eligibility 
to section 306 pension was December 31, 1978, current Sec.  3.252(e)(1) 
no longer applies to section 306 or old-law pension.
    We propose to remove Sec.  3.252(f), which contains specific 
provisions for computing a special reduced aid and attendance allowance 
under 38 U.S.C. 1521(d)(1) as in effect on December 31, 1978 (when it 
was numbered 38 U.S.C. 521(d)(1)). We believe there is no longer a need 
for Sec.  3.252(f). Veterans are not entitled to the special reduced 
aid and attendance allowance unless they were in need of aid and 
attendance on or before December 31, 1978. VA publishes the income 
limits for continued entitlement to this allowance every year as the 
income limits increase. If there would be a case at some time to which 
Sec.  3.252(f) would apply (due to error or oversight), the statute 
would control.
    We propose to remove current Sec.  3.257 as obsolete. This 
regulation states that if old-law or section 306 pension is not payable 
to a surviving spouse because his or her annual income exceeds the 
income limit, VA will make payments to children as if there were no 
surviving spouse. Because new entitlement to old-law or section 306 
pension cannot be established, VA cannot establish new entitlement to 
either old-law or section 306 pension for a child if a surviving 
spouse's income exceeds the income limit for either of these pensions. 
Removal of this regulation would not affect current pension awards to 
children.
    We propose to remove current Sec.  3.714 as obsolete. Current Sec.  
3.714 implemented the Adoption and Child Welfare Act of 1980, Public 
Law 96-272 Sec.  310(b), 94 Stat. 500, which provided that certain 
beneficiaries who had once been in receipt of prior pensions had the 
right to disaffirm an election of improved pension, thereby restoring 
their right to prior pension. The primary purpose of the law was to 
restore Medicaid eligibility to those who lost it because they were 
required to elect improved pension under the regulations that 
previously governed eligibility to receive public assistance. Under 
section 310(b), VA was required to obtain from every affected pension 
beneficiary an informed decision regarding whether he or she wish to 
continue to receive improved pension or disaffirm the earlier election. 
VA long ago complied with these notification provisions.
    Current Sec.  3.714 also provides for a special informed election 
process for those pension beneficiaries who reside in states in which 
Medicaid eligibility is based on public assistance. However, section 
114(a) of the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, Public Law 104-193, 110 Stat. 2105, 
provides that eligibility for Medicaid is no longer linked to the 
receipt of public assistance. In other words, there is no longer any 
state to which the first sentence of current Sec.  3.714(b) applies.

[[Page 77588]]

Endnote Regarding Removals From Part 3

    For the reasons shown in the preceding supplementary information, 
the amendments proposed in this document would, if adopted, result in 
removal of current Sec. Sec.  3.16, 3.17, 3.26, 3.28, 3.252, 3.257, 
3.261, 3.270, 3.314, 3.711, 3.712, 3.713, and 3.714, and removal of 
portions of Sec. Sec.  3.1, 3.3, 3.260, 3.262, 3.263, 3.400, 3.401, 
3.660, 3.700, and 3.960. This would be the case because those part 3 
sections, or portions of sections, would be replaced by new part 5 
sections or they would be removed entirely. Readers are invited to 
comment both on these part 5 removals and on the proposed new part 5 
rules at this time.
    NPRMs frequently include formal ``amendatory language'' listing the 
sections, or portions of sections, that would be removed if the 
proposed amendments are adopted. However, we have not included such 
``amendatory language'' in this NPRM because of the nature of this 
Project. Because of the very large scope of the Project, we are 
publishing proposed amendments in several NPRMs. Then, after public 
comments in response to all of the NPRMs making up the Project have 
been reviewed and considered, VA will propose to remove all of part 3, 
concurrent with the implementation of part 5.

Paperwork Reduction Act

    Although this document contains a provision constituting a 
collection of information in proposed 38 CFR 5.478(b), under the 
provisions of the Paperwork Reduction Act (44 U.S.C. 3501-3521), no new 
or proposed revised collection of information is associated with this 
proposed rule. The information collection requirement for proposed 
Sec. Sec.  5.474 and 5.478(b) are currently approved by the Office of 
Management and Budget (OMB) and have been assigned OMB control numbers 
2900-0624 and 2900-0101.

Regulatory Flexibility Act

    The Secretary hereby certifies that this proposed regulatory 
amendment will not have a significant economic impact on a substantial 
number of small entities as they are defined in the Regulatory 
Flexibility Act, 5 U.S.C. 601-612. This proposed amendment would not 
affect any small entities. Only VA beneficiaries could be directly 
affected. Therefore, pursuant to 5 U.S.C. 605(b), this proposed 
amendment is exempt from the initial and final regulatory flexibility 
analysis requirements of sections 603 and 604.

Executive Order 12866

    This document has been reviewed by the Office of Management and 
Budget under Executive Order 12866.

Unfunded Mandates

    The Unfunded Mandates Reform Act requires, at 2 U.S.C. 1532, that 
agencies prepare an assessment of anticipated costs and benefits before 
developing any rule that may result in an expenditure by State, local, 
or tribal governments, in the aggregate, or by the private sector of 
$100 million or more in any given year. This proposed rule would have 
no such effect on State, local, or tribal governments, or the private 
sector.

Catalog of Federal Domestic Assistance Numbers

    The Catalog of Federal Domestic Assistance program numbers for this 
proposal are 64.100-102, 64.104-110, 64.115, and 64.127.

List of Subjects in 38 CFR Part 5

    Administrative practice and procedure, Claims, Disability benefits, 
Pensions, Veterans.

    Approved: October 14, 2004.
Anthony J. Principi,
Secretary of Veterans Affairs.
    For the reasons set forth in the preamble, VA proposes to amend 38 
CFR chapter I as set forth below:

PART 5--COMPENSATION, PENSION, BURIAL, AND RELATED BENEFITS

    Part 5, as proposed to be added at 69 FR 4832, January 30, 2004, is 
further amended by adding subpart F to read as follows:
Subpart F--Nonservice-Connected Disability Pensions and Death Pensions

Choosing Improved Pension Over Certain Other VA Pension Programs: 
Veterans and Survivors

Sec.
5.460 Definitions of certain VA pension programs.
5.461 Electing improved pension instead of Old-Law or Section 306 
pension.
5.462 Right of surviving spouses receiving Spanish-American War 
death pension to elect improved death pension.
5.463 Effective dates of improved pension elections.
5.464 Multiple pension awards not payable.
5.465-5.469 [Reserved]

Continuing Entitlement to Old-Law or Section 306 Pension: Veterans 
and Survivors

5.470 Reasons for discontinuing or reducing section 306 or old-law 
pension.
5.471 Annual income limits and rates for section 306 and old-law 
pension.
5.472 Evaluation of income for section 306 and old-law pension.
5.473 Counting a dependent's income for section 306 and old-law 
pension.
5.474 Deductible expenses for section 306 pension only.
5.475 Gaining or losing a dependent for section 306 and old-law 
pension.
5.476 Net worth for section 306 pension only.
5.477 Effective dates for section 306 and old-law pension reductions 
or discontinuances.
5.478 Time limit to establish continuing entitlement to section 306 
or old-law pension.
5.479-5.499 [Reserved]

    Authority: 38 U.S.C. 501(a) and as noted in specific sections.

Subpart F--Nonservice-Connected Disability Pensions and Death 
Pensions

Choosing Improved Pension Over Certain Other VA Pension Programs: 
Veterans and Survivors


Sec.  5.460  Definitions of certain VA pension programs.

    (a) Section 306 pension means the nonservice-connected disability 
and death pension programs available to new claimants during the period 
beginning on July 1, 1960, and ending on December 31, 1978.
    (b) Old-Law pension means the nonservice-connected disability and 
death pension programs available to new claimants before July 1, 1960.
    (c) Spanish-American War death pension means pension payable to a 
surviving spouse or child of a veteran who served in the Spanish-
American War. Entitlement is based solely on the veteran's service in 
the Spanish-American war without regard to disability, income, or net 
worth.

(Authority 38 U.S.C. 501(a)).

Sec.  5.461  Electing improved pension instead of old-law or section 
306 pension.

    (a) Right to elect (choose) Improved pension. Unless this section 
states otherwise, a pension beneficiary who was entitled to receive 
old-law pension or section 306 pension on December 31, 1978, may 
instead elect (choose) to receive improved pension.
    (b) Finality of election. Unless one of the following exceptions 
applies, an election of Improved pension is final when a beneficiary 
negotiates a check for a payment of Improved pension. Once the election 
is final, the beneficiary cannot receive old-law or section 306 
pension. An election may be canceled according to the following 
exceptions:
    (1) The beneficiary receives benefits by direct deposit or 
electronic funds transfer (DD/EFT). If the beneficiary receives a 
payment of improved pension benefits by direct deposit or electronic

[[Page 77589]]

funds transfer, the beneficiary must cancel the election of improved 
pension before the financial institution receives the second Improved 
pension payment. Once the financial institution receives a second 
payment, the election is final.
    (2) The beneficiary is incompetent. If VA finds that a beneficiary 
was mentally incompetent when he or she elected Improved pension, the 
beneficiary (or guardian) may cancel that election. VA must receive the 
request to cancel the election within one year from the date the 
election became effective.
    (3) Beneficiary based election on erroneous VA information. A 
beneficiary who elected improved pension based on erroneous information 
provided by VA may cancel the election within one year after the date 
the election became effective. For this paragraph (b)(3) to apply, VA 
must determine that it previously provided erroneous information and 
that determination must be based on the same evidence that VA used when 
it previously provided the erroneous information.
    (c) If a veteran's spouse is also a veteran eligible to elect 
Improved pension. If a veteran who is eligible to elect Improved 
pension has a spouse who is also a veteran who is eligible to elect 
Improved pension, neither veteran may receive Improved pension unless 
both elect to receive it.
    (d) If a beneficiary does not elect Improved pension. If a pension 
beneficiary who is eligible to elect Improved pension does not do so, 
VA will continue to pay that beneficiary old-law pension or section 306 
pension at the monthly rate in effect on December 31, 1978, unless that 
rate must be reduced or discontinued under Sec.  5.470 or another 
regulation in this part.

(Authority: Sec. 306(a) and (b), Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.462  Right of surviving spouses receiving Spanish-American War 
death pension to elect improved death pension.

    A surviving spouse who is receiving Spanish-American War death 
pension may elect to receive Improved death pension instead. Paragraph 
(b) of Sec.  5.461, concerning finality of elections, applies to 
surviving spouses of Spanish-American War veterans. Once the election 
is final, the surviving spouse has no right to receive Spanish-American 
War death pension again. Surviving spouse beneficiaries of Spanish-
American War death pension who do not elect Improved pension will 
continue to receive Spanish-American War death pension.

(Authority: 38 U.S.C. 1536).

Sec.  5.463  Effective dates of improved pension elections.

    An election to receive improved pension will be effective the date 
VA receives the election.

(Authority: Sec. 306(d), Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.464  Multiple pension awards not payable.

    If a veteran is entitled to improved pension on the basis of his or 
her own service and is also entitled to pension under any other VA 
pension program based on another person's service, VA will pay only the 
greater benefit.

(Authority: 38 U.S.C. 1521(i)).

Sec. Sec.  5.465 through 5.469  [Reserved]

Continuing Entitlement to Old-Law or Section 306 Pension: Veterans and 
Survivors


Sec.  5.470  Reasons for discontinuing or reducing section 306 or old-
law pension.

    (a) Discontinuances. Section 306 or old-law pension will be 
discontinued for any one of the following reasons:
    (1) A veteran pension beneficiary ceases to be permanently and 
totally disabled.
    (2) A surviving spouse pension beneficiary no longer meets the 
definition of ``surviving spouse'' as provided in Sec.  3.50 of this 
chapter.
    (3) A child pension beneficiary no longer meets the definition of 
``child,'' as provided in Sec.  3.57 of this chapter.
    (4) A pension beneficiary's income exceeds the annual income limit.
    (5) A section 306 pension beneficiary has a net worth of such value 
that it is reasonable that some part of it be consumed for the 
beneficiary's maintenance. Evaluation of net worth will be made under 
Sec.  5.476, ``Net worth for section 306 pension only.''
    (b) Finality of discontinuance. Discontinuance of section 306 or 
old-law pension for one of the reasons listed in paragraph (a) of this 
section means that a pension beneficiary is no longer entitled to 
receive section 306 or old-law pension benefits. Any new entitlement 
that may be established would be to improved pension.
    (c) Reduction and finality of reduction. If a beneficiary of 
section 306 or old-law pension loses a dependent who was established 
before December 31, 1978, VA must reduce such pension by the additional 
amount payable based on the existence of the dependent. Such reductions 
are final and rates do not increase. VA must discontinue pension as 
provided in paragraph (a)(4) of this section if a veteran or surviving 
spouse no longer has any dependents and his or her annual income 
exceeds the annual income limit for a veteran or surviving spouse 
alone.

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.471  Annual income limits and rates for section 306 and old-law 
pension.

    (a) Where to find the annual income limits and pension rates. When 
annual income limits are adjusted as provided in paragraph (b) of this 
section, VA will publish the new limits in the ``Notices'' section of 
the Federal Register. Current and historical annual income limits and 
historical pension rates for old-law and section 306 pension can be 
found on the Internet at http://www.va.gov or are available from any 
Veterans' Service Center.
    (b) When annual income limits are adjusted. Whenever there is a 
cost-of-living increase in Social Security benefit amounts under the 
Federal Old-Age, Survivors, and Disability Insurance Benefits section 
of the Social Security Act (42 U.S.C. 415(i)), VA will increase the 
following by the same percentage effective the same date:
    (1) The annual income limits applicable to continued receipt of 
section 306 and old-law pension.
    (2) The dollar amount of a veteran's spouse's income that may be 
excluded in determining the income of a veteran for section 306 pension 
purposes.

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.472  Evaluation of income for section 306 and old-law pension.

    (a) Purpose and scope. This section provides rules for determining 
how to count income for section 306 and old-law pension purposes. This 
section also applies to counting spousal income for section 306 pension 
purposes when spousal income is included as the veteran's income.
    (b) Countable income. (1) All payments included. VA counts all 
payments of any kind from any source in determining the income of a 
pension beneficiary, except payments that are not counted under an 
exclusion provided in this section or Sec.  5.473.
    (2) ``Payments'' defined. For purposes of this section, 
``payments'' are cash and cash equivalents (such as goods and other 
negotiable instruments) and include the fair market value of personal 
services, goods, or room and board a beneficiary receives in lieu of 
other forms of payment.
    (i) For section 306 pension purposes, VA counts as income 
retirement benefits

[[Page 77590]]

(pension or retirement payments) that have been waived.
    (ii) For old-law pension purposes, ``payments'' do not include 
retirement benefits from the following sources that have been waived 
pursuant to Federal statutes:
    (A) Civil Service Retirement and Disability Fund.
    (B) Railroad Retirement Board.
    (C) District of Columbia (paid to firemen, policemen, or public 
school teachers).
    (D) Former United States Lighthouse Service.
    (3) Countable income is rounded down. VA rounds countable income 
down to the nearest whole dollar. For section 306 pension, VA rounds 
down after subtracting any authorized deductible expenses specified in 
Sec.  5.474.
    (4) Income considered for year of receipt. VA computes income for 
the calendar year in which it is received and considers income for the 
full calendar year. However, when VA discontinues section 306 or old-
law pension awards based on income that exceeds the limit, it does so 
effective January 1 of the following calendar year as provided in Sec.  
5.477.
    (c) Deductions from specific income sources. (1) Expenses of a 
business or profession. Necessary business operating expenses such as 
the cost of goods sold and payments for rent, taxes, upkeep, repairs, 
and replacements are deductible from income from a business or 
profession. Depreciation is not a deductible expense. Losses sustained 
in operating a business or profession may not be deducted from income 
from any other source. For purposes of this section, ``business'' 
includes the operation of a farm and transactions involving investment 
property.
    (2) Expenses associated with disability, accident, or health 
insurance recoveries. Medical, legal, or other expenses incident to the 
insured injury or illness are deductible from sums recovered under 
disability, accident, or health insurance. However, the same medical 
expenses cannot then be deducted as unusual medical expenses under 
Sec.  5.474.
    (3) Salary deductions and employer contributions. Income from a 
salary is not determined by ``take-home'' pay. The salary counted as 
income is the gross salary without any deductions. An employer's 
contributions to health and hospitalization plans are not included in 
gross salary.
    (d) Income-producing property and income from property sales. (1) 
Scope. This paragraph (d) provides rules for determining whether income 
from income-producing property and property sales should be counted as 
a pension beneficiary's income. The provisions of this paragraph (d) 
apply to all property, real or personal, in which a pension beneficiary 
has an interest, whether acquired through purchase, bequest, or 
inheritance.
    (2) Proof of ownership. In determining whether to count income from 
real or personal property or property sales, VA will consider the terms 
of the recorded deed or other evidence of title. In the absence of 
evidence showing otherwise, VA will accept the beneficiary's statement 
as proof of the terms of ownership.
    (3) Transfer of ownership with retention of income. If a pension 
beneficiary transfers ownership of property to another person or legal 
entity, but retains the right to income, the income will be counted.
    (4) Income from jointly-owned property. If a pension beneficiary 
owns property jointly with others, including partnership property, each 
person will be considered as receiving an equal share of the income 
from that property in the absence of evidence showing otherwise.
    (5) Property sales for old-law pension. (i) Unless it is the 
beneficiary's principal residence, net profit from the sale of real or 
personal property counts as income for old-law pension.
    (ii) In determining net profit from the sale of property owned 
prior to the date of entitlement, VA will compare the value of the 
property at the time entitlement began with the selling price.
    (iii) If payments are received in installments, the entire amount 
of installment payments received (including principal and interest) 
will be excluded until the total of installments received is equal to 
the cost of the residence, or if paragraph (d)(5)(ii) of this section 
applies, equal to the value of the property on the date pension 
entitlement was established. The entire amount of any installment 
received thereafter will be counted as income.
    (6) Profit from sale of principal residence for old-law pension. 
(i) Net profit realized from the sale of an old-law pension 
beneficiary's principal residence is not counted to the extent that it 
is applied to the purchase price of a subsequent principal residence 
for the beneficiary in either the calendar year of the sale or the 
following year.
    (ii) This exclusion does not apply where the net profit is applied 
to the price of a home purchased earlier than the calendar year 
preceding the calendar year of the sale of the old residence.
    (iii) To qualify for this exclusion, the application of the net 
profit from the sale of the old residence to the purchase of the 
replacement residence must be reported to VA within one year following 
the date it was so applied.
    (7) Profit from sale of non-business property for section 306 
pension. Profit realized from the disposition of real or personal 
property other than in the course of a business does not count for 
section 306 pension. However, amounts received in excess of the sales 
price, such as interest payments, count as income. If payments are 
received in installments, the entire amount of installment payments 
(including principal and interest) are excluded until the total amount 
received equals the sales price. The entire amount of any installment 
received thereafter counts as income.
    (e) VA benefits. (1) Old-law pension. All VA benefits are excluded 
for old-law pension.
    (2) Section 306 pension. Only the following VA benefits count as 
income for section 306 pension:
    (i) Subsistence allowance (38 U.S.C. Ch. 31).
    (ii) Special allowance under 38 U.S.C. 1312(a).
    (iii) Accrued benefits, unless paid as a reimbursement.
    (iv) World War I adjusted compensation.
    (f) Income exclusions for section 306 or old-law pension. VA will 
not count payments from the sources listed in this paragraph (f) when 
calculating income for section 306 or old-law pension. Paragraph (g) of 
this section provides additional exclusions for section 306 pension.
    (1) Maintenance. The value of maintenance furnished by a relative, 
friend, or a civic or governmental charitable organization, including 
money paid to an institution for the care of the beneficiary due to 
impaired health or advanced age. However, if the maintenance is paid to 
the beneficiary and excluded under this provision, VA cannot also 
deduct it as an unusual medical expense under Sec.  5.474.
    (2) Survivor benefit annuity. Annuities paid by the Department of 
Defense under the authority of section 653, Public Law 100-456, 102 
Stat. 1991, to qualified surviving spouses of veterans who died before 
November 1, 1953.
    (3) Death gratuity. Death gratuity payments under 10 U.S.C. 1475 
through 1480.
    (4) State service bonuses. Payments of a bonus or similar cash 
gratuity by any State based upon service in the Armed Forces.

[[Page 77591]]

    (5) Payment for civic obligations. Payments received for 
performance of jury duty or other obligatory civic duties.
    (6) Fire loss reimbursement. Proceeds from fire insurance.
    (7) Certain life insurance payments. Payments under policies of 
Servicemembers' Group Life Insurance, United States Government Life 
Insurance, Veterans' Group Life Insurance, or National Service Life 
Insurance.
    (8) Rental value of beneficiary's property. The rental value of a 
beneficiary's use of his or her own real property, such as the rental 
value of the beneficiary's personal residence.
    (9) Increased inventory value of a business. The value of an 
increase of stock inventory of a business.
    (10) Commercial insurance dividends. Dividends from commercial 
insurance.
    (11) Employer contributions for retired employees. Contributions a 
public or private employer makes to either of the following:
    (i) Public or private health or hospitalization plan for a retired 
employee.
    (ii) Retired employee as reimbursement for premiums for 
supplementary medical insurance benefits under the Social Security 
program.
    (12) Income from retirement plans and similar plans and programs. 
Ten percent of the amount of payments under public or private 
retirement, annuity, endowment, or similar plans. This includes, but is 
not limited to, payments under or for any of the following:
    (i) Annuities or endowments paid under a Federal, State, municipal, 
or private business or industrial plan.
    (ii) Old age and survivor's insurance and disability insurance 
under title II of the Social Security Act.
    (iii) Retirement benefits received from the Railroad Retirement 
Board. However, if the beneficiary is a veteran receiving old-law 
pension, payments from this source do not count at all.
    (iv) Payments for permanent and total disability or death received 
from the Office of Workers' Compensation Programs of the United States 
Department of Labor, the Social Security Administration, or the 
Railroad Retirement Board, or pursuant to any worker's compensation or 
employer's liability statute, including damages collected incident to a 
tort suit under an employer's liability law of the United States or a 
political subdivision of the United States. This 10-percent exclusion 
applies after the income from the specified payments is reduced by the 
deductions described in paragraph (c)(3) of this section.
    (v) The proceeds of commercial annuity, endowment, or life 
insurance.
    (vi) The proceeds of disability, accident, or health insurance. 
This 10-percent exclusion applies after the income from the specified 
payments is reduced by the deductions described in paragraph (c)(3) of 
this section.
    (13) Other payments. Other payments listed in [regulation that will 
be published in a future Notice of Proposed Rulemaking].
    (g) Additional income exclusions for section 306 pension. In 
addition to the payments listed in paragraph (f) of this section, VA 
will exclude payments from the following sources as income for section 
306 pension:
    (1) Donations received. Donations from public or private relief or 
welfare organizations, including benefits received under 
noncontributory programs such as Supplemental Security Income payments.
    (2) Social Security death payments. Lump sum death payments under 
title II of the Social Security Act.
    (3) Money acquired from joint accounts because of death. Money that 
a death pension beneficiary acquires because of the death of a co-owner 
of a joint account in a bank or similar institution.
    (h) Donations received for old-law pension. If an old-law pension 
beneficiary receives additional donations from public or private relief 
organizations for members of his or her family, these additional 
allowances may not be divided per member of the family in determining 
the pension beneficiary's income. The entire payment is counted as 
income.

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)


Sec.  5.473  Counting a dependent's income for section 306 and old-law 
pension.

    (a) Veteran awards for old-law pension. VA excludes the separate 
income of a veteran's spouse or child in computing income for veteran 
old-law pension beneficiaries.
    (b) Veteran awards for section 306 pension. (1) Child's income. VA 
excludes the separate income of a veteran's child in computing income 
for veteran section 306 pension beneficiaries.
    (2) Spousal income. (i) VA presumptions concerning spousal income. 
For section 306 pension purposes, if a veteran and his or her spouse 
live together, VA presumes--
    (A) That the spouse's income is available to the veteran. The 
veteran may rebut this presumption by submitting evidence showing that 
all or part of the spouse's income is not available.
    (B) That counting the spouse's income would not cause the veteran 
hardship. The veteran may rebut this presumption by submitting evidence 
showing that there are expenses beyond the usual family requirements. 
Examples of such expenses include special training for a handicapped 
child and expenses for the prolonged illness of a family member. 
However, if the spouse's income is excluded because it is needed to pay 
for unusual medical expenses, the same medical expenses cannot be 
deducted as unusual medical expenses under Sec.  5.474(b).
    (ii) Spousal income exclusions. Unless excluded under paragraph 
(b)(2)(i) of this section, the veteran's income includes his or her 
spouse's income for section 306 pension purposes. However, VA will 
exclude from the veteran's income the greater of the following two 
amounts:
    (A) The amount of the spousal income exclusion specified in Public 
Law 95-588, section 306(a)(2)(B) (as increased by amounts published in 
the ``Notices'' section of the Federal Register).
    (B) All of the spouse's earned income.
    (c) Surviving spouse awards for section 306 or old-law pension. (1) 
Veteran's child not in surviving spouse's custody. For section 306 or 
old-law pension purposes, if a deceased veteran is survived by a spouse 
and a child, the annual income limits for a surviving spouse and child 
apply even if the child is not the surviving spouse's child and not in 
the surviving spouse's legal custody.
    (2) When a child's separate income is excluded. (i) VA will not 
count a child's or children's separate income as part of the surviving 
spouse's income if it is paid to the child, regardless of who has legal 
custody of the child.
    (ii) If the child's income is paid or given to the surviving 
spouse, VA will only count as much of the child's income as remains 
after deducting the child's living expenses.
    (d) Child awards. (1) Old-law pension. Earned income of child 
beneficiaries counts as income for old-law pension.
    (2) Section 306 pension. Earned income of child beneficiaries is 
excluded for section 306 pension.

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)


Sec.  5.474  Deductible expenses for section 306 pension only.

    (a) Scope. This section applies to section 306 pension only. 
Because section 306 pension rates cannot increase, deductible expenses 
paid after

[[Page 77592]]

December 31, 1978, can only be deducted from a pension beneficiary's 
income to keep the income within the annual income limit and continue 
entitlement to section 306 pension.
    (b) Unusual medical expenses. (1) Application. (i) Family members. 
For section 306 pension purposes, a family member is a relative of the 
beneficiary who is a member of the beneficiary's household whom the 
beneficiary has a moral or legal obligation to support. This includes 
relatives who are physically absent from the household for a temporary 
purpose or for reasons beyond their control.
    (ii) Unusual medical expenses. For purposes of this section, 
``unusual medical expenses'' means unreimbursed medical expenses above 
5 percent of annual income. However, if annual income includes 
retirement plan income, VA will calculate the 5 percent before applying 
the 10 percent exclusion under Sec.  5.472(f)(11). For medical expenses 
that VA will deduct, see [regulation that will be published in a future 
Notice of Proposed Rulemaking].
    (2) Veteran or surviving spouse awards. VA will deduct amounts paid 
by a veteran or surviving spouse for the veteran's or surviving 
spouse's own unusual medical expenses and those of family members.
    (3) Child awards. VA will deduct amounts paid by a child pension 
beneficiary for his or her own unusual medical expenses and those of 
the child's parent, brothers, and sisters.
    (4) When expenses are deducted. VA will deduct unusual medical 
expenses from income for the calendar year in which they were paid 
regardless of when the expenses were incurred.
    (5) Proof of expenses. VA will accept the pension beneficiary's 
statement as proof of the amount and nature of such medical expenses, 
the date of payment, and the identity of the creditor, unless 
circumstances create doubt as to the statement's credibility.
    (6) Estimates of expenses for future benefit periods. VA will 
project anticipated medical expenses based on a clear and reasonable 
expectation that they will continue. See Sec.  3.660(a) of this chapter 
(concerning the beneficiary's responsibility to inform VA concerning 
income changes).
    (c) Final expenses. (1) Definition. Final expenses are amounts paid 
for the expenses of a deceased person's last illness and burial. The 
same expense cannot be deducted as both a final expense and an unusual 
medical expense under paragraph (a) of this section.
    (2) Final expenses paid by the veteran. VA will deduct from a 
veteran's income the final expenses the veteran pays for his or her 
spouse or child.
    (3) Final expenses paid by a surviving spouse. VA will deduct from 
a surviving spouse's income the final expenses the surviving spouse 
pays for the veteran's child.
    (4) Proof of expenses. VA will accept as proof of expenses 
deductible under paragraph (c) of this section the pension 
beneficiary's statement as to the amount and nature of each expense, 
the date of payment, and identity of the creditor unless the 
circumstances create doubt as to the credibility of the statement.
    (5) When expenses are deducted. Expenses deductible under paragraph 
(c) of this section are deductible for the year in which they were 
paid. However, if such expenses were paid during the year following the 
year the spouse, surviving spouse, or child died, the expenses may be 
deducted for the year the expenses were paid or the year of death, 
whichever is to the beneficiary's advantage.
    (d) Prepayment on real property mortgage after death of spouse. (1) 
Section 306 veteran pension beneficiaries only. If a veteran who is 
receiving section 306 pension makes a pre-payment on a mortgage or 
similar type security instrument on real property after the death of 
his or her spouse, VA will deduct the amount of the pre-payment from 
the veteran's income. The real property must have been the principal 
residence of the veteran and spouse, and the mortgage or security 
instrument must have existed when the veteran's spouse died.
    (2) Time limit of pre-payment. The pre-payment described in 
paragraph (d)(1) of this section must be made after the spouse's death 
but before the end of the year following the year of death. VA will 
deduct the amount of the pre-payment from the veteran's income for the 
year of death or the year after death, whichever is to the veteran's 
advantage.

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.475  Gaining or losing a dependent for section 306 and old-law 
pension.

    (a) Pension beneficiary gains a dependent. (1) Section 306 or old-
law pension. If a section 306 or old-law pension beneficiary gains a 
dependent, VA will determine if a higher annual income limit applies. A 
higher limit applies if the beneficiary previously had no dependents.
    (2) Veteran receiving section 306 pension gains a spouse who has 
income. If a veteran beneficiary of section 306 pension gains a spouse 
who has countable income, VA will recompute the veteran's income for 
the year in which the person became the veteran's spouse. VA will then 
determine if the veteran is entitled to continued pension benefits or 
whether the recomputed income exceeds the annual income limit. VA makes 
the determination based on calendar-year income. However, VA will not 
count income that the spouse received or deduct any of the spouse's 
expenses paid before the date the person became the veteran's spouse 
for VA purposes.
    (b) Pension beneficiary loses dependent. (1) Loss of last 
dependent. When section 306 or old-law pension beneficiaries lose their 
last dependent, their annual income limit is lowered. When this occurs, 
VA must determine if the beneficiary is still entitled to pension based 
on the lowered income limit and recalculated income for the calendar 
year that the dependent was lost.
    (2) Computation of new rate if a dependent established on or before 
December 31, 1978. If a pension beneficiary loses a dependent and that 
dependent was established on or before December 31, 1978, VA will 
calculate a new pension rate. Because section 306 and old-law pension 
rates are based on 1978 income and number of dependents, VA calculates 
the new rate by removing the dependent and the dependent's 1978 income, 
if any, and using the remaining 1978 income to determine the new rate.
    (i) If the recomputed rate is higher than the previous rate, VA 
will continue the previous rate.
    (ii) If the rate payable to a surviving spouse with one child is 
less than the rate payable for a child alone, the surviving spouse will 
be paid the child's rate unless paragraph (b)(2)(i) of this section 
applies.
    (c) Section 306 pension and dependency of spouse. For section 306 
pension purposes, the December 31, 1978, rates for a veteran with a 
spouse and the annual income limit for a veteran with a spouse apply as 
long as the veteran and spouse live together or if not living together, 
are not estranged. If they are estranged, the married rates and the 
annual income limit for a veteran with a spouse apply if the veteran is 
reasonably contributing to the spouse's support. VA counts spousal 
income only if the annual income limit for a veteran with a spouse 
applies. VA bases its determination of ``reasonable'' contribution on 
all of the circumstances of the case, including a consideration of the 
veteran's income and net worth and the spouse's separate income and net

[[Page 77593]]

worth. VA automatically considers the requirement of ``reasonable'' 
contribution met without further review if the spouse is receiving an 
apportionment under Sec.  3.451 of this chapter.

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.476  Net worth for section 306 pension only.

    (a) Definition. For purposes of determining continuing entitlement 
to section 306 pension, net worth means the market value, minus 
mortgages or other encumbrances, of all real and personal property the 
beneficiary owns. VA excludes the beneficiary's dwelling (single-family 
unit), which also includes a reasonable lot area, and personal effects 
suitable to and consistent with the beneficiary's reasonable mode of 
life. VA will evaluate a ``reasonable lot area'' by considering the 
typical size of lots in the area. If the person lives on a farm, VA 
will exclude the value of a reasonable lot area, including the 
residence area, and consider the rest of the farm as part of net worth.
    (b) General. VA only considers the net worth of the veteran, 
surviving spouse, or child beneficiary. In determining whether property 
belongs to a pension beneficiary, VA will consider the terms of the 
recorded deed or other evidence of title. In the absence of such 
evidence, VA will accept the beneficiary's statement as proof of the 
terms of ownership.
    (c) How VA evaluates net worth. In determining whether some part of 
a beneficiary's net worth should be used for his or her maintenance, VA 
considers the beneficiary's income as determined under Sec.  5.472, 
``Evaluation of income for section 306 and old-law pension,'' along 
with all of the beneficiary's living expenses. However, in considering 
the beneficiary's living expenses, VA cannot consider expenses it 
excluded or deducted in determining income. In addition to these income 
and expense factors, VA will also consider the following factors:
    (1) The value of liquid assets and the value of other property the 
beneficiary can readily convert into cash.
    (2) The ability of the beneficiary to dispose of property if 
limited by community property laws.
    (3) The number of family members (as described in Sec.  
5.474(b)(1)(i)) who depend on the beneficiary for support.
    (4) The beneficiary's average life expectancy, and the potential 
rate of depletion of the beneficiary's net worth.
    (d) Statutory exclusions from net worth. Resources excluded by 
statute will not be considered part of the beneficiary's net worth. For 
the list of resources excluded by statute, see [regulation that will be 
published in a future Notice of Proposed Rulemaking].

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.477  Effective dates for section 306 and old-law pension 
reductions or discontinuances.

    (a) Reductions or discontinuances based on certain events. If 
required, VA will pay a reduced section 306 or old-law pension rate or 
discontinue benefits effective January 1 of the calendar year 
immediately following any of these events:
    (1) Marriage, annulment, divorce, or death. A beneficiary loses a 
dependent due to marriage, annulment, divorce, or death.
    (2) Increased income. The beneficiary receives increased income 
that could not reasonably have been anticipated based on the amount 
actually received from that source the previous year.
    (3) Increased net worth. The beneficiary's net worth increases to 
the extent benefits must be discontinued (section 306 pension only).
    (b) General effective dates apply for other reasons. VA will use 
the general effective dates in Sec. Sec.  3.500 through 3.503 of this 
chapter for a discontinuance or reduction for any reason other than 
those stated in paragraph (a) of this section or in Sec.  5.478(a).

(Authority: Sec. 306, Pub. L. 95-588, 92 Stat. 2508)

Sec.  5.478  Time limit to establish continuing entitlement to section 
306 or old-law pension.

    (a) Anticipated income appears to exceed income limit. If it 
appears that a section 306 or old-law pension beneficiary's income for 
a calendar year will be higher than the annual income limit, VA will 
discontinue pension benefits for that year effective January 1 of the 
following year, subject to paragraph (b) of this section.
    (b) Time limit for continuing entitlement. If VA discontinues 
pension benefits as described in paragraph (a) of this section because 
of the beneficiary's anticipated income for a calendar year, the 
beneficiary can establish continuing entitlement by submitting evidence 
showing that income for the calendar year was below the annual income 
limit. The beneficiary must submit the evidence before the end of the 
calendar year that follows the year for which VA determined the income 
exceeded the limit. For example, if VA determines that a beneficiary's 
income for 2005 exceeds the income limit and discontinues pension 
benefits effective January 1, 2006, the beneficiary has up to and 
including December 31, 2006, to submit evidence such as deductible 
medical expenses or other information showing that 2005 income was 
within the 2005 income limit.
    (c) Finality of discontinuance. If a beneficiary does not submit 
income evidence as described in paragraph (b) of this section or if 
such evidence does not warrant continued benefits, the discontinuance 
described in paragraph (a) of this section is final. This means that 
the beneficiary is no longer entitled to receive section 306 or old-law 
pension benefits. Any new entitlement that may be established would be 
to Improved pension.

(Authority: 38 U.S.C. 5110(h))


Sec. Sec.  5.479 through 5.499  [Reserved]

[FR Doc. 04-28161 Filed 12-23-04; 8:45 am]
BILLING CODE 8320-01-P