[Federal Register Volume 72, Number 186 (Wednesday, September 26, 2007)]
[Proposed Rules]
[Pages 54776-54803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-18745]



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Part III





Department of Veterans Affairs





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38 CFR Part 5



Improved Pension; Proposed Rule

  Federal Register / Vol. 72, No. 186 / Wednesday, September 26, 2007 / 
Proposed Rules  

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DEPARTMENT OF VETERANS AFFAIRS

38 CFR Part 5

RIN 2900-AM04


Improved 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 Improved Pension regulations. These 
revisions are proposed as part of VA's rewrite and reorganization of 
all of its compensation and pension rules in a logical, claimant-
focused, and user-friendly format. The intended effect of the proposed 
revisions is to assist claimants, beneficiaries, and VA personnel in 
locating and understanding these Improved Pension regulations.

DATES: Comments must be received by VA on or before November 26, 2007.

ADDRESSES: Written comments may be submitted through http://www.regulations.gov; by mail or hand-delivery to: Director, Regulations 
Management (00REG), Department of Veterans Affairs, 810 Vermont Ave., 
NW., Room 1068, Washington, DC 20420; or by fax to (202) 273-9026. 
Comments should indicate that they are submitted in response to ``RIN 
2900-AM04--Improved Pension.'' Copies of 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. In addition, during the comment period, comments may be 
viewed online through the Federal Docket Management System (FDMS) at 
http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: William F. Russo, Director of 
Regulations Management (00REG), 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 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 content of the regulations in 38 CFR part 3 governing the 
compensation and pension program of the Veterans Benefits 
Administration. 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 rules that apply to VA's Improved Pension 
program. After review and consideration of public comments, final 
versions of these proposed regulations will ultimately be published in 
a new part 5 in 38 CFR.

Outline

Overview of New Part 5 Organization

Overview of This Notice of Proposed Rulemaking

Table Comparing Current Part 3 Rules With Proposed Part 5 Rules

Background Information

Content of Proposed Regulations

Improved Pension Requirements--Veterans, Surviving Spouses, and 
Surviving Children

5.370 Definitions for Improved Pension.
5.371 Eligibility and entitlement requirements for Improved Pension.
5.372 Wartime service requirements for Improved Pension.
5.373 Evidence of age in Improved Pension claims.

Improved Disability Pension--Disability Determinations and 
Effective Dates

5.380 Disability requirements and presumptions for Improved 
Disability Pension.
5.381 Permanent and total disability ratings for Improved Disability 
Pension purposes.
5.382 Improved Disability Pension--combining disability ratings.
5.383 Effective dates for awards of Improved Disability Pension.

Special Monthly Pension Eligibility for Veterans and Surviving 
Spouses

5.390 Special monthly pension for veterans and surviving spouses at 
the aid and attendance rate.
5.391 Special monthly pension for veterans and surviving spouses at 
the housebound rate.
5.392 Effective dates for awards of special monthly pension.

Maximum Annual Pension Rates

5.400 Maximum annual pension rates for veterans, surviving spouses, 
and surviving children.
5.401 Automatic adjustment of maximum annual pension rates.

Improved Pension Income, Net Worth, and Dependency

5.410 Countable annual income.
5.411 Counting a child's income for Improved Pension.
5.412 Income exclusions for calculating countable annual income.
5.413 Income deductions for calculating adjusted annual income.
5.414 Net worth determinations for Improved Pension.
5.415 Effective dates for Improved Pension awards based on a change 
in net worth.
5.416 Persons considered as dependents for Improved Pension.
5.417 Child custody for Improved Pension.

Improved Pension--Income Reporting Periods, Payments, Effective 
Dates, and Time Limits

5.420 Reporting periods for Improved Pension.
5.421 How VA calculates an Improved Pension payment amount.
5.422 Effective dates for changes to Improved Pension payments due 
to a change in income.
5.423 Improved Pension determinations when anticipated annual income 
is uncertain.
5.424 Time limits to establish entitlement to Improved Pension or to 
increase the annual Improved Pension amount based on income.
5.425 Frequency of payment of Improved Pension benefits.

Improved Death Pension Marriage Date Requirements and Effective 
Dates

5.430 Marriage date requirements for Improved Death Pension.
5.431 Effective dates for Improved Death Pension.
5.432 Deemed valid marriages and contested claims for Improved Death 
Pension.
5.433 Effective date of discontinuance of Improved Death Pension 
payments to a beneficiary no longer recognized as the veteran's 
surviving spouse.
5.434 Award, or discontinuance of award, of Improved Death Pension 
to a surviving spouse where Improved Death Pension payments to a 
child are involved.
5.435 Calculating annual Improved Pension amounts for surviving 
children.

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Non-inclusion of Other Part 3 Provisions

Endnote Regarding Amendatory Language

Paperwork Reduction Act

Regulatory Flexibility Act

Executive Order 12866

Unfunded Mandates

Catalog of Federal Domestic Assistance Numbers and Titles

List of Subjects in 38 CFR Part 5

Overview of New Part 5 Organization

    We plan to organize the new part 5 regulations so that most 
provisions governing a specific benefit are located in the same 
subpart, with general provisions pertaining to all compensation and 
pension benefits also grouped together. This organization will allow 
claimants, beneficiaries, and their representatives, as well as VA 
personnel, to find information relating to a specific benefit more 
quickly than the organization provided in current part 3.
    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. This subpart 
was published as proposed on March 31, 2006. See 71 FR 16464.
    ``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 claims and benefit filing procedures, VA's duties, rights and 
responsibilities of claimants and beneficiaries, general evidence 
requirements, and general effective dates for new awards, as well as 
revision of decisions and protection of VA ratings. This subpart will 
be published as three separate Notices of Proposed Rulemaking (NPRMs) 
due to its size. The first, concerning the duties of VA and the rights 
and responsibilities of claimants and beneficiaries, was published on 
May 10, 2005. See 70 FR 24680. The second, covering general evidence 
requirements, effective dates for awards, revision of decisions, and 
protection of VA ratings, was published as proposed on May 22, 2007. 
See 72 FR 28770.
    ``Subpart D--Dependents and Survivors'' would inform readers how VA 
determines whether an individual is a dependent or a survivor for 
purposes of determining eligibility for VA benefits. It would also 
provide the evidence requirements for these determinations. This 
subpart was published as proposed on September 20, 2006. See 71 FR 
55052.
    ``Subpart E--Claims for Service Connection and Disability 
Compensation'' would define service-connected disability compensation 
and service connection, including direct and secondary service 
connection. This subpart would inform readers how VA determines service 
connection and entitlement to disability compensation. 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 NPRMs due to its size. The first, concerning presumptions 
related to service 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: Old-Law Pension, Section 306 Pension, and 
Improved Pension. This subpart would also include those provisions that 
state how to establish eligibility and entitlement to Improved Pension, 
and the effective dates governing each pension. This subpart will be 
published as two separate NPRMs due to its size. The portion concerning 
Old-Law Pension, Section 306 Pension, and elections of Improved Pension 
was published as proposed on December 27, 2004. See 69 FR 77578. The 
portion concerning eligibility and entitlement requirements, as well as 
effective dates for Improved Pension is the subject of this document.
    ``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 was published as two separate NPRMs due to its 
size. The portion concerning accrued benefits, death compensation, 
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 was 
published on October 21, 2005. See 70 FR 61326.
    ``Subpart H--Special and Ancillary Benefits for Veterans, 
Dependents, and Survivors'' would pertain to special and ancillary 
benefits available, including benefits for children with various birth 
defects. This subpart was published as proposed on March 9, 2007. See 
72 FR 10860.
    ``Subpart I--Benefits for Certain Filipino Veterans and Survivors'' 
would pertain to the various benefits available to Filipino veterans 
and their survivors. This subpart was published as proposed on June 30, 
2006. See 71 FR 37790.
    ``Subpart J--Burial Benefits'' would pertain to burial allowances.
    ``Subpart K--Matters Affecting the Receipt of Benefits'' would 
contain provisions regarding bars to benefits, forfeiture of benefits, 
and renouncement of benefits. This subpart was published as proposed on 
May 31, 2006. See 71 FR 31056.
    ``Subpart L--Payments and Adjustments to Payments'' would include 
general rate-setting rules, several adjustment and resumption 
regulations, and election-of-benefit rules. Because of its size, 
proposed regulations in subpart L will be published in two separate 
NPRMs.
    The final subpart, ``Subpart M--Apportionments to Dependents and 
Payments to Fiduciaries and 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 counterpart in some respects, but we believe this method will 
assist readers in understanding these proposed regulations where no 
part 5 counterpart has yet been published. If there is no part 3 
counterpart to a proposed part 5

[[Page 54778]]

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 a part of the Project, if the 
matter being commented on relates to both rulemakings.

Overview of This Notice of Proposed Rulemaking

    This NPRM pertains to the Improved Pension program. 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. However, a few 
substantive differences are proposed, as are some regulations that do 
not have counterparts in 38 CFR part 3.

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 the proposed 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'')
------------------------------------------------------------------------
5.370....................................  3.23(a), (d)(4) and (5);
                                            3.24(a); 3.271(a), (h);
                                            3.351(b), (f)
5.371(a).................................  New
5.371(b).................................  3.3(a)(3)
5.371(c).................................  3.3(b)(4)
5.371(d).................................  3.3(a)(3)(v), (b)(4)(iii)
5.372(a).................................  3.3(a)(3)
5.372(b).................................  3.3(a)(3)(i)-(iv), (b)(4)(i)
5.372(c).................................  3.3(b)(4)(ii)
5.373....................................  3.208
5.380....................................  3.3(a)(3)(vi)(A), (B)(1) and
                                            (2)
5.381....................................  3.342
5.382....................................  3.323(b)
5.383(a).................................  3.400(intro), (b)(1)(intro),
                                            (b)(1)(ii)(A)
5.383(b).................................  3.151(b); 3.400(b)(1)(ii)(B)
5.390(a).................................  3.351(b)
5.390(b).................................  3.351(c)
5.391(a).................................  3.351(d)
5.391(b).................................  New
5.391(c).................................  3.351(f)
5.392....................................  3.401(a)(1); 3.402(c)(1)
5.400(a).................................  3.23(a); 3.24(b)
5.400(a)(1)..............................  3.23(a)(1)
5.400(a)(2)..............................  3.23(a)(3)
5.400(a)(3)..............................  3.23(a)(2)
5.400(a)(4)..............................  3.23(a)(4)
5.400(a)(5)..............................  3.23(a)(5)
5.400(a)(6)..............................  3.23(a)(7)
5.400(a)(7)..............................  3.23(a)(6)
5.400(a)(8)..............................  3.24(b)
5.400(b).................................  3.23(c)
5.400(c).................................  New; 3.23(a)(5)
5.401(a).................................  3.27(a)
5.401(b).................................  3.23(a), (c); 3.24(b);
                                            3.27(e)
5.410(a).................................  3.271(a)
5.410(b)(1)..............................  3.23(d)(4)
5.410(b)(2)..............................  3.23(d)(5)
5.410(b)(3)..............................  New
5.410(c)(intro)..........................  3.271(a)
5.410(c)(1)..............................  3.271(a)(1), 3.273(d)
5.410(c)(2)..............................  3.271(a)(3), 3.273(c)
5.410(c)(3)..............................  3.271(a)(2), 3.273(d)
5.410(d).................................  3.276(a)
5.410(e).................................  3.271(b)
5.410(f)(1), (2).........................  3.271(d)
5.410(f)(3)..............................  New
5.411(a)(1)..............................  3.23(d)(5), (6); 3.272(m)
5.411(a)(2)..............................  3.23(d)(4), (5), 3.272(m)
5.411(b).................................  3.23(d)(6) (second sentence)
5.411(c).................................  3.272(j)
5.412(a).................................  3.272(a), (l)
5.412(a)(1)..............................  3.272(b)
5.412(a)(2)..............................  New
5.412(a)(3)..............................  3.272(l)
5.412(b)(1)..............................  3.272(c)
5.412(b)(2), (3).........................  New
5.412(c).................................  3.272(d)
5.412(d).................................  3.272(e)
5.412(e).................................  3.272(f)
5.412(f).................................  3.272(n)
5.412(g).................................  3.272(s)
5.412(h)-(j).............................  New
5.412(k)(1)..............................  3.272(q)
5.412(k)(2)-(8)..........................  New
5.413(a).................................  3.272 (intro)
5.413(b)(intro)..........................  3.272(g)(intro)
5.413(b)(1)..............................  3.272(g)(1)(iii), (2)(iii)
5.413(b)(2)(i)...........................  3.272(g)(1)(i)
5.413(b)(2)(ii)..........................  3.272(g)(2)(i)
5.413(b)(2)(iii).........................  3.272(g)(3)
5.413(c)(1)(i)...........................  3.272(h)
5.413(c)(1)(ii)..........................  New
5.413(c)(1)(iii).........................  3.272(h)(1)(ii)
5.413(c)(2)(i)-(iii).....................  3.272(h)(1)(ii), (2)
5.413(c)(2)(iv)..........................  3.272(h)(1)(i)
5.413(c)(3)..............................  3.272(h)(1)(ii)
5.413(d).................................  3.272(i)
5.413(e).................................  New
5.413(f).................................  3.271(g)
5.413(g)(1)..............................  3.271(c)(1)
5.413(g)(2)..............................  3.271(c)(2)
5.413(g)(3)..............................  3.271(c)(3)
5.414(a)(1), (2).........................  3.275(b)
5.414(a)(3)..............................  3.275(c)
5.414(a)(4)..............................  3.276(b)
5.414(b).................................  3.274(a), (c)
5.414(c)(1)..............................  3.274(b), (d)
5.414(c)(2)..............................  3.274(e)
5.414(c)(3)..............................  3.275(e)
5.414(d).................................  3.275(d)
5.414(e)(1)..............................  3.275(h)
5.414(e)(2)-(5)..........................  New
5.415....................................  3.660(a)(2), (d)
5.416(a).................................  3.23(d)(1); 3.60
5.416(b).................................  3.23(d)(1)
5.416(c).................................  3.23(d)(4), (5)
5.417(a)-(c).............................  3.57(d)(1)
5.417(d), (e)............................  3.57(d)(2)
5.417(f), (g)............................  3.57(d)(3)
5.420....................................  New
5.421....................................  3.29(b); 3.273 intro, (a),
                                            (b)
5.422(a)(1)..............................  New
5.422(a)(2)..............................  3.660(a)(2)
5.422(b).................................  3.660(b), (c)
5.423(a).................................  3.271(f)(1)
5.423(b).................................  3.271(f)(2)
5.424(a)-(c).............................  3.660(b)
5.424(d).................................  New
5.425....................................  3.30 intro, (a)-(d), (f)
5.430(a).................................  3.54 intro, (a)(2)
5.430(a)(1)..............................  3.54(a)(1)
5.430(a)(2)..............................  3.54(a)(3)
5.430(b).................................  3.54(e)
5.431(a).................................  New
5.431(b).................................  3.400(c)
5.432....................................  3.52(d)
5.433....................................  3.657(a)
5.434....................................  3.503(a)(9); 3.657(b)
5.435....................................  3.24; 3.57(d)(2)
------------------------------------------------------------------------

    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 
regarding the subject matter of this rulemaking is accounted for in the 
table. In some instances, other portions of the part 3 sections that 
are addressed 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 provisions from part 3 regulations that will not 
be repeated in part 5. Such provisions are discussed specifically under 
the appropriate part 5 heading in this preamble. Readers are invited to 
comment on the proposed part 5 provisions and also on our proposals to 
omit those part 3 provisions from part 5.

[[Page 54779]]

Background Information

    The term ``Improved Pension'' is derived from the ``Veterans' and 
Survivors' Pension Improvement Act of 1978,'' Public Law 95-588, 92 
Stat. 2508. Improved Pension is the current nonservice-connected 
disability or death pension program that VA offers to new VA pension 
applicants. The Improved Pension designation distinguishes this program 
from ``Section 306'' Pension and ``Old-Law'' Pension, the nonservice-
connected disability or death pension programs VA offered to new VA 
pension applicants before January 1, 1979. Statutes that pertain to 
Improved Pension are primarily found in chapter 15 of title 38, United 
States Code.
    The regulations in this NPRM apply only to Improved Pension. We 
recognize that in the past, some of the regulations on which these 
proposed regulations are based applied to Old-Law Pension and/or 
Section 306 Pension, as well as Improved Pension. However, claimants 
can no longer establish entitlement to Old-Law Pension or Section 306 
Pension programs. Therefore, certain regulations that once applied to 
other pension programs now apply to Improved Pension only. Examples 
include regulations pertaining to establishing wartime service, 
marriage dates, and determinations of permanent and total disability. 
Those regulations form the basis for many of the regulations in this 
NPRM.

Content of Proposed Regulations

Improved Pension Requirements--Veterans, Surviving Spouses, and 
Surviving Children

Section 5.370 Definitions for Improved Pension
    Proposed Sec.  5.370 contains definitions of certain basic terms 
used throughout the regulations governing Improved Pension benefits. 
The proposed definitions will make these regulations easier to use and 
understand.
    We propose to use the terms ``adjusted annual income'' and 
``maximum annual pension rate'' throughout part 5. The definitions of 
both of these terms are based on sections 1503, 1521, 1541 and 1542 of 
title 38, United States Code. Section 1503 provides that ``annual 
income'' for Improved Pension purposes consists of all payments, 
subject to certain exceptions. 38 U.S.C. 1503(a). We propose, rather 
than refer to ``annual income,'' to refer to ``adjusted annual 
income.'' We propose to define ``adjusted annual income'' as 
``countable annual income minus deductions described in Sec.  5.413, 
rounded down to the nearest dollar.'' Readers already familiar with the 
Improved Pension program will recognize the definition of ``adjusted 
annual income'' as synonymous with what is commonly termed within VA as 
``Income for VA Purposes'' or ``IVAP.'' The proposed definition of 
``adjusted annual income'' combines most of current Sec.  3.271 with 
paragraphs (d)(4) and (d)(5) of Sec.  3.23, and current Sec.  3.276(a).
    We also propose to standardize references to the actual amount of 
Improved Pension VA pays by using the term, ``Annual Improved Pension 
amount.'' Using standardized terms will help reduce confusion in these 
regulations. We propose to define ``annual Improved Pension amount'' as 
``the amount of Improved Pension payable to a beneficiary, calculated 
as the maximum annual pension rate minus adjusted annual income.'' This 
definition is based on current Sec.  3.23(b), which requires VA to 
calculate an award of pension by subtracting the amount of the 
countable annual income of the veteran or surviving spouse from the 
maximum annual pension rate.
    We define ``countable annual income'' as ``payments of any kind 
from any source'' unless specifically excluded. This definition is also 
consistent with current VA regulations.
    We propose to define the term ``maximum annual pension rate'' as 
the pension rate payable to a beneficiary whose income is zero. The 
term ``maximum annual pension rate,'' or ``MAPR,'' is well-known and 
understood by persons familiar with the Improved Pension program, and 
the definition reflects the common understanding of the terms. More 
importantly, we believe this term is necessary to avoid confusion. The 
authorizing statute, 38 U.S.C. 1521, refers to pension paid at one of 
several ``annual rate[s],'' which are then reduced by the claimant's or 
beneficiary's annual income in order to determine the actual annual 
amount payable. In other words, a beneficiary may receive the statutory 
``annual rate of pension'' (i.e., the MAPR) only if his or her adjusted 
annual income is zero. We believe it is essential to emphasize that 
these statutory rates are maximum rates.
    We propose to define ``payments'' as cash and cash equivalents 
(such as checks and other negotiable instruments), and the fair market 
value of personal services, goods or room and board received in lieu of 
other forms of payment. It is important that readers know that not only 
is currency considered income, but checks and money orders as well, to 
include the market value of goods or services received in lieu of cash.
    Although ``Special Monthly Pension'' is not defined in the current 
regulations, we propose to offer a definition to clarify for readers 
that Special Monthly Pension is a higher maximum annual pension rate 
applicable to a veteran or surviving spouse by reason of a disability 
or disabilities ratable at 60 percent or more, their housebound status 
or their need for the aid and attendance of another person in 
performing their daily living habits. The statutory authority for 
pension at this rate is contained in 38 U.S.C. 1521(d) and (e), and 
1541(d) and (e).
    Proposed Sec.  5.370 defines a surviving child for Improved Pension 
purposes as one who is eligible for Improved Death Pension and who is 
not in the custody of a surviving spouse eligible for Improved Death 
Pension. This definition is critical to understanding the Improved 
Pension program because a child who is in the custody of a surviving 
spouse who has basic eligibility to receive Improved Pension has no 
separate eligibility. A child in this circumstance is a dependent of 
the surviving spouse and would be included in the surviving spouse's 
award.
Section 5.371 Eligibility and Entitlement Requirements for Improved 
Pension
    Proposed Sec.  5.371 is based on current Sec. Sec.  3.3(a)(3), 
3.3(b)(4), and 3.24(a). In this regulation concerning Improved Pension, 
we provide an overview of the Improved Pension program and the specific 
criteria that must be met to receive payments under this program.
    Proposed Sec.  5.371(a) is an introductory statement intended to 
give readers a general overview of the Improved Pension program. This 
section explains that Improved Pension claimants must be both eligible 
and entitled before benefits can be paid. We propose to use the term 
``eligibility'' to refer to the age and service requirements applicable 
to Improved Pension awards, while the income and net worth requirements 
applicable to Improved Pension will be referred to as ``entitlement'' 
requirements.
    We recognize that in common usage there is little, if any, 
difference between the words ``eligible'' and ``entitled.'' Both terms 
generally mean ``qualified,'' but defining these terms will make the 
Improved Pension regulations easier to understand. A veteran is 
``eligible'' for Improved Disability Pension if he or she meets the 
basic requirements found in 38 U.S.C. 1521(a) or 1513 concerning

[[Page 54780]]

wartime service and disability or age 65. A surviving spouse is 
``eligible'' for Improved Death Pension if the veteran met the basic 
requirements found in section 1541(a) concerning wartime service and 
disability. A surviving child is ``eligible'' for Improved Death 
Pension if the veteran met the basic requirements of section 1542 
concerning wartime service and disability and if the child is not in 
the custody of an eligible surviving spouse. Veterans, surviving 
spouses, or surviving children are ``entitled'' to Improved Pension 
benefit payments only so long as their income is within statutory 
limits and their net worth does not bar payment. It is important to 
maintain a distinction between ``eligibility'' and ``entitlement'' in 
the regulations governing Improved Pension.
    We propose to refer to the pension program for veterans as 
``Improved Disability Pension'' and the program for survivors as 
``Improved Death Pension.'' Proposed Sec.  5.371(b) is based on current 
Sec.  3.3(a)(3), and describes the eligibility criteria for Improved 
Disability Pension for veterans. We recognize that the ``disability'' 
designation is a misnomer because veterans are no longer required to be 
disabled to receive Improved Disability Pension if they have attained 
age 65. A veteran having reached age 65 who meets the service 
requirements of 38 U.S.C. 1521 may be paid Improved Disability Pension 
without a documented total and permanent disability as long as the 
entitlement criteria have been met. See 38 U.S.C. 1513. However, we 
propose to retain the long-standing and statutory ``disability 
pension'' designations to distinguish it from other pension benefits.
    Proposed Sec.  5.371(c) describes the eligibility criteria for 
Improved Death Pension for a deceased veteran's surviving spouse or 
surviving child. Under 38 U.S.C. 1541 and 1542, it is not required that 
the veteran's death be nonservice-connected in order for the survivor 
to be eligible for Improved Death Pension. Therefore, instead of using 
the term, ``nonservice-connected death,'' which is used in current 
Sec.  3.3(b)(4), we propose to state in Sec.  5.371(c)(3) that a 
survivor may be eligible for Improved Death Pension regardless of 
whether the veteran's death is service-connected. This will clarify 
that even if the veteran's death is service-connected (and the survivor 
is eligible for dependency and indemnity compensation (DIC)), the 
survivor may instead elect to receive Improved Death Pension.
    Proposed Sec.  5.371(d) is based on current Sec. Sec.  3.3(a)(3)(v) 
and (b)(4)(iii), and expands on these provisions in order to clarify 
that a claimant or beneficiary is entitled to Improved Pension benefits 
only when the claimant's or beneficiary's adjusted annual income is 
lower than the applicable maximum annual pension rate and when the 
claimant's or beneficiary's net worth does not bar benefit payments.
Section 5.372 Wartime Service Requirements for Improved Pension
    Proposed Sec.  5.372 pertains to veterans, surviving spouses, and 
surviving children. The definition of a surviving spouse is contained 
in proposed Sec.  5.200, which was published in the Federal Register on 
September 20, 2006, in RIN 2900-AL94. See 71 FR 55052. Proposed Sec.  
5.200 defines surviving spouse as a person who met all of the 
requirements for being a spouse in proposed Sec.  5.190 at the time the 
veteran died, who has not remarried, and who lived continuously with 
the veteran from the date of marriage to the date of the veteran's 
death. A surviving child for Improved Pension purposes is defined in 
proposed Sec.  5.370 as a child who is eligible for Improved Death 
Pension as the surviving child of a deceased wartime veteran and who is 
not in the custody of a surviving spouse eligible to receive Improved 
Death Pension.
    Proposed Sec.  5.372 is based on paragraphs (a)(3)(i) through (iv) 
as well as paragraphs (b)(4)(i) and (ii) of current Sec.  3.3. These 
paragraphs currently provide the wartime service periods for Improved 
Pension. Proposed Sec.  5.372(a) includes a cross-reference to the 
proposed wartime service regulation in Sec.  5.20 (69 FR 4832), so that 
persons who require more specific provisions concerning wartime periods 
may easily find them. Consistent with our proposal in a prior NPRM (69 
FR 4822), we would shorten the term, ``active military, naval, or air 
service,'' to ``active military service.''
    Proposed Sec.  5.372(b)(1) is based on current Sec.  3.3(a)(3)(iii) 
and requires that at least one day during a period of qualifying 
service of at least 90 consecutive days be served during a wartime 
period.
    Proposed Sec.  5.372(b)(2) is based on current Sec.  3.3(a)(3)(i) 
and states VA's long-standing interpretation that separate periods of 
service within the same wartime period may be added together. We 
believe that this is a reasonable interpretation of 38 U.S.C. 1521(j), 
upon which current Sec.  3.3(a)(3)(i) is based.
Section 5.373 Evidence of Age in Improved Pension Claims
    Proposed Sec.  5.373 is based on current Sec.  208. No substantive 
changes are intended.

Improved Disability Pension--Disability Determinations and Effective 
Dates

Section 5.380 Disability Requirements and Presumptions for Improved 
Disability Pension
    Proposed Sec.  5.380 is based on paragraphs (a)(3)(vi)(A) and 
(B)(1) and (2) of current Sec.  3.3. We propose no substantive changes. 
We propose not to include paragraphs (a)(3)(vi)(B)(3) and (4) in part 5 
because these current paragraphs are redundant of current Sec. Sec.  
3.340 and 3.342, and those criteria would be made expressly applicable 
to part 5 Improved Pension claims by proposed Sec.  5.381.
Section 5.381 Permanent and Total Disability Ratings for Improved 
Disability Pension Purposes
    We propose to repeat most of the content of Sec.  3.342 in Sec.  
5.381 with minor technical changes, and cross reference to current 
Sec.  3.340, ``Total and permanent total ratings and unemployability,'' 
for other qualifying criteria. However, we propose not to repeat the 
provisions of Sec.  3.342(c), which concern a temporary program of 
vocational training for certain new pension recipients. This program 
was based on 38 U.S.C. 1524 and allowed veterans who were awarded 
Improved Pension to receive vocational rehabilitation and employment 
services from VA. However, Congress included a provision allowing the 
Secretary of Veterans Affairs to set a reasonable time limit for 
veterans to participate in the program. Specifically, Sec.  1524(b)(4) 
states that:

    A veteran may not begin pursuit of a vocational training program 
under this subsection after the later of (A) December 31, 1995, or 
(B) the end of a reasonable period of time, as determined by the 
Secretary [of Veterans Affairs], following either the evaluation of 
the veteran under subsection (a) of this section or the award of 
pension to the veteran as described in subsection (a)(2) of this 
section. Any determination by the Secretary of such a reasonable 
period of time shall be made pursuant to regulations which the 
Secretary shall prescribe.

    The Secretary of Veterans Affairs has not extended the period for 
beginning a vocational training program beyond December 31, 1995. 
Moreover, the Secretary has promulgated a regulation stating that no 
veteran may receive VA assistance under 38 U.S.C. 1524 after January 
31, 1998. 38 CFR 21.6042(d).

[[Page 54781]]

Because this program has expired, we believe there is no reason to 
repeat the provisions of current Sec.  3.342(c) in proposed Sec.  
5.381.
Section 5.382 Improved Disability Pension--Combining Disability Ratings
    When VA grants service connection for a disability incurred or 
aggravated by military service, VA assigns a ``disability rating'' to 
the disability according to the ``Schedule for Rating Disabilities'' 
located in part 4 of title 38, Code of Federal Regulations. In cases 
where veterans have multiple disabilities, the disability ratings 
assigned to each of these disabilities may be combined in accordance 
with 38 CFR part 4.
    Disabilities that are not service connected generally serve as a 
basis for a finding that a veteran is permanently and totally disabled 
for purposes of Improved Disability Pension. Section 1523(a) of title 
38, United States Code, authorizes VA to combine ratings for 
nonservice-connected disabilities with ratings for service-connected 
disabilities to determine whether a veteran is totally disabled for 
Improved Disability Pension purposes.
    VA has implemented Sec.  1523(a) in 38 CFR 3.323(b). Current Sec.  
3.323(b)(1) provides that for pension purposes two or more nonservice-
connected disabilities will be combined in the same manner that 
service-connected disabilities are combined, as described in Sec.  
3.323(a). Current Sec.  3.323(b)(2) provides that for pension purposes 
VA may combine nonservice-connected and service-connected disabilities 
in the same manner that service-connected disabilities are combined.
    Current Sec.  3.323(b)(2) provides that VA ``may'' combine service-
connected with nonservice-connected disability ratings. This permissive 
rule contrasts with the rules elsewhere in Sec.  3.323 for combining 
nonservice-connected disabilities on the one hand, and the rules for 
combining service-connected disabilities on the other hand, which are 
mandatory rules and are expressed using the word ``will.'' Section 
1523(a) of title 38, United States Code, provides that the ``Secretary 
shall provide that,'' for ascertaining whether an individual is totally 
disabled for pension purposes, service-connected and nonservice-
connected disabilities ``may'' be combined. In fact, VA routinely 
combines service-connected and nonservice-connected disabilities for 
pension purposes, and we can think of no circumstance wherein VA would 
decline to combine a veteran's disabilities for Improved Pension 
purposes. Proposed Sec.  5.382(b) states that VA ``will'' combine 
disabilities in such a manner because this is logical, consistent, and 
fair to veterans.
    Current Sec.  3.323(b)(2) provides for the combination of service-
connected and nonservice-connected disability ratings without apparent 
restriction. The authorizing statute requires VA to combine such 
disability ratings to determine whether a veteran is permanently and 
totally disabled for pension purposes. See 38 U.S.C. 1523(a). We 
propose to include language to this effect in proposed Sec.  5.382(b). 
Moreover, Sec.  3.323(b)(2) is under the heading of ``pension'' and VA 
has always limited the applicability of the regulation to pension 
cases. Therefore, the proposed rule would apply only to Disability 
Pension claims.
    We propose to not include the phrase in current Sec.  3.323(b) that 
requires that disabilities considered in the determination of 
eligibility for Improved Disability Pension not be ``the result of the 
veteran's own willful misconduct.'' This requirement is already 
expressed in Sec.  5.381(a) and we see no reason to repeat that 
provision in Sec.  5.382.
Section 5.383 Effective Dates for Awards of Improved Disability Pension
    Proposed Sec.  5.383 is based on current Sec. Sec.  3.151(b), 
3.400(intro) and 3.400(b)(1)(ii), which provide effective dates for 
awards of Improved Disability Pension. We propose not to include 
current Sec.  3.400(b)(1)(i), which refers to claims received before 
October 1, 1984, because we know of no such pending Improved Pension 
claims.
    The first sentence of proposed Sec.  5.383(a) states that except as 
provided in paragraph (b) of this section, the effective date of an 
award of Improved Disability Pension will be the date of receipt of 
claim or the date the veteran became eligible (by attaining age 65 or 
by becoming permanently and totally disabled), whichever is later. This 
is based on the introduction of current Sec.  3.400, which states that 
the effective date of an award of pension will be the date of receipt 
of the claim or the date entitlement arose, whichever is the later. The 
first sentence also incorporates the introductory paragraph of current 
Sec.  3.400(b)(1), which states that an award of disability pension may 
not be effective prior to the date entitlement arose. Instead of using 
the phrase ``the date entitlement arose,'' which appears in current 
Sec.  3.400, we have used the phrase ``the date the veteran became 
eligible * * * and entitled'', and we have specified that the date the 
veteran became eligible is the date the veteran attained age 65 or the 
date the veteran became permanently and totally disabled and that the 
veteran becomes entitled by meeting income and net worth requirements. 
The first sentence of proposed Sec.  5.383(a) also incorporates current 
Sec.  3.400(b)(1)(ii)(A), which states that the effective date of the 
award is the date of receipt of claim (except as provided in Sec.  
3.400(b)(1)(ii)(B), which is the subject of proposed 5.383(b), 
concerning retroactive awards).
    The second sentence of proposed Sec.  5.383(a) contains a cross-
reference to proposed Sec.  5.424, ``Time limits to establish 
entitlement to Improved Pension or to increase the annual Improved 
Pension amount based on income,'' which is based upon current Sec.  
3.660(b). Current Sec. Sec.  3.400(b)(1) and 3.660(b) are authorized by 
38 U.S.C. 5110(b)(3) and 38 U.S.C. 5110(h), respectively. We provide a 
fuller discussion concerning 38 U.S.C. 5110(h) later in this NPRM. For 
this discussion, it is sufficient to say that Sec.  5110(h) provides 
time limits to establish Improved Pension entitlement based on income 
beyond the time limits provided in Sec.  5110(b)(3) to establish 
disability.
    When it appears that a veteran's anticipated income for the 12-
month period following the date of receipt of claim will exceed the 
maximum annual pension rate, VA does not pay benefits. A decision that 
the claimant is not entitled to pension because the claimant's income 
exceeds the maximum annual pension rate often occurs without VA first 
making the disability determination necessary for pension eligibility. 
In our view, this procedure is reasonable because it would be 
inefficient for VA to make a pension disability determination when it 
cannot otherwise grant entitlement to pension. At the same time, it 
would be unfair to the claimant if VA did not assign an effective date 
based on the date the pension claim was received in those cases where 
the veteran is able to establish qualifying income within the time 
limits provided under Sec.  5110(h), even if VA had not ascertained 
that the veteran was permanently and totally disabled at that time. The 
cross-reference in proposed Sec.  5.383(a) would make it plain that the 
``date of receipt of claim'' is the date of receipt of the previous 
Improved Pension claim in these types of cases. We do not see this as a 
change, but as a clarification and a reconciliation of the two 
statutory provisions. This clarification is consistent with long 
standing VA practice and is fair to veterans.
    Paragraph (b) of proposed Sec.  5.383 clarifies current Sec. Sec.  
3.151(b) and 3.400(b)(1)(ii)(B). Current Sec.  3.400(b)(1)(ii)(B) 
states that if an

[[Page 54782]]

incapacitating disability prevented a veteran from claiming benefits 
for at least the first 30 days after becoming permanently and totally 
disabled, that veteran could be awarded pension benefits effective the 
date he or she became permanently and totally disabled, if he or she 
files a claim within one year from the date on which the veteran became 
permanently and totally disabled. We propose to define the term 
``incapacitating disability.'' We propose to clarify that the 
disability that prevented a veteran from applying for benefits need not 
be the same disability that caused the veteran to become permanently 
and totally disabled. This would conform to the law and long-standing 
VA practice. The statute merely requires that ``a'' disability 
prevented the claimant from applying for Improved Disability Pension. 
See 38 U.S.C. 5110(b)(3)(B). We propose not to include the reference to 
the ``presumptive provisions of Sec.  3.342(a),'' currently found in 
the last sentence of Sec.  3.400(b)(1)(ii)(B), because current Sec.  
3.342(a) no longer contains presumptive provisions.
    Proposed Sec.  5.383(b) retains language from current Sec.  
3.400(b)(1)(ii)(B) which states that the disability pension award may 
be effective from the date of receipt of claim or the date on which the 
veteran became permanently and totally disabled, whichever is to the 
advantage of the veteran. The phrase ``whichever is to the advantage of 
the veteran'' is utilized both in the current statute (Sec.  
5110(b)(3)(A)) and the current regulation (Sec.  3.400(b)(1)(ii)(B)). 
We have retained this phrase (slightly rewritten as ``whichever is to 
the veteran's advantage'') in the proposed regulation. It means that 
one cannot automatically assume that an earlier effective date would be 
more to the claimant's advantage than a later one. This is because the 
veteran's adjusted annual income, if considered from an earlier 
effective date, might preclude entitlement for a 12-month period, 
whereas a later effective date might not.

Special Monthly Pension Eligibility for Veterans and Surviving Spouses

Section 5.390 Special Monthly Pension for Veterans and Surviving 
Spouses at the Aid and Attendance Rate
    Proposed Sec.  5.390 is derived from current Sec.  3.351(b) and 
(c). We propose no substantive changes. In proposed Sec.  5.390(a), we 
have used the term ``significantly disabled'' to conform to the 
Veterans' Housing Opportunity and Benefits Improvement Act of 2006. 
That law amended certain sections of title 38 of the United States Code 
to eliminate the use of the obsolete term ``helpless'' to describe 
significantly disabled veterans who seek aid and attendance benefits or 
their significantly disabled dependents and survivors who seek aid and 
attendance benefits. See Pub. L. No. 109-233, Sec.  502, 120 Stat. 397, 
415 (2006) (codified at 38 U.S.C. 1502(b) (2006)). No substantive 
change was intended by these amendments. See Explanatory Statement on 
Amendment to Senate Bill, S. 1235, as Amended, 152 Cong. Rec. H2976, 
H2978 (daily ed. May 22, 2006).
    Proposed Sec.  5.390(b)(4) cross-references Sec.  3.352, which 
provides the criteria for determining need for aid and attendance or 
``bedridden.''
Section 5.391 Special Monthly Pension for Veterans and Surviving 
Spouses at the Housebound Rate
    Proposed Sec.  5.391(a) and (c) are based on current Sec.  3.351(d) 
and (f).
    Proposed Sec.  5.391(b) is a new provision. It reconciles the 
current regulations, which have not been altered since being 
promulgated in 1979, with Hartness v. Nicholson, 20 Vet. App. 216 
(2006). In that case, the United States Court of Appeals for Veterans 
Claims (CAVC) stated that current Sec.  3.315(d) does not consider the 
interpretive effects of 38 U.S.C. 1513(a), first enacted in 2001, on 38 
U.S.C. 1521(e). See Hartness, 20 Vet. App. at 221. The CAVC held that, 
according to these statutes, a veteran who is otherwise eligible for 
Improved Pension based on being age 65 or older, and who is not in need 
of regular aid and attendance, is entitled to special monthly pension 
at the housebound rate if he or she has a disability ratable at 60 
percent or more or is considered permanently housebound. See Hartness, 
20 Vet. App. at 221-22. Such a veteran, unlike a veteran who is under 
65 years old, need not have a disability that is permanent and total. 
See id. Proposed paragraph (b)(1) implements this aspect of Hartness.
    Proposed paragraph (b)(2) reconciles 38 U.S.C. 1513(b) with the 
holding in Hartness. Under section 1513(b), ``[i]f a veteran is 
eligible for pension under both [38 U.S.C. 1513 and 38 U.S.C. 1521], a 
pension shall be paid to the veteran only under section 1521.'' A 
veteran who is age 65 or older who has a permanent and total disability 
would be eligible for pension under both section 1513 and section 
1521(a). Such a veteran would then be subject to 38 U.S.C. 1513(b) and 
could receive pension only under section 1521(a). In order for that 
veteran to receive special monthly pension under section 1521(e), he or 
she would need to have a disability rated 60 percent or higher or be 
permanently housebound, in addition to being permanently and totally 
disabled. In contrast, a veteran who is 65 years or older and has a 
disability rated 60 percent or higher (but less than permanent and 
total) need not be permanently and totally disabled to receive special 
monthly pension. This is because such a veteran would not fall within 
the operation of section 1513(b) because that veteran's disability 
would not independently qualify him or her for pension under section 
1521(a). Proposed paragraph (b)(2) clarifies the different rules for 
these two groups of veterans, which we are bound to apply pursuant to 
the CAVC's Hartness decision.
    Finally, we propose to clarify in Sec.  5.391(c) that the 
definition of ``permanently housebound'' is the same for veterans and 
surviving spouses.
Section 5.392 Effective Dates for Awards of Special Monthly Pension
    Proposed Sec.  5.392 is based on current Sec.  3.401(a)(1) and 
Sec.  3.402(c)(1). Paragraph (a) of proposed Sec.  5.392 states the 
general effective date rule for special monthly pension. Paragraph (b) 
of proposed Sec.  5.392 states an exception to the general effective 
date rule. The exception is when an award of Improved Pension is 
effective retroactively. In such cases, the special monthly pension 
award may be effective retroactively as well, if entitlement to special 
monthly pension is established for any part of the retroactive period.

Maximum Annual Pension Rates

Section 5.400 Maximum Annual Pension Rates for Veterans, Surviving 
Spouses, and Surviving Children
    Proposed Sec.  5.400 is based in part on paragraphs (a), (c), and 
(d)(3) of current Sec.  3.23, and portions of Sec.  3.24(b).
    Proposed Sec.  5.400(a) restates the statutory references in 
current Sec.  3.23(a). Improved Pension rates are set by statute. 
Proposed Sec.  5.400(a) provides the statutory references to 38 U.S.C. 
1521, 1541, and 1542, which are the rate-setting statutes for Improved 
Pension.
    Proposed Sec.  5.400(b) restates current Sec.  3.23(c) without 
reference to veterans of the Mexican border period. There are no more 
pension beneficiaries of veterans who served during this period of war.
    Proposed Sec.  5.400(c) informs readers that higher maximum annual 
pension rates apply to veterans and surviving spouses with dependents.
Section 5.401 Automatic Adjustment of Maximum Annual Pension Rates
    Proposed Sec.  5.401 is based on portions of current Sec. Sec.  
3.23, 3.24, and 3.27.

[[Page 54783]]

Current Sec.  3.27 governs automatic adjustment of various types of 
benefit rates. Paragraph (a) of Sec.  3.27 deals with Improved Pension 
and requires VA to increase the maximum annual pension rates whenever 
the Commissioner of Social Security increases Social Security benefits 
in accord with annual increases in the cost of living. Proposed Sec.  
5.401(b) is based on current Sec.  3.27(e), as well as those portions 
of Sec.  3.24(b) and paragraphs (a) and (c) of Sec.  3.23 which require 
VA to publish increased maximum annual pension rates in the Federal 
Register. No substantive changes are proposed.

Improved Pension Income, Net Worth, and Dependency

Section 5.410 Countable Annual Income
    Proposed Sec.  5.410(a) clearly states that for Improved Pension 
purposes, VA does not count income received before the effective date 
of the beneficiary's Improved Pension award, nor does VA count income 
that an Improved Death Pension claimant received before the date the 
veteran died. This fact is one of the distinguishing characteristics of 
Improved Pension as opposed to VA's other need-based benefits. In the 
Improved Pension program, initial payments are made based on the 
adjusted annual income that the claimant expects to receive during the 
twelve-month period immediately following the effective date of the 
award of pension (generally the date VA receives a claim or the date of 
the veteran's death).
    Proposed paragraphs (b)(1) and (2) of Sec.  5.410 incorporate 
paragraphs (d)(4) and (5) of current Sec.  3.23 in answering the 
question, ``Whose income is countable?'' In proposed paragraph (b)(1) 
concerning the income of a veteran, we have added a phrase concerning 
the income of a veteran's spouse. We state that a veteran's income 
includes that of his or her spouse ``regardless of whether the spouse's 
income is available to the veteran.'' This addition is not a change. It 
can be inferred from the current regulations and is consistent with 38 
U.S.C. 1521(c). We believe that this important provision should be made 
clearer to readers.
    Paragraphs (b)(1) and (2) of proposed Sec.  5.410 do not include 
certain portions of paragraphs (d)(4) and (5) of current Sec.  3.23 
concerning a child's income, in order to keep this lengthy regulation 
as simple as possible. Recognizing that many Improved Pension claimants 
do not have dependent children, we propose instead to incorporate the 
provisions concerning children within proposed Sec.  5.416, ``Persons 
considered as dependents for Improved Pension.'' Having separate 
regulations will make these provisions easier to read and understand.
    Proposed paragraphs (b)(1) through (b)(3) answer the question of 
whose income is included for the three types of claimants and 
beneficiaries: veterans, surviving spouses, and surviving children. We 
believe the complete answer concerning surviving children is too 
complex to be included in this regulation, so we propose to include a 
cross-reference to proposed Sec.  5.435, ``Calculating annual Improved 
Pension amounts for surviving children,'' which is the proposed 
comprehensive provision concerning annual Improved Pension amounts for 
surviving children.
    Proposed Sec.  5.410(c) restates current Sec.  3.271(a). Current 
3.271(a) states that a payment of any kind from any source shall be 
counted as income during the reporting period in which it was received 
unless it is specifically excluded under Sec.  3.272.
    Based on current part 3 regulations, including Sec. Sec.  3.271, 
3.272, 3.273, and 3.660, current VA practice is to use the term, ``12-
month annualization period'' to describe the period for which a 
beneficiary reports income, adjustments to income, and net worth to VA. 
We propose to instead use the term ``reporting period,'' which we 
believe is more explicit and more easily understood than ``12-month 
annualization period''. We propose to use ``reporting period'' in 
Sec. Sec.  5.410, 5.413, 5.420, and 5.424 of this NPRM and throughout 
part 5 and to define that term in Sec.  5.420(a).
    Paragraphs (c)(1) through (c)(3) of proposed Sec.  5.410 are 
derived from current Sec.  3.271(a)(1) through (a)(3), as well as 
current Sec.  3.273(c) and (d). Current Sec.  3.271 describes the 
various income types and Sec.  3.273 explains how to count them. We 
believe it makes sense for the two regulations to be merged. Paragraph 
(c)(3) includes information based on long-standing VA practice 
regarding counting of irregular income which we believe should be 
included in our regulations.
    Proposed Sec.  5.410(d) restates current Sec.  3.276(a), concerning 
waived income, which should be listed in proposed Sec.  5.410 with 
other items that VA counts as income. Current Sec.  3.276(a) provides 
that VA will include for Improved Pension purposes any income that an 
individual has waived. Long-standing VA policy provides a caveat--that 
if an individual withdraws a Social Security claim after a finding of 
entitlement to Social Security benefits, so as to maintain eligibility 
for an unreduced Social Security benefit on attainment of a certain 
age, this withdrawal is not presumed to be a waiver. We propose to 
include this clarification. We note that section 1503(a) of title 38, 
United States Code, requires VA to consider as income ``all payments of 
any kind or from any source (including salary, retirement or annuity 
payments, or similar income, which has been waived * * *).'' However, 
when a person applies for and is found entitled to Social Security, but 
then waives those benefits solely for the purpose of receiving more 
benefits at a later date, the action is more accurately considered a 
deferment of payments rather than a waiver. Therefore, proposed Sec.  
5.410(d) is fair and consistent with 38 U.S.C. 1503(a).
    Proposed Sec.  5.410(f)(1) and (2) are based on current Sec.  
3.271(d), concerning income from income-producing property. In Sec.  
5.410(f)(2), we propose to clarify that if a beneficiary's income 
includes that of his or her spouse, and both the beneficiary and spouse 
are co-owners of a property which produces income, then income 
representing both co-owned shares is included as income to the 
beneficiary.
    Proposed Sec.  5.410(f)(3) is a new provision, based on long-
standing VA practice, which states that if a person transfers ownership 
of income-producing property to another person or legal entity, but 
retains the right to that income, the income will be counted. We 
believe this is consistent with 38 U.S.C. 1503 and will help avoid 
confusion by pension beneficiaries by clarifying that such income will 
be counted by VA.
    We propose not to include current Sec.  3.271(e), which states: 
``Income shall be determined by the total amount received or 
anticipated during a 12-month annualization period.'' This sentence is 
unnecessary and redundant of other provisions, such as proposed Sec.  
5.423, which explains calculation procedures, as well as current Sec.  
3.272(e), which pertains to installment income from property sales.
Section 5.411 Counting a Child's Income for Improved Pension
    Proposed Sec.  5.411 is based on various provisions concerning when 
a child's income is countable for Improved Pension purposes. These 
provisions are presently found in paragraphs (d)(4) through (d)(6) of 
Sec.  3.23, and paragraphs (j) and (m) of Sec.  3.272. We believe it 
would simplify the provisions concerning counting a child's income to 
have them in one place.
    Proposed Sec.  5.411(a) concerns the availability of a dependent 
child's income to a veteran or surviving spouse. Rather than stating 
that VA counts a

[[Page 54784]]

child's income ``to the extent it is'' reasonably available (which is 
the language used in the current regulation Sec.  3.23(d)(4) and (5)), 
we propose to say that VA counts ``that portion of a child's income 
that is'' reasonably available, which is more clear. Additionally, this 
change mirrors the statutory language of 38 U.S.C. 1521(h)(1) and 
1541(g), which require VA to count as income to the beneficiary ``that 
portion of the annual income of the child.''
    Proposed Sec.  5.411(a)(1) restates the provisions of current 
paragraphs (d)(4), (d)(5), and (d)(6) of Sec.  3.23 concerning the 
presumption of availability of a child's income.
    Proposed Sec.  5.411(a)(2) is derived from current Sec.  3.23(d)(4) 
and (d)(5) relating to hardship. In addition to the current 
requirements, the proposed regulation states that a veteran or 
surviving spouse must specifically request that VA exclude all or part 
of a child's annual income because counting it would create a hardship 
on the veteran or surviving spouse. Currently, claimants are notified 
of this requirement in the VA Eligibility Verification Report form. 
Including the requirement in this regulation is consistent with VA's 
current practice, as reflected in the VA Eligibility Verification 
Report form.
    Proposed Sec.  5.411(a)(2) is also derived from current Sec.  
3.272(m) and describes the steps VA uses to calculate the amount of the 
hardship exclusion.
    Proposed Sec.  5.411(b) restates the second sentence of current 
Sec.  3.23(d)(6), which is the definition of ``expenses necessary for 
reasonable family maintenance.'' To the current list of examples (food, 
clothing, shelter) of basic necessities included in this definition, we 
propose to add healthcare, which is necessary to support a reasonable 
quality of life.
    Proposed Sec.  5.411(c) restates current Sec.  3.272(j). We propose 
to refer to title 26, United States Code, rather than to the Internal 
Revenue Code of 1954. We believe more readers are familiar with these 
citations.
Section 5.412 Income Exclusions for Calculating Countable Annual Income
    Proposed Sec.  5.412 implements 38 U.S.C. 1503, which contains the 
basic statutory provisions for determining what counts as income for 
Improved Pension. Current Sec.  3.272, ``Exclusions from income,'' is 
the part 3 regulation that implements the statute. The current 
regulation mirrors the structure of the statute in mixing two separate 
analytical categories--income received that should be excluded from 
countable annual income and expense payments that should be deducted 
from countable annual income. For example, Sec.  3.272(g), (h) and (i) 
list various types of expenses incurred by claimants; these are 
properly in a separate category from income that claimants receive. 
Because of this distinction between payments that may be excluded from 
income and payments that may be deducted from income, we propose to 
divide the current regulation into two smaller regulations (proposed 
Sec. Sec.  5.412 and 5.413) for the sake of clarity.
    Proposed Sec.  5.412 lists exclusions from annual income for 
Improved Pension purposes. In a future NPRM, we plan to propose a new 
regulation that would list all income sources and assets that are 
statutorily excluded in determining entitlement to all need-based 
programs that VA administers. The new regulation would be contained in 
proposed subpart L of proposed new part 5. Therefore, in proposed Sec.  
5.412, we do not cover such income sources that are found in current 
Sec.  3.272. These sources include those currently listed in paragraphs 
(k), (o), (p), (r), (t), (u), and (v) of Sec.  3.272. Proposed 
paragraphs (b)(3) and (k) cross-reference the new regulation.
    Proposed Sec.  5.412(a), based on Sec.  3.272(a), also includes the 
content of current Sec.  3.272(l). This consolidation is appropriate 
because current Sec.  3.272(l), which authorizes the exclusion from 
income of payments received for participating in a program of therapy 
or rehabilitation under 38 U.S.C. 1718, characterizes this payment as a 
donation from public or private relief, welfare, or charitable 
organization under Sec.  3.272(a). It is logical to place this type of 
payment in the paragraph dealing with such donations. Long-standing VA 
policy also regards benefits received under noncontributory programs 
(such as Supplementary Security Income) as an excluded donation. See 
current Sec.  3.262(f). We propose to list this common exclusion in 
Sec.  5.412(a)(2) for increased clarity.
    Proposed Sec.  5.412(b) is derived from Sec.  3.272(c) and adds a 
provision (proposed Sec.  5.412(b)(2)) that payments to a surviving 
spouse under Sec.  3.20(c) do not count as income. Current Sec.  
3.20(c) pertains to the veteran's month-of-death rate for certain 
surviving spouses. See 38 U.S.C. 5310(b). In our view, proposed Sec.  
5.412(b)(2) is consistent with 38 U.S.C. 5310, in that such payments 
are considered part of a surviving spouse's entitlement and are not 
included as income for Improved Death Pension purposes.
    Proposed Sec.  5.412(c) through (g) restate current Sec.  3.272(d)-
(f), (n), and (s). We do not propose any substantive changes to these 
paragraphs.
    Section 3803(c)(2)(C)(viii) of title 31, United States Code, 
defines ``benefits,'' for purposes of that statute (which codifies the 
Program Fraud Civil Remedies Act of 1986), as including Improved 
Pension. Section 6(h) of Public Law 101-426, the Radiation Exposure 
Compensation Act (RECA), provides that payments under RECA are not 
considered income or resources for purposes of determining eligibility 
for benefits listed in 31 U.S.C. 3803(c)(2)(C)(viii). We have 
implemented that statutory exclusion in current Sec.  3.272(s) 
(proposed Sec.  5.412(g)). We propose to implement the following 
similar exclusions in proposed Sec.  5.412(h)-(j), which include 
payments under section 103(c) of the Ricky Ray Hemophilia Relief Fund 
Act of 1998 (42 U.S.C. 300c-22 (note)), payments under the Energy 
Employees Occupational Illness Compensation Program (42 U.S.C. 7384 et 
seq.); and payments under 50 U.S.C. Appx. 1989b-4 and 1989c-5 to 
certain eligible Japanese-Americans and Aleuts. These statutes provide 
that such payments shall not be considered in determining entitlement 
to benefits listed in 31 U.S.C. 3803, which includes Improved Pension.
    Because VA must count all payments unless specifically excluded, we 
believe it is important for readers to know what VA considers and does 
not consider a ``payment.'' Proposed Sec.  5.412(k) lists several items 
that VA does not consider payments, consistent with law, current 
regulations, and long-standing VA policy.
Section 5.413 Income Deductions for Calculating Adjusted Annual Income
    We propose a new regulation, Sec.  5.413, based on current 
Sec. Sec.  3.271(c) and (g) and 3.272(g) through (i). These paragraphs 
pertain to expenses and losses that are deducted from countable annual 
income.
    Proposed Sec.  5.413(a) restates the last sentence of the 
introductory language of current Sec.  3.272, which currently states, 
``Unless otherwise provided, expenses deductible under this section are 
deductible only during the 12-month annualization period in which they 
were paid.'' However, because proposed Sec.  5.420 defines ``reporting 
periods'' for Improved Pension purposes, we refer to the ``initial 
reporting period or annual reporting period'' instead of the 12-month 
annualization period.
    Proposed Sec.  5.413(b) refers to a ``medical expense report'' 
instead of an eligibility verification report (EVR), which is referred 
to in current Sec.  3.272(g), because certain categories of Improved 
Pension beneficiaries are not required to submit annual EVRs under

[[Page 54785]]

current Sec.  3.277. Proposed Sec.  5.413(b) includes a cross-reference 
to Sec.  3.660(a), which explains that pension beneficiaries must 
inform VA if there is a change in income, and clarifies that a change 
in medical expenses is a change in income.
    Current Sec.  3.272(h) permits deductions of amounts paid for last 
illnesses, burials, and the veteran's just debts. We propose, 
consistent with long-standing VA usage, to designate these types of 
expenses as ``final expenses.'' We believe that doing so improves 
clarity in proposed Sec.  5.413(c).
    Proposed Sec.  5.413(c)(1)(ii) defines ``last illness'' as ``the 
medical condition that was the primary or secondary cause of a person's 
death as indicated on the person's death certificate.'' We believe that 
this definition is simple, clear, and easy for VA personnel to apply 
correctly and consistently. Proposed Sec.  5.413(c)(1)(iii), based upon 
current Sec.  3.272(h)(1)(ii), defines ``veteran's just debts.'' 
Consistent with long-standing VA policy, we propose to clarify to 
readers that a ``veteran's just debts'' includes debts that the veteran 
and spouse incurred jointly. We believe that it would be unfair and 
arbitrary to prohibit a surviving spouse or child from deducting debts 
that the veteran and surviving spouse incurred jointly, while allowing 
the deduction of debts incurred solely by the veteran.
    Proposed Sec.  5.413(c)(2)(i) through (c)(2)(iii) explain what 
final expenses VA will deduct for veteran awards, surviving child 
awards, and surviving spouse awards. These paragraphs restate and 
rearrange the provisions of current Sec.  3.272(h)(1)(ii) and (h)(2) 
concerning these deductible final expenses in a way we believe is 
clearer.
    Proposed Sec.  5.413(c)(2)(iv) is based on current Sec.  
3.272(h)(1)(i), which provides a special exception to other final 
expense provisions. Proposed Sec.  5.413(c)(2)(iv) incorporates the 
holding of VA's Office of General Counsel in VAOPGCPREC 1-2000, 65 FR 
33421 (May 23, 2000), which held that Congress intended for last 
illness expenses that a surviving spouse paid for a veteran to be 
treated differently than other deductible final expenses because last 
illness expenses include expenses that the surviving spouse paid before 
the veteran's death when the surviving spouse was still the veteran's 
spouse. Under section 1503(a)(3)(B) of title 38, United States Code, VA 
will deduct amounts paid by a spouse of a veteran for the expenses of 
such veteran's last illness from a surviving spouse's annual income, as 
well as amounts paid by the surviving spouse for the expenses of such 
veteran's last illness. This is an exception to the general rule that 
VA does not deduct expenses a claimant paid before the date of 
entitlement (or before the date of the veteran's death in death cases).
    Proposed Sec.  5.413(c)(2)(iv) provides this exception for the 
expenses of a veteran's last illness that a surviving spouse paid 
either before the veteran's death or after the veteran's death but 
before Improved Pension entitlement. It provides that payments made up 
to one year before the veteran's death may be deducted from a surviving 
spouse's countable annual income if the surviving spouse's Improved 
Death Pension claim is received within one year of the veteran's death. 
The amounts of these expenses would be deductible during the surviving 
spouse's initial reporting period. We believe this is a reasonable 
period in which to account for expenses associated with a veteran's 
last illness.
    Proposed Sec.  5.413(c) does not include the content of current 
Sec.  3.272(h) concerning time periods for deducting final expenses 
because the periods for allowing deductible final expenses are the 
periods stated in proposed Sec.  5.413(a), with the exception of ``last 
illness'' expenses under paragraph (c)(2)(iv). Therefore, we propose 
not to include the introduction to Sec.  3.272(h). This clarifies and 
simplifies these types of adjustments, benefiting claimants and claims 
examiners alike.
    Proposed paragraph (c)(3)(ii) clarifies that VA cannot allow the 
same expense as both a final expense and an unreimbursed medical 
expense.
    Proposed paragraph Sec.  5.413(d) restates current Sec.  3.272(i), 
which provides for the deduction of certain educational expenses of a 
veteran or surviving spouse. We also propose to state that scholarships 
and grants are not deductible educational expenses when used for 
educational purposes.
    Although VA counts all payments as income unless there is statutory 
authority or a policy basis to exclude or deduct them, VA permits 
certain deductions from particular income sources. In other words, the 
amount of income counted from certain sources is the difference between 
income and certain deductible expenses directly associated with that 
income. Proposed Sec.  5.413(e), (f), and (g) list deductions permitted 
from particular income sources.
    Proposed Sec.  5.413(e) is new and states that gambling losses can 
be deducted from gross winnings to arrive at the net gambling income. 
This provision is based on long-standing VA policy and is consistent 
with how the Internal Revenue Service counts gambling income. We 
believe it is important to include this information so that claimants 
or beneficiaries are fully informed about what VA considers a deduction 
from gambling winnings.
    Proposed Sec.  5.413(f)(1) is new and adds commercial insurance 
(disability, accident, life, or health) to the sources of an award or 
settlement listed in current Sec.  3.271(g) from which deductions may 
be taken. It is consistent with the other items listed in Sec.  
5.413(f) including (6), ``Legal damages collected for personal injury 
or death''.
Section 5.414 Net Worth Determinations for Improved Pension
    Proposed Sec.  5.414 combines current Sec.  3.274, Sec.  3.275, and 
Sec.  3.276(b) into one regulation. Current Sec.  3.274 concerns the 
applicability of net worth concepts to Improved Pension entitlement, 
and current Sec.  3.275 outlines the criteria for evaluating net worth. 
Current Sec.  3.276(b) concerns asset transfers and whether such 
transfers can reduce net worth.
    Currently the terms ``net worth'' and ``corpus of estate'' are used 
interchangeably. Consistent with our proposal in a prior NPRM (RIN 
2900-AL83, 69 FR 77584), we propose to use the term ``net worth'' only 
and not include references to ``corpus of estate'' because we believe 
``net worth'' is more commonly understood.
    Proposed Sec.  5.414(a) is derived from current Sec.  3.275(b), the 
definition of net worth. We propose to add paragraphs (a)(1) through 
(3) to add detail consistent with long-standing VA policy. We also 
propose to provide two examples of the types of personal effects that 
are suitable to and consistent with the claimant's or beneficiary's 
reasonable mode of life.
    Proposed Sec.  5.414(a)(1) states that a mortgage on a home is not 
deducted from net worth. We believe this provision clarifies the 
principle, implied by the pension regulations in current 38 CFR, that a 
personal residence has no bearing on net worth for Improved Pension 
purposes.
    Proposed Sec.  5.414(a)(2) includes current and long-standing VA 
policy that VA will evaluate a ``reasonable lot area'' by considering 
the size of other residential lots in the vicinity. We believe this 
provision would improve the fairness of this regulation 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 VA 
would require disposal of some or all of that asset for the claimant's 
or beneficiary's maintenance. We have also proposed to state VA's

[[Page 54786]]

long-standing policy that if the claimant or beneficiary 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. 
We believe this will allow claimants and beneficiaries to continue to 
live on their family farm, while still accurately measuring net worth.
    Proposed Sec.  5.414(a)(4) restates current Sec.  3.276(b), 
concerning asset transfers, which we propose to incorporate into the 
net worth regulation because it applies only to net worth. We propose 
no substantive changes to this provision.
    Paragraphs (b) and (c) of proposed Sec.  5.414 refer only to a 
veteran's or surviving spouse's adjusted annual income instead of 
listing all of the persons (veteran, dependent spouse, and dependent 
children for a veteran's adjusted annual income and surviving spouse 
and dependent children for a surviving spouse's adjusted annual income) 
whose income would be included in the adjusted annual income. It is 
sufficient to refer only to the veteran's or surviving spouse's 
adjusted annual income because the definition of adjusted annual income 
includes countable annual income, which includes the incomes of the 
dependent spouse and dependent children for a veteran's countable 
annual income and includes the incomes of the surviving spouse and 
dependent children for a surviving spouse's countable annual income. 
For the sake of clarity, paragraph (d) of proposed Sec.  5.414 refers 
to the definition of ``adjusted annual income'' in proposed Sec.  
5.370.
    Proposed Sec.  5.414(b) combines paragraphs (a) and (c) of current 
Sec.  3.274 into one paragraph dealing with veteran and surviving 
spouse Improved Pension awards. Because current paragraphs (a) and (c) 
of Sec.  3.274 are substantively similar, this combination is 
appropriate.
    Proposed Sec.  5.414(c) combines paragraphs (b), (d), and (e) of 
Sec.  3.274, and paragraph (e) of Sec.  3.275(e), all pertaining to net 
worth of a child for Improved Pension purposes. We believe that 
combining rules pertaining only to children will make it easier for 
readers to find these rules.
    Proposed Sec.  5.414(c)(1) is based on current (b) and (d) of Sec.  
3.274 and states that an increased pension payable to a veteran or 
surviving spouse for a child will be discontinued or denied if the 
child's net worth is such that some part of that net worth reasonably 
should be consumed for the child's maintenance.
    Paragraph (c)(2) of proposed Sec.  5.414 is based on current Sec.  
3.274(e), which concerns net worth of a surviving child. However, we 
propose a change that would assist readers and provide more clarity. We 
propose that paragraphs (c)(2)(i) and (ii) of proposed Sec.  5.414 
mirror paragraphs (a) and (b) of proposed Sec.  5.435, which concerns 
annual income of a surviving child. Proposed Sec.  5.414(c)(2)(i) 
provides that if a surviving child is not in the custody of another 
person, VA considers the net worth of the child only. Proposed Sec.  
5.414(c)(2)(ii) provides that if the child is in the custody of another 
person, the child's net worth includes that of the custodian. 
Additionally, we propose to mirror the provision of current Sec.  
3.57(d)(2) and proposed Sec.  5.435, and state that when a child is in 
the joint custody of his or her parent and stepparent, the parent's net 
worth includes that of the stepparent. We believe this provision is 
consistent with 38 U.S.C. 1543.
    Proposed Sec.  5.414(c)(3) is derived from current Sec.  3.275(e). 
The current regulation excludes actual or prospective educational or 
vocational expenses from a child's net worth, but not ``beyond age 
23.'' Proposed Sec.  5.414(c)(3) states that VA will exclude those 
educational or vocational expenses until a child reaches age 23. 
Proposed Sec.  5.414(c)(3) reflects long-standing VA interpretation and 
application of this rule. This does not represent a substantive change 
because in practice VA limits the exclusion when a child reaches age 
23.
    When 38 U.S.C. 1503 defines ``annual income,'' it does so ``under 
this chapter.'' Therefore, we must conclude that the references to 
income in the net worth statutes (38 U.S.C. 1522 and 1543) are 
references to the same definition of income because the statutes are in 
the same chapter. We believe that Congress intended the definition of 
income in section 1503 to apply to all determinations in which income 
might play a role, and we would clarify this point. At the same time, 
proposed Sec.  5.414(d) states that, ``in considering the claimant's or 
beneficiary's living expenses, VA cannot consider expenses it excluded 
or deducted in determining adjusted annual income.'' This statement is 
necessary because VA cannot consider living expenses that have already 
been used to calculate adjusted annual income. Because we propose this 
clarification concerning income and because the phrase ``all of the 
claimant's or beneficiary's living expenses'' sufficiently encompasses 
medical expenses, it is not necessary to specifically mention medical 
expenses in proposed Sec.  5.414(d), although current Sec.  3.275(d) 
does mention medical expenses.
    In Sec.  5.414(d)(1), we propose to restate a phrase currently 
found in Sec.  3.275(d), ``[w]hether the property can be readily 
converted into cash at no substantial sacrifice.'' Review of the 
legislative history of Public Law 86-211, which first required VA to 
use net worth in pension determinations, as well as Public Law 95-588, 
the Improved Pension law, shows Congress clearly intended that the 
greatest pension benefit should go to those with the greatest needs, 
and that benefits should be denied or discontinued if a claimant's or 
beneficiary's estate is large enough to provide for maintenance.
    VA has historically interpreted the phrase ``substantial 
sacrifice'' as meaning that a claim should not be denied for excessive 
net worth if the claimant or beneficiary cannot readily convert real or 
personal property into liquid assets (assets that can be readily 
converted into cash). Therefore, proposed paragraph Sec.  5.414(d)(1) 
provides for consideration of ``[t]he value of liquid assets (assets 
that the claimant or beneficiary can readily convert into cash).'' We 
believe this wording will be clearer to claimants and beneficiaries, as 
well as consistent with VA practice. We also note that proposed 
paragraph Sec.  5.414(a), excluding the value of personal effects 
suitable to and consistent with a reasonable mode of life, would 
protect claimants and beneficiaries from having to sell non-liquid 
assets if this sale would be a substantial sacrifice.
    Paragraphs (d)(2) and (3) of proposed Sec.  5.414 restate current 
Sec.  3.275(d) without substantive change.
    Finally, Sec.  5.414(e) lists resources excluded by statute from 
net worth determinations. This list includes payments excluded by 
statutes that reference a list of benefits in 31 U.S.C. 3803(c)(2)(C). 
Specifically, these are payments under section 6 of the Radiation 
Exposure Compensation Act of 1990; payments under the Ricky Ray 
Hemophilia Relief Fund Act of 1998; payments under the Energy Employees 
Occupational Illness Compensation Program; and payments to certain 
eligible Japanese-Americans and Aleuts. Also, see the discussion 
concerning these payments in this NPRM under the discussion of proposed 
Sec.  5.412.
    We previously discussed a new regulation, to be addressed in a 
future NPRM, which would 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. Therefore, proposed Sec.  
5.414(e)(5) cross-references

[[Page 54787]]

the new proposed regulation, and proposed Sec.  5.414 would not repeat 
the sources currently described in paragraphs (f), (g), and (i) through 
(j) of Sec.  3.275 because these would be in the new regulation.
Section 5.415 Effective Dates for Improved Pension Awards Based on a 
Change in Net Worth
    Proposed Sec.  5.415 is based on current Sec.  3.660(d), as well as 
the third sentence of current Sec.  3.660(a)(2). Proposed Sec.  
5.415(a) governs the assignment of the effective date of a reduction or 
discontinuance of Improved Pension based on the beneficiary's net 
worth.
    Proposed Sec.  5.415(b), based on current Sec.  3.660(d), concerns 
the effective date for payment or resumption when VA previously found 
net worth to bar Improved Pension. No substantive changes are proposed.
Section 5.416 Persons Considered as Dependents for Improved Pension
    Proposed Sec.  5.416 is based on current Sec.  3.23(d)(1). It also 
encompasses current Sec.  3.60, as well as portions of current 
paragraphs (d)(4) and (5) of Sec.  3.23, and statutory provisions, all 
pertaining to dependency for Improved Pension purposes.
    Section 1521(c) of title 38, United States Code, provides the 
statutory maximum annual pension rate for a veteran with a dependent 
spouse, stating that the higher rate applies ``[i]f the veteran is 
married and living with or reasonably contributing to the support of 
such veteran's spouse'' (emphasis added). Then, 38 U.S.C. 1521(h)(2) 
provides that ``[a] veteran shall be considered as living with a spouse 
even though they reside apart unless they are estranged.'' The 
provision of 38 U.S.C. 1521(h)(2) is expressed in current 38 CFR 3.60: 
``For the purposes of determining entitlement to pension under 38 
U.S.C. 1521, a person shall be considered as living with his or her 
spouse even though they reside apart unless they are estranged.''
    Proposed Sec.  5.416(a) states that a spouse is considered a 
dependent spouse for Improved Pension if: (1) The veteran lives with 
the spouse; (2) the veteran and spouse live apart but are not 
estranged; or (3) the veteran reasonably contributes to the estranged 
spouse's support. This wording makes the regulation clear without 
changing the statutory meaning of 38 U.S.C. 1521(c) and (h)(2).
    Proposed Sec.  5.416(a)(3) restates current Sec.  3.23(d)(1) as it 
pertains to spousal support and adds that determining whether support 
is ``reasonable'' is a factual matter that VA determines. Proposed 
Sec.  5.416(b) restates the last sentence of current Sec.  3.23(d)(1) 
as it pertains to a dependent child of a veteran. It also states the 
implication of 38 U.S.C. 1541(c) and 1542 as interpreted by 38 CFR 
3.23(d)(5), 3.24, and 3.57(d): VA considers a veteran's child to be a 
surviving spouse's dependent if the child is in the custody of the 
surviving spouse. See 38 U.S.C. 1506(1). The term ``custody'' for 
Improved Pension is defined in current Sec.  3.57(d) (proposed 
counterpart Sec.  5.417). In proposed Sec.  5.416(b)(1), we propose to 
state that a child need not be living with the veteran or surviving 
spouse to be presumed in custody.
    Proposed Sec.  5.416(b)(2) restates the provision of current Sec.  
3.23(d)(1) that even if a veteran does not have custody of a child, the 
child is presumed to be the veteran's dependent child if the veteran 
provides reasonable support contributions.
    Proposed Sec.  5.416(c) indicates that a child is not considered a 
dependent child of the veteran or surviving spouse for Improved Pension 
purposes if the child's net worth is such that under proposed Sec.  
5.414(c)(1) (current paragraphs (b) and (d) of Sec.  3.274) increased 
pension that would otherwise be payable to the veteran or surviving 
spouse on account of the child is denied or discontinued. We believe 
this is the correct interpretation of the statutes, 38 U.S.C. 1522(b) 
and 1543(a)(2), which provide that during the period that net worth 
bars increased pension, a child shall not be considered as the 
veteran's or surviving spouse's child for purposes of Improved Pension.
Section 5.417 Child Custody for Improved Pension
    Proposed Sec.  5.417 is based on current Sec.  3.57(d), which 
defines ``child custody'' for Improved Pension purposes. Proposed Sec.  
5.417(a) through (c) are plain language restatements of current Sec.  
3.57(d)(1), and proposed Sec.  5.417(f) and (g) are plain language 
restatements of current Sec.  3.57(d)(3). Proposed paragraph (g) adds 
that if a child has no custodian, that child may be eligible for 
benefits in his or her own right.
    Proposed Sec.  5.417(d) and (e) are plain language restatements of 
the first three sentences of current Sec.  3.57(d)(2). We propose to 
replace the word ``remarried'' with the more inclusive word 
``married''; this replacement does not change the intent or meaning of 
the current regulation. We excluded the last sentence of Sec.  
3.57(d)(2) from proposed Sec.  5.417 and included it instead with the 
proposed regulation that explains how to calculate annual Improved 
Pension amounts for surviving children, Sec.  5.435.

Improved Pension--Income Reporting Periods, Payments, Effective Dates, 
and Time Limits

Section 5.420 Reporting Periods for Improved Pension
    Proposed Sec.  5.420, is not directly based on any part 3 
regulation. Rather it explains several key concepts regarding income 
reporting periods for Improved Pension, which are based on the part 3 
Improved Pension regulations and long-standing VA practice. It defines 
a reporting period as the period for which VA counts income that is 
anticipated or received, when calculating adjusted annual income. It 
states that there are two types of reporting periods, the initial 
reporting period and the annual reporting period, and describes these 
periods in detail.
Section 5.421 How VA Calculates an Improved Pension Payment Amount
    Proposed Sec.  5.421 is based on paragraphs (a) and (b) of current 
Sec.  3.273, VA's regulation pertaining to the calculation of the 
monthly amount payable to Improved Pension beneficiaries. Proposed 
regulations derived from current Sec.  3.273(c) and (d), concerning 
categories of income, are covered in this NPRM in the discussion 
concerning proposed Sec.  5.410. Proposed Sec.  5.421 addresses ``the 
basics'' of how VA calculates an Improved Pension payment amount and 
what happens when changes occur. A general introduction to Improved 
Pension payment amount calculation is a useful tool for understanding 
more specific related regulations.
    We propose to retain the long-standing VA term, ``maximum annual 
pension rate,'' to refer to the statutory ``annual rate,'' ``annual 
rate of pension,'' and ``annual pension rate'' referenced in 38 U.S.C. 
1521, 1541, and 1542. We also see no reason to refer to the 
``applicable'' maximum annual pension rate. It is unnecessary to state 
that VA uses whichever maximum annual pension rate applies. Therefore, 
we propose to not include the word ``applicable.''
    Proposed Sec.  5.421(a) restates current Sec.  3.273(a). However, 
we propose to exclude several words and phrases that are unnecessary. 
We propose not to include the phrase, ``For the purpose of determining 
initial entitlement, or for resuming payments on an award which was 
previously discontinued,'' because the basic procedure for calculating 
an Improved Pension payment amount is the same whether VA is 
calculating an initial award or a resumption of pension payments. For 
the same reason, we propose not to include the reference to

[[Page 54788]]

the ``effective date of entitlement'' in current Sec.  3.273(a).
    Current paragraphs (a) and (b) of Sec.  3.273 contain three 
references to current Sec.  3.29(b), which is the ``rounding down'' 
provision that became effective for pensions paid on or after June 1, 
1983. We propose not to refer to the June 1, 1983, effective date 
because all VA pensions paid under part 5 will be effective after June 
1, 1983. We otherwise propose to incorporate the provision of current 
Sec.  3.29(b), pertaining to rounding, within proposed Sec.  5.421(a).
    Proposed Sec.  5.421(b) and (c) provide answers to the simple 
questions, ``What if the maximum annual pension rate changes?'' and 
``What if adjusted annual income changes?'' The simple answer is that 
VA recalculates the Improved Pension payment amount. Proposed paragraph 
(c) cross-references proposed Sec.  5.422, ``Effective dates for 
changes to Improved Pension payments due to a change in income,'' which 
is a more complex regulation concerning annual income adjustments.
Section 5.422 Effective Dates for Changes to Improved Pension Payments 
Due to a Change in Income
    Proposed Sec.  5.422 contains effective dates for payment amount 
adjustments due to a change in income.
    Current Sec.  3.660 provides the effective dates for adjustments to 
VA's need-based benefits. Specific effective-date provisions for 
increases are complex and are contained in a separate proposed 
regulation, Sec.  5.424, ``Time limits to establish entitlement to 
Improved Pension or to increase the annual Improved Pension amount 
based on income.'' Proposed Sec.  5.422(a)(1) cross-references this 
regulation and provides the general rule that increases are effective 
the date entitlement arose, or in this specific instance, the date that 
income changed. Proposed Sec.  5.422 also states that generally, VA 
makes such adjustments the first day of the month after the income 
change, according to current Sec.  3.31, ``Commencement of the period 
of payment.''
    Proposed Sec.  5.422(a)(2) restates the second sentence of current 
Sec.  3.660(a)(2), using revised language for the effective date for 
payment of reduced or discontinued benefits. Although the current 
regulation states that the award will be reduced or discontinued 
effective the end of the month in which an increase in income occurred, 
in the proposed regulation we have stated that the award will be 
reduced or discontinued effective ``the first day of the month 
following the income change.'' VA has taken this approach throughout 
the Regulation Rewrite Project. That is, rather than stating the 
effective date on which entitlement to the previous rate ends, the part 
5 effective-date regulations would state the effective date as the day 
on which VA begins to discontinue benefits. For example, rather than 
stating that a particular discontinuance is effective ``the last day of 
the month,'' we would state that VA will discontinue benefits effective 
``the first day of the following month.'' VA intends no substantive 
change by this rewording.
    We also propose not to include the references to ``running 
award[s]'' found in current Sec.  3.660(a)(2). The references to 
``running award[s]'' are not found in the authorizing statute, 38 
U.S.C. 5112(b). We believe the effective-date provisions of 38 U.S.C. 
5112(b) apply, regardless of whether or not VA has actually processed 
the award or the award is in suspense.
    Proposed Sec.  5.422(b)(1) states a matter of long-standing policy 
which is not currently contained in any regulation. Although the 
provision is somewhat intuitive, we believe it should be explicitly 
stated in the regulations that VA stops counting a dependent's income 
effective the same date that the dependent is removed. This is an 
exception to the general rule that VA must count all income for at 
least 12 months. Proposed Sec.  5.422(b)(2) and (3) are derived from 
the first and second sentences of Sec.  3.660(c).
Section 5.423 Improved Pension Determinations When Anticipated Annual 
Income is Uncertain
    Proposed Sec.  5.423(a) is based on current Sec.  3.271(f), 
pertaining to VA action when anticipated annual income is uncertain. We 
propose to expand on the current provision to explicitly state that 
this provision also applies when there is evidence of record indicating 
the claimant's anticipated annual income may be higher than the 
claimant reports. Because the current regulation does not bar 
consideration of evidence suggesting higher anticipated annual income, 
it is VA's current practice to consider such evidence. We believe this 
provision is fair to claimants and easy to administer.
    Proposed Sec.  5.423(a)(1) also expands on Sec.  3.271(f) to 
clarify that when anticipated annual income is expected to exceed the 
maximum annual pension rate, VA will not pay pension at that time. VA 
will then adjust benefits or pay pension upon the receipt of amended 
income information (for example, information about deductible 
expenses). We note that this provision is not new and can be derived 
from current Sec.  3.271(f)(1); however, we believe it should be 
explicitly stated.
    Proposed Sec.  5.423(b) restates Sec.  3.271(f)(2), concerning 
counting dependents' income in situations when VA has not received 
evidence to establish dependents. There is no substantive change to 
this provision.
Section 5.424 Time Limits To Establish Entitlement to Improved Pension 
or To Increase the Annual Improved Pension Amount Based on Income
    Proposed Sec.  5.424 restates current Sec.  3.660(b) as it pertains 
to Improved Pension. Current Sec.  3.660(b)(1) provides that if 
payments are not made because anticipated income exceeds the maximum 
annual pension rate, pension may be awarded in ``accordance with the 
facts found, but not earlier than the beginning of the appropriate 12-
month annualization period if satisfactory evidence is received within 
the same or the next calendar year.'' Proposed Sec.  5.424(b)(1) is a 
plain language rewrite of Sec.  3.660(b)(1).
    Proposed Sec.  5.424(b)(2) deals with benefits that are 
discontinued or paid at a lower amount. VA's long-standing 
interpretation of Sec.  3.660(b)(1) is that in claims for Improved 
Pension, the ``12-month annualization period'' refers to the initial or 
annual reporting period, as appropriate, and that the ``same * * * 
calendar year'' refers to the calendar year in which the reporting 
period ends. Proposed Sec.  5.424(b)(1) and (b)(2) reflect this 
interpretation. Both (b)(1) and (b)(2) apply whether the income is 
actual or anticipated. Regarding the use of the term ``facts found'' in 
current Sec.  3.660(b)(1), VA interprets ``facts found'' and another 
phrase used in several effective date rules, ``date entitlement 
arose,'' to have the same basic meaning. We propose to use only one of 
these terms, ``date entitlement arose,'' to improve consistency.
    Proposed Sec.  5.424(c) is based on current Sec.  3.660(b)(2), 
which pertains to payment of Improved Pension benefits following 
nonentitlement for one reporting period.
    Proposed Sec.  5.424(d) is derived from current Sec.  3.652(b) and 
is a matter of long-standing VA policy. Proposed Sec.  5.424(d) states 
that there is no time limit to submit income evidence in order to 
reduce an overpayment; however, the income evidence submitted must 
pertain to the time period for which the overpayment was created. 
Although this provision is implied in current Sec.  3.652(b), we 
believe that positively stating it within the Improved Pension time 
limits section makes the provision clearer to readers.

[[Page 54789]]

Section 5.425 Frequency of Payment of Improved Pension Benefits
    Current Sec.  3.30 governs the frequency of payment of Improved 
Pension and parents' dependency and indemnity compensation (DIC). (The 
provisions concerning parents' DIC are contained in a different NPRM 
(70 FR 61326).) Paragraphs (a) through (d), and paragraph (f) of 
current Sec.  3.30 explain that the amount of Improved Pension payable 
determines how often the payment is made. The introduction to current 
Sec.  3.30 includes a caveat that if a beneficiary is subject to losing 
other Federal benefit payments because pension payment is less often 
than monthly, the beneficiary may choose to receive monthly payment. 
Our proposal contains format and language changes only. There is no 
revision to the substance of the part 3 regulation.

Improved Death Pension Marriage Date Requirements and Effective Dates

Section 5.430 Marriage Date Requirements for Improved Death Pension.
    Proposed Sec.  5.430 is based on current Sec.  3.54, the regulation 
that limits, in the case of post-service marriages, the class of 
surviving spouses eligible for pension to those whose marriages satisfy 
one of three conditions. We propose to separate these provisions into 
separate regulations because the Project is separating regulations 
according to benefit type. Proposed regulations based on other 
provisions contained in current Sec.  3.54 will be or have been 
contained in separate NPRMs.
    Proposed Sec.  5.430 reorganizes the provisions of current Sec.  
3.54(a) in order to make it easier for the reader to locate pertinent 
marriage date requirements.
    Proposed Sec.  5.430(a)(1) contains a new sentence that explicitly 
states that multiple marriage periods may be added together to meet the 
one-year requirement. We believe this is a reasonable interpretation of 
38 U.S.C. 1541(f)(2) because the statute does not provide that the 
period must be continuous. Proposed Sec.  5.430(a)(2) limits the 
wartime periods described to the Mexican Border Period, World War I and 
later periods because this group of regulations pertains only to 
Improved Pension.
    Proposed Sec.  5.430(b) restates current Sec.  3.54(e). We propose 
not to include the introductory clause in the first sentence of current 
Sec.  3.54(e), which limits the scope of Sec.  3.54(e) to ``periods 
commencing after December 31, 1957.'' January 1, 1958, is the effective 
date of the Veterans' Benefits Act of 1957 (1957 Act), Public Law 85-
56, 71 Stat. 83. The 1957 Act primarily served to consolidate laws 
concerning veterans' benefits into one statute. The text of one of the 
1957 Act's provisions is similar to current 38 U.S.C. 103(b). See sec. 
103, Public Law 85-56, 71 Stat. 90. However, the law in effect before 
the passage of the 1957 Act also permitted using the original date of 
marriage to determine if date of marriage requirements had been met 
where the surviving spouse and the veteran had been married more than 
once. See sec. 3, Public Law 78-483, 58 Stat. 804.
Section 5.431 Effective Dates for Improved Death Pension
    Current Sec.  3.400(c) pertains to effective dates for all VA death 
benefits. Proposed Sec.  5.431 is based on current Sec.  3.400(c) only 
as it pertains to Improved Pension.
    Proposed Sec.  5.431(b) restates current Sec.  3.400(c)(1) 
pertaining to death in service. We propose to not include current 
paragraph (c)(3)(i), which refers to claims received before October 1, 
1984, because we know of no such pending Improved Death Pension claims. 
Should one be discovered, the prior version of the regulations would 
control the effective date. Likewise, we propose not to include current 
paragraph (c)(3)(ii) for claims received on or after October 1, 1984, 
but before December 10, 2004, for the same reasons.
Section 5.432 Deemed Valid Marriages and Contested Claims for Improved 
Death Pension
    Proposed Sec.  5.432 is a new regulation based on current Sec.  
3.52(d). In VAOPGCPREC 20-90, 55 FR 40985 (Oct. 5, 1990), VA's General 
Counsel held that the phrase ``legal surviving spouse who has been 
found entitled to gratuitous death benefits'' in Sec.  3.52(d) does not 
apply to an individual who has been found to be the legal surviving 
spouse of the veteran but who does not meet the income requirements to 
qualify for Improved Death Pension. In other words, the mere fact of 
recognized status as a legal surviving spouse is not sufficient to 
prevent a surviving spouse of a deemed valid marriage from being 
entitled to gratuitous death benefits if the legal surviving spouse 
does not show that he or she meets all the legal criteria for the award 
of the benefit. We propose this new regulation to clarify that this 
deemed valid provision means that the legal surviving spouse must have 
been found entitled under all of the factual criteria for the award of 
the benefit in order to bar the recognition of the surviving spouse of 
the deemed valid marriage as eligible for the same benefit.
    Current Sec.  3.52(d) indicates that a legal surviving spouse and a 
surviving spouse of a deemed valid marriage may compete at the same 
time for the same death benefits. In such cases, the wording of current 
Sec.  3.52(d) suggests that a surviving spouse of a deemed valid 
marriage will be recognized so long as the legal surviving spouse fails 
to fulfill some factual criterion for the award of death benefits. A 
legal surviving spouse may not be entitled to Improved Death Pension, 
for example, due to excessive income. In this case, the other claimant 
may be eligible for Improved Death Pension as a surviving spouse of a 
deemed valid marriage.
    When both a legal surviving spouse and a person claiming to be a 
surviving spouse of a deemed valid marriage apply for Improved Death 
Pension at the same time and the legal surviving spouse is not entitled 
to Improved Death Pension because his or her expected adjusted annual 
income appears to exceed the maximum annual pension rate, VA will not 
recognize a surviving spouse of a deemed valid marriage until the 
Improved Pension time limits under current Sec.  3.660(b)(1) have 
expired. In this way, VA avoids the prospect of making a duplicate 
payment in violation of 38 U.S.C. 103(d).
Section 5.433 Effective Date of Discontinuance of Improved Death 
Pension Payments to a Beneficiary No Longer Recognized as the Veteran's 
Surviving Spouse
    Proposed Sec.  5.433 is based on current Sec.  3.657(a). Current 
Sec.  3.657 addresses two different effective date and payment 
adjustment scenarios when a surviving spouse is awarded Improved Death 
Pension, or when his or her Improved Death Pension benefits are 
discontinued. VA proposes to address each of these situations in 
separate sections in subpart F of part 5 as Sec. Sec.  5.433 and 5.434.
    The first scenario occurs when VA is paying Improved Death Pension 
to one beneficiary who claims to be the surviving spouse of a veteran, 
but a second person later claims Improved Death Pension and 
successfully establishes that he or she is actually the veteran's 
lawful surviving spouse. Current Sec.  3.657(a) governs the effective 
date for the discontinuance of the award to the beneficiary previously 
recognized as the veteran's surviving spouse. Proposed Sec.  5.433 
addresses this situation.
    Proposed Sec.  5.433(a) describes the situation to which the 
section applies. Proposed Sec.  5.433(b) is substantively the

[[Page 54790]]

same as Sec.  3.657(a) with two exceptions. First, 38 U.S.C. 5112(b)(6) 
precludes reduction or discontinuance of compensation, DIC, or pension 
``by reason of change in law or administrative issue'' or a ``change in 
interpretation of a law or administrative issue'' until ``the last day 
of the month following sixty days from the date of notice to the payee 
(at the payee's last address of record) of the reduction or 
discontinuance.'' We propose to add this exception as Sec.  
5.433(b)(3). Again, we propose to phrase the effective date that VA 
pays a reduced amount or discontinues benefits in terms of the date 
that the reduced amount begins or discontinuance occurs.
    Second, current Sec.  3.657(a)(1) and (2) refer to payments to the 
legal surviving spouse being effective either before or from ``the date 
of filing claim.'' Under the provisions of 38 U.S.C. 5110(a), the 
effective date of an award based on an original claim, a reopened 
claim, or claim for increase of compensation, pension, or DIC is fixed 
in accordance with the facts found, but shall not be earlier than the 
date of receipt of an application. The operative effective date is not 
the date of filing, but the date VA receives the claim. Therefore, 
Sec.  5.433 refers to the date of receipt of claim.
Section 5.434 Award, or Discontinuance of Award, of Improved Death 
Pension to a Surviving Spouse Where Improved Death Pension Payments to 
a Child Are Involved
    Proposed Sec.  5.434 is based on current Sec.  3.657(b), which 
concerns effective dates and payment adjustments to surviving spouses 
and children. This involves two different situations: (1) The surviving 
spouse is found eligible for death benefits and a separate award for a 
surviving child in that surviving spouse's custody must therefore be 
discontinued, or (2) the surviving spouse continues to receive Improved 
Death Pension for a period of time after his or her eligibility 
discontinues (by remarriage, for example) and the veteran's surviving 
child is eligible and entitled to receive Improved Death Pension 
because the surviving spouse is no longer eligible. In the second 
situation, we propose to refer to the surviving spouse, who is no 
longer eligible for benefits, as the ``former'' surviving spouse.
    Proposed Sec.  5.434(a) is based on current Sec. Sec.  3.657(b)(1) 
and 3.503(a)(9), which provide that VA will discontinue benefits to a 
surviving child effective the date of last payment when a surviving 
spouse establishes eligibility.
    Proposed Sec.  5.434(b) is based on current Sec.  3.657(b)(2), 
which provides that VA will adjust the payment to the former surviving 
spouse, and surviving child depending on whether the child's payment 
amount was lower, or equal to or greater than the former surviving 
spouse's payment amount.
    We propose a further wording change consistent with our proposal to 
clarify effective dates for reductions or discontinuances. Rather than 
saying VA will reduce or discontinue benefits ``effective the date of 
last payment,'' we propose to state that VA will reduce or discontinue 
benefits ``effective the first of the month that follows the month for 
which VA last paid benefits.'' Although it is longer, we believe the 
proposed phrase is clearer than the current rule. We propose this 
rewording because ``date of last payment'' could have varying meanings 
because VA pays one month in arrears. Therefore, proposed Sec.  5.434 
clarifies that VA will begin paying the new payee effective the same 
day it stops paying the previous payee in these cases. No substantive 
change is intended.
    We have restructured the material of current Sec.  3.657(b) to make 
it easier to follow and to clarify this rule's application to Improved 
Pension claims. Current Sec.  3.657(b) does not apply to Improved 
Pension in the same way that it applies to DIC.
    Improved Pension is very different from DIC in its treatment of 
children and surviving spouses. Under current Sec.  3.24 (proposed 
Sec.  5.435), children may not establish separate entitlement to 
Improved Death Pension if they are in the custody of a surviving spouse 
who is eligible for Improved Pension. ``Custody'' for Improved Pension 
purposes is defined in current Sec.  3.57(d) (proposed Sec.  5.417). 
Custody for Improved Pension purposes exists unless legally divested 
and does not discontinue when the child reaches age 18. When such 
children are in the custody of a surviving spouse who is eligible for 
Improved Death Pension, VA considers them to be dependent children of 
the surviving spouse for Improved Pension purposes rather than 
surviving children.
    Section 1542 of title 38, United States Code, provides, ``The 
Secretary shall pay to each child [who meets basic eligibility 
requirements] and who is not in the custody of a surviving spouse 
eligible for [Improved Death Pension] pension [at statutory rates].'' 
Therefore, if a surviving child is receiving Improved Death Pension, 
the fact that a surviving spouse also establishes entitlement to 
Improved Death Pension has no effect on the surviving child's benefits 
if the surviving spouse is not a person legally responsible for the 
surviving child's support under current Sec.  3.57(d)(2).
    Alternatively, if a surviving child is receiving Improved Death 
Pension, and the child's parent or legal custodian establishes 
eligibility for Improved Death Pension as the veteran's surviving 
spouse, the child loses his or her separate entitlement. Therefore, we 
propose to amend the language of the existing provision and address its 
application to the Improved Pension program.
    Current Sec.  3.657(b) has been rewritten to clarify effective 
dates and payment adjustments that apply in the event the surviving 
spouse's Improved Pension payment amount is equal to the child's 
Improved Pension payment amount.
Section 5.435 Calculating Annual Improved Pension Amounts for Surviving 
Children
    Proposed Sec.  5.435 is derived from current Sec.  3.24, except for 
several provisions from current Sec.  3.24(a), which have been included 
elsewhere. The first two sentences of current Sec.  3.24(a) have been 
incorporated in proposed Sec.  5.370 as a definition of a surviving 
child. The third sentence of current Sec.  3.24(a), concerning 
eligibility versus entitlement, has been included at the beginning of 
the Improved Pension subpart, in Sec.  5.371. The last sentence of 
current Sec.  3.24(a), which cross-references and restates part of 
current Sec.  3.23(d)(5), that a surviving spouse's income includes 
that of surviving children in the surviving spouse's custody unless it 
would cause hardship, is included in the hardship provisions in 
proposed Sec.  5.411.
    Paragraphs (b)(1) and (b)(2) of proposed Sec.  5.435 are based on 
current Sec.  3.24(c) and are rewritten in plain language to improve 
readability. Proposed Sec.  5.435(b)(3) includes the provision from the 
last sentence of current Sec.  3.57(d)(2) that if a surviving child is 
in joint custody, the annual income of the natural or adoptive parent 
includes the income of the natural or adoptive parent's spouse.

Non-Inclusion of Other Part 3 Provisions

    Previously in this NPRM in the discussions concerning the new 
proposed part 5 regulations, we discussed regulations or portions of 
regulations that we propose not to include to part 5. We now discuss 
several other provisions that we propose not to include.
    We propose not to include Sec.  3.1(w), which briefly defines 
Improved Pension. Because of the regulation

[[Page 54791]]

reorganization of the Project, this definition would not be needed.

Endnote Regarding Amendatory Language

    We intend to ultimately remove part 3 entirely, but we are not 
including amendatory language to accomplish that at this time. VA will 
provide public notice before removing part 3.

Paperwork Reduction Act

    Although this document contains regulations which include 
collections of information under the provisions of the Paperwork 
Reduction Act (44 U.S.C. 3501-3521), no new or proposed revised 
collections of information are associated with these proposed rules. 
The information collection requirements for these regulations are 
currently approved by the Office of Management and Budget (OMB) and 
have been assigned OMB control numbers 2900-0001 (Veteran's Application 
for Compensation and/or Pension), 2900-0004 (Application for Dependency 
and Indemnity Compensation, Death Pension and Accrued Benefits by a 
Surviving Spouse or Child), 2900-0095 (Pension Claim Questionnaire for 
Farm Income), 2900-0101 (Improved Pension Eligibility Verification 
Reports), and 2900-0104 (Report of Accidental Injury in Support of 
Claim for Compensation or Pension).

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. 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

    Executive Order 12866 directs agencies to assess all costs and 
benefits of available regulatory alternatives and, when regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including potential economic, environmental, public health and safety, 
and other advantages; distributive impacts; and equity). The Executive 
Order classifies a ``significant regulatory action,'' requiring review 
by the Office of Management and Budget (OMB) unless OMB waives such 
review, as any regulatory action that is likely to result in a rule 
that may: (1) Have an annual effect on the economy of $100 million or 
more or adversely affect in a material way the economy, a sector of the 
economy, productivity, competition, jobs, the environment, public 
health or safety, or State, local, or tribal governments or 
communities; (2) Create a serious inconsistency or otherwise interfere 
with an action taken or planned by another agency; (3) Materially alter 
the budgetary impact of entitlements, grants, user fees, or loan 
programs or the rights and obligations of recipients thereof; or (4) 
Raise novel legal or policy issues arising out of legal mandates, the 
President's priorities, or the principles set forth in the Executive 
Order.
    The economic, interagency, budgetary, legal, and policy 
implications of this proposed rule have been examined and it has been 
determined to be a significant regulatory action under the Executive 
Order because it is likely to result in a rule that may raise novel 
legal or policy issues arising out of legal mandates, the President's 
priorities, or the principles set forth in the Executive Order.

Unfunded Mandates

    The Unfunded Mandates Reform Act of 1995 requires, at 2 U.S.C. 
1532, that agencies prepare an assessment of anticipated costs and 
benefits before issuing 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 (adjusted annually for 
inflation) in any given year. This proposed rule would have no such 
effect on State, local, or tribal governments, or on the private 
sector.

Catalog of Federal Domestic Assistance Numbers and Titles

    The Catalog of Federal Domestic Assistance program numbers and 
titles for this proposal are 64.104, Pension for Non-Service-Connected 
Disability for Veterans; 64.105, Pension to Veterans Surviving Spouses, 
and Children; 64.115, Veterans Information and Assistance.

List of Subjects in 38 CFR Part 5

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

    Approved: June 15, 2007.
Gordon H. Mansfield,
Deputy Secretary of Veterans Affairs.
    For the reasons set out in the preamble, VA proposes to further 
amend 38 CFR part 5, as proposed to be added at 69 FR 4832, January 30, 
2004, and as further proposed to be amended at 69 FR 77578, December 
27, 2004, as follows:

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

Subpart F--Nonservice-Connected Disability and Death Pensions

    1. The authority citation for part 5, subpart F, continues to read 
as follows:

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

    2. Sections 5.370 through 5.459 and their undesignated center 
headings are added to subpart F to read as follows:

Improved Pension Requirements--Veterans, Surviving Spouses, and 
Surviving Children

Sec.
5.370 Definitions for Improved Pension.
5.371 Eligibility and entitlement requirements for Improved Pension.
5.372 Wartime service requirements for Improved Pension.
5.373 Evidence of age in Improved Pension claims.
5.374-5.379 [Reserved]

Improved Disability Pension--Disability Determinations and Effective 
Dates

5.380 Disability requirements and presumptions for Improved 
Disability Pension.
5.381 Permanent and total disability ratings for Improved Disability 
Pension purposes.
5.382 Improved Disability Pension--combining disability ratings.
5.383 Effective dates for awards of Improved Disability Pension.
5.384-5.389 [Reserved]

Special Monthly Pension Eligibility for Veterans and Surviving Spouses

5.390 Special Monthly Pension for Veterans and Surviving Spouses at 
the Aid and Attendance Rate.
5.391 Special Monthly Pension for Veterans and Surviving Spouses at 
the Housebound Rate.
5.392 Effective Dates for Awards of Special Monthly Pension.
5.393-5.399 [Reserved]

Maximum Annual Pension Rates

5.400 Maximum Annual Pension Rates for Veterans, Surviving Spouses, 
and Surviving Children.
5.401 Automatic Adjustment of Maximum Annual Pension Rates.
5.402-5.409 [Reserved]

Improved Pension Income, Net Worth, and Dependency

5.410 Countable Annual Income.
5.411 Counting a Child's Income for parents' Improved Pension.
5.412 Income exclusions for calculating countable annual income.
5.413 Income deductions for calculating adjusted annual income.
5.414 Net worth determinations for Improved Pension.

[[Page 54792]]

5.415 Effective dates for Improved Pension awards based on a change 
in net worth.
5.416 Persons considered as dependents for Improved Pension.
5.417 Child custody for purposes of determining dependency for 
Improved Pension purposes.
5.418-5.419 [Reserved]

Improved Pension--Income Reporting Periods, Payments, Effective Dates, 
and Time Limits

5.420 Reporting periods for Improved Pension.
5.421 How VA calculates an Improved Pension payment amount.
5.422 Effective dates for changes to Improved Pension payments due 
to a change in income.
5.423 Improved Pension determinations when anticipated annual income 
is uncertain.
5.424 Time limits to establish entitlement to Improved Pension or to 
increase the annual Improved Pension amount based on income.
5.425 Frequency of payment of Improved Pension benefits.
5.426-5.429 [Reserved]

Improved Death Pension Marriage Date Requirements and Effective Dates

5.430 Marriage date requirements for Improved Death Pension.
5.431 Effective dates for Improved Death Pension.
5.432 Deemed valid marriages and contested claims for Improved Death 
Pension.
5.433 Effective date of discontinuance of Improved Death Pension 
payments to a beneficiary no longer recognized as the veteran's 
surviving spouse.
5.434 Award, or discontinuance of award, of Improved Death Pension 
to a surviving spouse where Improved Death Pension payments to a 
child are involved.
5.435 Calculating annual Improved Pension amounts for surviving 
children.
5.436-5.459 [Reserved]

Eligibility for Improved Pension--Veterans, Surviving Spouses, and 
Surviving Children


Sec.  5.370  Definitions for Improved Pension.

    For the purposes of Sec. Sec.  5.370 through 5.459:
    Adjusted annual income means countable annual income minus 
deductions described in Sec.  5.413, rounded down to the nearest 
dollar.
    Annual Improved Pension amount means the amount of Improved Pension 
payable to a beneficiary, calculated as the maximum annual pension rate 
minus adjusted annual income.
    Countable annual income means payments of any kind from any source 
that are not specifically excluded under Sec. Sec.  5.410, 5.411, or 
5.412.
    Maximum annual pension rate means the amount of Improved Pension 
payable to a beneficiary whose adjusted annual income is zero. The 
maximum annual pension rates are established by law. The various types 
of maximum annual pension rates are set forth at Sec.  5.400.
    Payments are cash and cash equivalents (such as checks and other 
negotiable instruments), and the fair market value of personal 
services, goods, or room and board received in lieu of other forms of 
payment.
    Special Monthly Pension is a type of Improved Pension with higher 
maximum annual pension rates than the basic rates listed in Sec.  
5.400(a)(1) and (5). Special Monthly Pension is based on a veteran's or 
surviving spouse's disability or disabilities ratable at 60 percent or 
more, their housebound status, or their need of the aid and attendance 
of another person in performing their daily living habits.
    A surviving child is a person who is eligible for Improved Death 
Pension as the surviving child of a deceased wartime veteran and who is 
not in the custody of a surviving spouse eligible to receive Improved 
Death Pension. [FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][PRORULES][PRORULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/
SUBJECT][/PREAMB][SUPLINF][HED]*[/HED][SECTION][SECTNO]*[/
SECTNO][SUBJECT]*[/SUBJECT]


Sec.  5.371  Eligibility and entitlement requirements for Improved 
Pension.

    (a) General. Improved Pension is a benefit payable to certain 
veterans or to a veteran's surviving spouse or surviving child. 
Improved Pension is paid monthly or as provided in Sec.  5.425. In 
order for Improved Pension benefits to be paid, beneficiaries must be 
both eligible and entitled.
    (b) Eligibility requirements for Improved Disability Pension. 
Veterans are eligible for Improved Disability Pension if they--
    (1) Have wartime service under Sec.  5.372 and are either
    (2) Age 65 or older; or
    (3) Permanently and totally disabled under Sec.  5.381.
    (c) Eligibility requirements for Improved Death Pension. (1) A 
surviving spouse is eligible for Improved Death Pension if the deceased 
veteran had wartime service under Sec.  5.372.
    (2) A surviving child is eligible for Improved Death Pension if the 
deceased veteran had wartime service under Sec.  5.372.
    (3) A surviving spouse or surviving child may be eligible for 
Improved Death Pension regardless of whether the veteran's death is 
service-connected.
    (d) Entitlement requirements for Improved Disability or Death 
Pension. In addition to the eligibility requirements of paragraphs (b) 
and (c) of this section, a claimant or beneficiary must meet income and 
net worth requirements to be entitled or to continue to be entitled to 
Improved Pension.
    (1) Income. VA determines a claimant's or beneficiary's annual 
Improved Pension amount by subtracting adjusted annual income from the 
maximum annual pension rate. A claimant is not entitled to benefits if 
his or her adjusted annual income is greater than the maximum annual 
pension rate. See Sec.  5.400, ``Maximum annual pension rates for 
veterans, surviving spouses and surviving children.'' See also Sec.  
5.370 for the definitions of ``adjusted annual income,'' ``annual 
Improved Pension amount,'' and ``maximum annual pension rate.''
    (2) Net worth. A claimant's or beneficiary's net worth must not bar 
payment of Improved Pension, as provided in Sec.  5.414.

(Authority: 38 U.S.C. 1513, 1521, 1522, 1541, 1542, 5303A)

Sec.  5.372  Wartime service requirements for Improved Pension.

    (a) Wartime periods for Improved Pension. The periods of war for 
Improved Pension purposes are those specified in Sec.  5.20.
    (b) Wartime service requirement for Improved Disability Pension. A 
veteran has ``wartime service'' for Improved Disability Pension 
purposes if he or she served in the active military service for one or 
more of the following:
    (1) A period of 90 consecutive days or more, at least 1 day of 
which was during a period of war.
    (2) Ninety days or more during a period of war. Separate periods of 
service within the same period of war can be added together to meet the 
90-day requirement.
    (3) A total of 90 days or more in 2 or more separate periods of 
service during more than 1 period of war.
    (4) Any period of time during a period of war if the veteran was:
    (i) Discharged or released for a disability that was determined to 
be service-connected without presumptive provisions of law; or
    (ii) Official service records show that the veteran had such a 
service-connected disability at the time of discharge that in medical 
judgment would have justified a discharge for disability.
    (c) Wartime service requirement for Improved Death Pension. For 
Improved Death Pension claims, the veteran met the wartime service 
requirement if either of the following is true:
    (1) The veteran had wartime service as specified in paragraph (b) 
of this section; or

[[Page 54793]]

    (2) The veteran was, at the time of his or her death, receiving or 
entitled to receive disability compensation or military retired pay for 
a service-connected disability based on service during a period of war.

(Authority: 38 U.S.C. 1521(j), 1541(a), 1542)

Sec.  5.373  Evidence of age in Improved Pension claims.

    Where the age of a veteran or surviving spouse is material to the 
decision of an Improved Pension claim, VA will accept as true the 
veteran's or surviving spouse's statement of age where it is consistent 
with all other statements of age in the record. If the record contains 
inconsistent statements of age, VA will use the youngest age of record 
unless the veteran or surviving spouse can submit documentation of an 
older age in one of the ways outlined in Sec.  5.229 of this chapter.

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

Sec. Sec.  5.374-5.379  [Reserved]

Improved Disability Pension--Disability Determinants and Effective 
Dates


Sec.  5.380  Disability requirements and presumptions for Improved 
Disability Pension.

    (a) Veteran must be permanently and totally disabled unless age 65 
or older. Unless a veteran has attained age 65, he or she must meet 
disability requirements in order to be eligible for Improved Disability 
Pension. The disability requirements are found in paragraph (b) of this 
section and in Sec.  5.381, ``Permanent and total disability ratings 
for Improved Disability Pension purposes.''
    (b) Presumption of permanent and total disability for certain 
veterans. A veteran is presumed permanently and totally disabled for 
Improved Disability Pension purposes if the veteran is:
    (1) A patient in a nursing home for long-term care because of 
disability; or
    (2) Disabled, as determined by the Commissioner of Social Security 
for purposes of any benefits administered by the Commissioner.

(Authority: 38 U.S.C. 1502(a), 1513)

Sec.  5.381  Permanent and total disability ratings for Improved 
Disability Pension purposes.

    (a) General. Permanent total disability ratings for Improved 
Disability Pension purposes are authorized for a disability or a 
combination of disabilities that are not the result of the veteran's 
own willful misconduct whether or not they are service connected.

(Authority: 38 U.S.C. 1502(a), 1521(a))


    (b) Criteria. In addition to the criteria for determining total 
disability and permanency of total disability contained in Sec.  3.340 
of this chapter, the following special considerations apply in Improved 
Disability Pension cases:
    (1) Permanent total disability pension ratings will be authorized 
for congenital, developmental, hereditary or familial conditions, 
provided the other requirements for entitlement are met.
    (2) The permanence of total disability will be established as of 
the earliest date consistent with the evidence in the case. Active 
pulmonary tuberculosis not otherwise established as permanently and 
totally disabling will be presumed so after 6 months' hospitalization 
without improvement. The same principle may be applied with other types 
of disabilities requiring hospitalization for indefinite periods. The 
need for hospitalization for periods shorter or longer than 6 months 
may be a proper basis for determining permanence. Where, in application 
of this principle, it is necessary to employ a waiting period to 
determine permanence of totality of disability and a report received at 
the end of such period shows the veteran's condition is unimproved, 
permanence may be established as of the date of entrance into the 
hospital. Similarly, when active pulmonary tuberculosis is improved 
after 6 months' hospitalization but still diagnosed as active after 12 
months' hospitalization, permanence will also be established as of the 
date of entrance into the hospital. In other cases the rating will be 
effective the date the evidence establishes permanence.
    (3) Special consideration must be given the question of permanence 
in the case of veterans under 40 years of age. For such veterans, 
permanence of total disability requires a finding that the end result 
of treatment and adjustment to residual handicaps (rehabilitation) will 
be permanent disability of the required degree precluding more than 
marginal employment. Severe diseases and injuries, including multiple 
fractures or the amputation of a single extremity, should not be taken 
to establish permanent and total disability until it is shown that the 
veteran, after treatment and convalescence, has been unable to secure 
or follow employment because of the disability and through no fault of 
the veteran.
    (4) The following will not be presumed as evidence of 
employability:
    (i) Employment as a member-employer or similar employment obtained 
only in competition with disabled persons.
    (ii) Participation in, or the receipt of a distribution of funds as 
a result of participation in, a therapeutic or rehabilitation activity 
under 38 U.S.C. 1718.

(Authority: 38 U.S.C. 1718(g))


    (5) The authority granted the Secretary under 38 U.S.C. 1502(a)(4) 
to classify as permanent and total those diseases and disorders, the 
nature and extent of which, in the Secretary's judgment, will justify 
such determination, will be exercised under Sec.  3.321(b).


Sec.  5.382  Improved Disability Pension--combining disability ratings.

    (a) Nonservice-connected disabilities. VA will combine the 
disability ratings assigned to multiple nonservice-connected 
disabilities in the manner prescribed by 38 CFR part 4.
    (b) Nonservice-connected and service-connected disabilities. In 
order to determine whether a veteran is permanently and totally 
disabled for Improved Pension purposes, VA will combine the disability 
ratings assigned to one or more nonservice-connected disabilities in 
the manner prescribed by 38 CFR part 4, with the disability ratings 
assigned to one or more service-connected disabilities.

(Authority: 38 U.S.C. 1523(a))

Sec.  5.383  Effective dates for awards of Improved Disability Pension.

    (a) General Effective Date Provisions. (1) Except as provided in 
paragraph (b) of this section, the effective date of an award of 
Improved Disability Pension will be the later of either:
    (i) The date of receipt of claim; or
    (ii) The date the veteran became eligible (by attaining age 65 or 
by becoming permanently and totally disabled) and entitled (by meeting 
the income and net worth requirements).
    (2) If pension was previously claimed but was denied because the 
veteran's adjusted annual income was greater than the maximum annual 
pension rate, the claim is subject to Sec.  5.424, ``Time limits to 
establish entitlement to Improved Pension or to increase the annual 
Improved Pension amount based on income.''
    (b) Retroactive award. If all of the following criteria apply, the 
effective date of an award of Improved Disability Pension will be the 
date the veteran became permanently and totally disabled or the date of 
receipt of the pension claim, whichever is to the veteran's advantage:
    (1) The veteran specifically requests a retroactive award;
    (2) VA receives the claim for a retroactive award not more than one 
year after the date the veteran became permanently and totally 
disabled; and

[[Page 54794]]

    (3) The veteran was unable to submit a claim for at least the first 
30 days after the date that the veteran became permanently and totally 
disabled because of incapacitating disability. An incapacitating 
disability is a physical or mental disability that prevents a veteran 
from filing a claim for pension. A disability resulting from the 
veteran's willful misconduct does not qualify as incapacitating. An 
incapacitating disability may be a disability other than that which 
made the veteran permanently and totally disabled. A disability need 
not require extensive hospitalization to qualify, but a disability that 
does require extensive hospitalization will be presumed to be 
incapacitating.

(Authority: 38 U.S.C. 5110(a) and (b)(3))

Sec. Sec.  5.384-5.389  [Reserved]

Special Monthly Pension Eligibility for Veterans and Surviving Spouses


Sec.  5.390  Special monthly pension for veterans and surviving spouses 
at the aid and attendance rate.

    (a) Eligibility. Special monthly pension based on the aid and 
attendance rate applies to a veteran or surviving spouse who is 
eligible for Improved Pension under Sec. Sec.  5.371 and 5.372, and who 
is so significantly disabled as to need the regular aid and attendance 
of another person.
    (b) Eligibility criteria. VA considers a claimant or beneficiary to 
be in need of aid and attendance if the claimant or beneficiary:
    (1) Has 5/200 visual acuity or less in both eyes with corrective 
lenses; or
    (2) Has concentric contraction of the visual field to 5 degrees or 
less in both eyes; or
    (3) Is a patient in a nursing home because of mental or physical 
incapacity; or
    (4) Establishes a factual need for aid and attendance as set forth 
in Sec.  3.352, Criteria for determining need for aid and attendance 
and ``permanently bedridden.''

(Authority: 38 U.S.C. 1502(b), 1521(d) and 1541(d))

Sec.  5.391  Special monthly pension for veterans and surviving spouses 
at the housebound rate.

    A veteran or surviving spouse is eligible for special monthly 
pension based on the housebound rate if he or she is eligible for 
Improved Pension under Sec. Sec.  5.371 and 5.372, does not need 
regular aid and attendance, and meets the criteria of paragraph (a), 
(b), or (c) of this section.
    (a) Eligibility criteria for veterans with permanent and total 
disability. The veteran has a single, permanent disability rated 100 
percent disabling under the Schedule for Rating Disabilities in part 4 
of this chapter (determinations of unemployability under Sec.  4.17 of 
this chapter do not qualify), and either:
    (1) Has an additional disability or disabilities independently 
ratable at 60 percent or more under VA's Schedule for Rating 
Disabilities. The additional disability or disabilities must be 
separate and distinct from the disability rated 100 percent disabling 
and must involve different anatomical segments or bodily systems than 
the disability rated 100 percent disabling; or
    (2) Is ``permanently housebound'' by reason of disability or 
disabilities. ``Permanently housebound'' means that the veteran is 
substantially confined to his or her residence and its immediate 
premises. If the veteran is institutionalized, ``permanently 
housebound'' means he or she is substantially confined to the ward or 
clinical area of the institution. It must be reasonably certain that 
the veteran's disability or disabilities and resulting confinement will 
continue throughout the veteran's lifetime.
    (b) Eligibility criteria for veterans who are 65 years of age or 
older. (1) General. The veteran is 65 years of age or older, and 
either:
    (i) Has a disability or disabilities ratable at 60 percent or more 
under VA's Schedule for Rating Disabilities in part 4 of this Chapter; 
or
    (ii) By reason of disability or disabilities, is ``permanently 
housebound'' as defined in paragraph (a)(2) of this section;
    (2) Special rule for veterans who are 65 years of age or older and 
have permanent and total disability. If the veteran is 65 years of age 
or older and also has permanent and total disability, the veteran must 
meet the requirements of paragraph (a) of this section in order to 
receive special monthly pension.
    (c) Eligibility criteria for surviving spouses. The surviving 
spouse is permanently housebound because of a disability or 
disabilities. The meaning of ``permanently housebound'' for surviving 
spouses is the same as its meaning for veterans in paragraph (a)(2) of 
this section.

(Authority: 38 U.S.C. 1502(c), 1521(e), 1541(e))

Sec.  5.392  Effective dates for awards of special monthly pension.

    (a) General. The effective date for an award of special monthly 
pension will be either the date VA received the claim for special 
monthly pension or the date entitlement arose, whichever date is later.
    (b) Exception--when an award of Improved Pension is effective 
retroactively. Paragraph (b) of this section applies when an award of 
Improved Pension is effective retroactively, and entitlement to special 
monthly pension is established for all or part of the retroactive 
period. (Retroactively means that the award is effective prior to the 
date of receipt of the claim.) In such cases, the effective date of an 
award of special monthly pension will be the later of the effective 
date of the Improved Pension award or the date entitlement to special 
monthly pension arose.

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

Sec. Sec.  5.393-5.399  [Reserved]

Maximum Annual Pension Rates


Sec.  5.400  Maximum annual pension rates for veterans, surviving 
spouses, and surviving children.

    (a) Maximum annual pension rates. The maximum annual rates of 
Improved Pension for the following categories of beneficiaries shall be 
the amounts specified in 38 U.S.C. 1521, 1541, and 1542, as increased 
from time to time under 38 U.S.C. 5312. Each time there is an increase 
under 38 U.S.C. 5312, the actual rates will be published in the 
``Notices'' section of the Federal Register.
    (1) Veterans who are permanently and totally disabled or age 65 or 
older.

(Authority: 38 U.S.C. 1521(b) or (c))


    (2) Veterans who are housebound.

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


    (3) Veterans who are in need of aid and attendance.

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


    (4) Two veterans who are married to one another; combined rates.

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


    (5) Surviving spouse who is alone or who is with a child or 
children of the deceased veteran in custody of the surviving spouse.

(Authority: 38 U.S.C. 1541(b) or (c))


    (6) Surviving spouses who are housebound.

(Authority: 38 U.S.C. 1541(e))


    (7) Surviving spouses who are in need of aid and attendance.

(Authority: 38 U.S.C. 1541(d))


    (8) Surviving child or children of a deceased veteran, when the 
child or children have no personal custodian or are in the custody of 
an institution.

(Authority: 38 U.S.C. 1542)



[[Page 54795]]


    (b) World War I veterans. The applicable maximum annual pension 
rate payable to a World War I veteran under this section shall be 
increased by the amount specified in 38 U.S.C. 1521(g), as increased 
from time to time under 38 U.S.C. 5312. Each time there is an increase 
under 38 U.S.C. 5312, the actual rate will be published in the 
``Notices'' section of the Federal Register.
    (c) Dependents. The maximum annual pension rates will increase if 
the veteran has a spouse or one or more dependent children. The maximum 
annual pension rates will increase if a surviving spouse has custody of 
the deceased veteran's surviving children. The applicable maximum 
annual pension rate payable under this section shall be increased by 
the amount specified in 38 U.S.C. 1521 and 1541, as increased from time 
to time under 38 U.S.C. 5312. Each time there is an increase under 38 
U.S.C. 5312, the actual rates will be published in the ``Notices'' 
section of the Federal Register.

(Authority: 38 U.S.C. 1521, 1541, 1542)

Sec.  5.401  Automatic adjustment of maximum annual pension rates.

    (a) Pension rates increase when Social Security benefits increase. 
VA will increase each maximum annual pension rate whenever there is a 
cost-of-living increase in Social Security benefit amounts under title 
II of the Social Security Act (42 U.S.C. 415(i)), which pertains to the 
Federal Old-Age, Survivors, and Disability Insurance Benefits program. 
VA will increase the maximum annual pension rates by the same 
percentage as the Social Security increase, and the increase will be 
effective on the same date as the Social Security increase.
    (b) New rates are published in the Federal Register. Whenever the 
maximum annual pension rates increase, VA will publish the new rates in 
the ``Notices'' section of the Federal Register.

(Authority: 38 U.S.C. 5312(a))

Sec. Sec.  5.402-5.409  [Reserved]

Improved Pension Income, Net Worth, and Dependency


Sec.  5.410  Countable annual income.

    (a) Time of receipt of income. (1) For Improved Disability Pension 
claims, VA does not include income received before the effective date 
of the beneficiary's award.
    (2) For Improved Death Pension claims, VA does not include income 
received before the date of the veteran's death or income received 
before the effective date of the award.
    (b) Whose income is countable?--(1) Improved Disability Pension for 
veterans. The income of a veteran includes the veteran's income and 
that of the veteran's dependent spouse, regardless of whether the 
spouse's income is available to the veteran. It also includes the 
income of each dependent child (as defined in Sec.  5.416(b)), subject 
to Sec.  5.411, ``Counting a child's income for Improved Pension.''
    (2) Improved Death Pension for surviving spouses. The income of a 
surviving spouse includes the surviving spouse's income and the income 
of each dependent child of the deceased veteran in the surviving 
spouse's custody, subject to Sec.  5.411, ``Counting a child's income 
for Improved Pension.''
    (3) Improved Death Pension for surviving children. The income of a 
surviving child includes the income of that child's custodial parent 
and the income of other surviving children as described in Sec.  5.435, 
``Calculating annual Improved Pension amounts for surviving children.''
    (c) Categories and counting of income. If there is more than one 
way to categorize income, it will be categorized in the way that is 
most to the claimant's or beneficiary's advantage. Payments of any kind 
from any source will be counted as income during the reporting period 
in which it was received unless specifically excluded under this 
section, Sec.  5.411, or Sec.  5.412. See Sec.  5.420, ``Reporting 
periods for Improved Pension.''
    (1) Recurring income. Recurring income is income a claimant or 
beneficiary receives or expects to receive in equal amounts and at 
regular intervals (e.g., weekly, monthly, quarterly, etc.). There are 
two categories of recurring income as follows:
    (i) Long-term. Long-term recurring income continues for an entire 
reporting period. VA will count such income during the reporting period 
in which it was received. If the initial payment was received after the 
beginning of the reporting period, VA will count such income for 12 
months from the first of the month after the initial payment was 
received. Thereafter, VA will count such income during the reporting 
period in which it is received.
    (ii) Short-term. Short-term recurring income stops before it has 
been received for at least one full reporting period. VA will count 
such income for 12 months from the first of the month after the initial 
payment was received.
    (2) Nonrecurring income. Nonrecurring income is income that a 
claimant or beneficiary receives or expects to receive on a one-time 
basis (e.g., an inheritance). VA will count such income for 12 months 
from the first of the month after it was received.
    (3) Irregular income. Irregular income is income that a claimant or 
beneficiary receives or expects to receive in unequal amounts or at 
different intervals during a reporting period. VA will count the first 
installment of irregular income for 12 months from the first of the 
month after it was received. Thereafter, VA will count irregular income 
for 12 months from the beginning of the reporting period in which it is 
received.
    (d) Waived income. If a person waives income that cannot be 
excluded under Sec.  5.412, VA must count the waived income. However, 
if the person withdraws a claim for Social Security benefits in order 
to maintain eligibility for unreduced Social Security benefits upon 
reaching a particular age, VA will not regard this potential income as 
having been waived and will therefore not count it.
    (e) Salary. Income from a salary is not determined by ``take home'' 
pay. VA counts as income the gross salary (earnings or wages) without 
any deductions. However, an employer's contributions to health and 
hospitalization plans are not included in gross salary.
    (f) Income-producing property. Income from real or personal 
property counts as income of the property's owner. This includes 
property acquired through purchase, gift, or inheritance.
    (1) Proof of ownership. VA will consider the terms of the recorded 
deed or other evidence of title as proof of ownership.
    (2) Income from jointly-owned property. Where a person owns 
property jointly with others, including partnership property, VA will 
only count that portion of income produced by the property that 
represents the person's share of the ownership of the property.

    Note: If a beneficiary's income includes that of his or her 
spouse, and both the beneficiary and spouse are co-owners of a 
property that produces income, then income representing both co-
owned shares is included as income to the beneficiary.

    (3) Transfer of ownership with retention of income. If a person 
transfers ownership of property to another person or legal entity, but 
retains the right to income, the income will be counted.

(Authority: 38 U.S.C. 1503, 1521, 1541)

Sec.  5.411  Counting a child's income for parents' Improved Pension.

    (a) When to include a child's income in the veteran's or surviving 
spouse's countable annual income. Subject to paragraphs (a)(1) and 
(a)(2) of this

[[Page 54796]]

section, for each child of the veteran who is in the veteran's or 
surviving spouse's custody, VA counts that portion of the child's 
annual income that is reasonably available to the veteran or surviving 
spouse. There is a rebuttable presumption that all of such a child's 
annual income is reasonably available to the veteran or surviving 
spouse.
    (1) Inclusion of a child's income when it is reasonably available 
to the veteran or surviving spouse. VA considers a child's annual 
income reasonably available to the veteran or surviving spouse when it 
can readily be applied to meet the veteran's or surviving spouse's 
expenses necessary for reasonable family maintenance, as defined in 
paragraph (b) of this section.
    (2) Exclusion of a child's income when counting it would create a 
hardship. If a veteran or surviving spouse specifically claims that 
counting a child's income would result in hardship, VA will exclude all 
or part of a child's available income if VA determines that counting it 
would create a hardship for the veteran or the surviving spouse. The 
effective date for the hardship exclusion is determined by Sec.  5.424, 
``Time limits to establish entitlement to Improved Pension or to 
increase the annual Improved Pension amount based on income.'' VA takes 
the following steps in calculating the amount of the hardship 
exclusion:
    (i) Adjusted annual income determined. VA first determines the 
veteran's or surviving spouse's adjusted annual income without 
considering hardship.
    (ii) Annual Improved Pension amount determined. VA then determines 
the veteran's or surviving spouse's annual Improved Pension amount 
without considering hardship.
    (iii) Annual expenses necessary for reasonable family maintenance 
calculated. VA then calculates the claimant's annual expenses necessary 
for reasonable family maintenance, as defined in paragraph (b) of this 
section. However, VA cannot include expenses already deducted in 
determining adjusted annual income.
    (iv) Amount of hardship exclusion. The expense amount greater than 
adjusted annual income plus the annual Improved Pension amount is the 
amount of the hardship exclusion. However, the amount of the hardship 
exclusion shall not exceed the available income of any child or 
children.
    (b) Expenses necessary for reasonable family maintenance. For the 
purposes of this section, ``expenses necessary for reasonable family 
maintenance'' are expenses for basic necessities. Examples include 
food, clothing, healthcare, and shelter. VA may include other expenses 
that are necessary to support a reasonable quality of life, as 
determined on a case-by-case basis.
    (c) Child's earned income. This paragraph (c) applies whether the 
child is a dependent child or a surviving child. A child's earned 
income, which is current work income received during the year, is 
countable for VA purposes. VA will deduct from such earned income the 
amounts described in paragraphs (c)(1) and (c)(2) of this section.
    (1) VA will deduct from a child's earned income the lowest amount 
of gross income for which an unmarried person must file a Federal 
Income Tax return if the person is not a surviving spouse or a head of 
household. For the law regarding this amount, see 26 U.S.C. 6012. For 
the definitions of the terms ``unmarried person,'' ``surviving 
spouse,'' and ``head of household'' for purposes of this paragraph (c), 
see 26 U.S.C. 2(a) and (b), 7703. See also http://www.irs.gov.
    (2) VA will deduct from a child's earned income the amount the 
child pays for educational expenses if the child is pursuing post-
secondary education or vocational rehabilitation. This includes 
tuition, fees, books, and materials.

(Authority: 38 U.S.C. 1503(a)(10), 1521, 1541)

Sec.  5.412  Income exclusions for calculating countable annual income.

    VA will not count income from the following sources when 
calculating countable income for Improved Pension:
    (a) Donations received. Donations received from public or private 
relief or welfare organizations. Examples include the following:
    (1) The value of maintenance furnished by a relative, friend, or a 
civic or governmental charitable organization, including money paid to 
an institution for care due to a person's impaired health or advanced 
age. However, if the maintenance is excluded as income under this 
provision, VA cannot deduct it as an unreimbursed medical expense under 
Sec.  5.413.
    (2) Benefits received under means-tested programs, for example, 
Supplementary Security Income payments.
    (3) Payments from the VA Special Therapeutic and Rehabilitation 
Activities Fund for participating in VA-approved therapy or 
rehabilitation under 38 U.S.C. 1718, or in a program of rehabilitation 
which is conducted by a VA-approved State home and which conforms to 
the requirements of 38 U.S.C. 1718.

(Authority: 38 U.S.C. 1503(a)(1), 1718(f)(3))


    (b) Certain VA benefit payments. The following VA benefit payments:
    (1) VA nonservice-connected disability or death pension payments, 
including accrued benefits.
    (2) The veteran's month-of-death rate paid to a surviving spouse 
under Sec.  3.20(c) of this chapter.
    (3) VA benefits listed in [regulation that will be published in a 
future Notice of Proposed Rulemaking].

(Authority: 38 U.S.C. 1503(a)(2), 5310(b))


    (c) Casualty loss reimbursement. Reimbursements of any kind for any 
casualty loss, but only up to the greater of the fair market value or 
the reasonable replacement value of the property involved immediately 
preceding the loss. For purposes of this section, a ``casualty loss'' 
is the complete or partial destruction of property resulting from an 
identifiable event of a sudden, unexpected or unusual nature.

(Authority: 38 U.S.C. 1503(a)(5))


    (d) Profit from sale of non-business property. Profit realized from 
the disposition of real or personal property other than in the course 
of a business. However, any amounts received in excess of the sales 
price, such as interest payments on deferred sales, will be counted as 
income. If payments are received in installments, the installments 
received will not begin to count as income until the total of 
installments received is equal to the sales price.

(Authority: 38 U.S.C. 1503(a)(6))


    (e) Joint accounts. Amounts in joint accounts in banks or similar 
institutions acquired because of the death of the other joint owner.

(Authority: 38 U.S.C. 1503(a)(7))


    (f) Survivor benefit annuity. Payments made by the Department of 
Defense to qualified surviving spouses of veterans who died before 
November 1, 1953. (This does not include Survivor Benefit Plan (SBP) 
annuity payments or SBP Minimum Income Widow(er)'s Annuity Plan 
payments, which count as income.)

(Authority: 10 U.S.C. 1448 note; Section 653(d), Pub. L. 100-456, 
102 Stat 1991)


    (g) Radiation Exposure Compensation Act payments. Payments made 
under section 6 of the Radiation Exposure Compensation Act of 1990.

(Authority: 42 U.S.C. 2210 (note))


    (h) Ricky Ray Hemophilia Relief Fund payments. Payments made under 
section 103(c) and excluded under 103(h)(2) of the Ricky Ray Hemophilia 
Relief Fund Act of 1998.

[[Page 54797]]


(Authority: 42 U.S.C. 300c-22 (note))


    (i) Energy Employees Occupational Illness Compensation Program 
payments. Payments made under the Energy Employees Occupational Illness 
Compensation Program.

(Authority: 42 U.S.C. 7385e(2))


    (j) Payments to Aleuts. Payments made to certain Japanese-Americans 
or Aleuts under 50 U.S.C. Appx. 1989b-4 or 1989c-5.

(Authority: 50 U.S.C. Appx. 1989b-4(f)(2), 1989c-5(d)(2))


    (k) Other amounts. The following are excluded because VA does not 
consider them as ``payments'':
    (1) Dividends on commercial insurance policies and cash surrender 
of life insurance to the extent that they represent return of premiums. 
However, interest earned is considered a payment.
    (2) Income Tax refunds.
    (3) Interest on Individual Retirement Accounts that cannot be 
withdrawn without incurring a penalty.
    (4) Interest on prepaid burial plans that is added to the value of 
the policy and is not available to the policy holder.
    (5) Royalties received for extracting minerals.
    (6) School scholarships and grants earmarked for specific 
educational purposes to the extent they are used for those purposes.
    (7) Benefits payable but withheld, such as Social Security withheld 
to recoup an overpayment. This does not apply to VA benefits withheld 
to recoup an overpayment.
    (8) Amounts listed in [regulation that will be published in a 
future Notice of Proposed Rulemaking].

(Authority: 38 U.S.C. 1503)

Sec.  5.413  Income deductions for calculating adjusted annual income.

    (a) General rule for allowing deductions. Except as otherwise 
provided in paragraph (c)(2)(iv) of this section, VA will only allow 
deductible expenses for the initial reporting period or annual 
reporting period during which the expense was paid, regardless of when 
the expense was incurred. VA will only allow deductible losses for the 
initial reporting period or annual reporting period during which the 
loss was sustained. For the definitions of initial reporting period and 
annual reporting period, see Sec.  5.420, ``Reporting periods for 
Improved Pension.''
    (b) Unreimbursed medical expenses. Within the provisions of the 
following paragraphs, there will be deducted from the amount of an 
individual's countable annual income any unreimbursed amounts for 
medical expenses which have been paid within the reporting period 
regardless of when the indebtedness was incurred. For the purpose of 
authorizing prospective payment of benefits, VA may accept a claimant's 
or beneficiary's estimate of future medical expenses based on a clear 
and reasonable expectation that they will continue, subject to 
necessary adjustment upon receipt of an amended estimate or upon 
receipt of a medical expense report. A change in medical expenses is a 
change in income. See Sec.  3.660(a) of this chapter (concerning the 
beneficiary's responsibility to inform VA concerning income changes).
    (1) What amount of unreimbursed medical expenses will VA deduct? VA 
will deduct from countable annual income any unreimbursed (out of 
pocket) medical expenses (excluding ``final expenses'' as defined in 
paragraph (c) of this section) that exceed 5 percent of the 
beneficiary's maximum annual pension rate. The maximum annual pension 
rate that VA uses for this calculation includes the maximum annual 
pension rates for established dependents. It does not include the 
maximum annual pension rates based on aid and attendance or housebound 
eligibility. VA will use the maximum annual pension rate that is in 
effect for the period(s) during which VA deducts the expenses.
    (2) Whose medical expenses will VA deduct?--(i) Improved Disability 
Pension--veteran or veteran's spouse. Amounts paid by the veteran or 
the veteran's spouse for the unreimbursed medical expenses of the 
veteran, the veteran's spouse, and those members or constructive 
members of the veteran's or spouse's household, including children, 
parents, or other relatives, for whom there is a moral or legal 
obligation of support.
    (ii) Improved Death Pension--surviving spouse. Amounts paid by the 
surviving spouse for the surviving spouse's own unreimbursed medical 
expenses and those of members or constructive members of the surviving 
spouse's household, including children, parents, or other relatives, 
for whom there is a moral or legal obligation of support.
    (iii) Improved Death Pension--surviving child. Amounts paid by a 
surviving child for the surviving child's own unreimbursed medical 
expenses and those of parents, brothers, or sisters are deductible.

(Authority: 38 U.S.C. 1503(a)(8))


    (c) Final expenses--(1) Definitions. (i) Final expenses, for the 
purposes of this section, are expenses paid by an Improved Pension 
beneficiary for a veteran's, spouse's, or child's last illness and 
burial. In Improved Death Pension cases, final expenses also include a 
veteran's just debts.
    (ii) Last illness. For purposes of this section, ``last illness'' 
means the medical condition that was the primary or secondary cause of 
a person's death as indicated on the person's death certificate.
    (iii) Veteran's just debts. A veteran's just debts are those debts 
that the veteran incurred or those debts that the veteran and spouse 
incurred jointly during the veteran's life. The term just debts does 
not include any debt that is secured by real or personal property.
    (2) Final expenses that VA will deduct from countable annual 
income--(i) Veteran awards. VA will deduct amounts paid by a veteran 
for the last illness and burial of the veteran's spouse or child, and 
amounts paid by a veteran's spouse for the last illness and burial of 
the veteran's child.
    (ii) Surviving child awards. VA will deduct amounts paid by a 
surviving child for the veteran's final expenses and just debts.
    (iii) Surviving spouse awards. VA will deduct amounts paid by a 
surviving spouse for the final expenses of the veteran or the veteran's 
child, and the just debts of the veteran.
    (iv) Surviving spouse's prior payments of veteran's last illness 
expenses. VA will deduct during the surviving spouse's initial 
reporting period amounts paid by the surviving spouse before the 
veteran's death for the veteran's last illness when:
    (A) The surviving spouse made the payments no more than one year 
before the veteran died; and
    (B) VA received the surviving spouse's Improved Death Pension claim 
no later than one year after the veteran's death.
    (3) Final expenses that VA will not deduct from countable annual 
income. VA will not deduct final expenses from a beneficiary's 
countable annual income if:
    (i) The expenses are reimbursed under 38 U.S.C. chapter 23 (see 
subpart J of this part concerning VA burial benefits) or 38 U.S.C. 
chapter 51 (see Sec.  5.551(e) concerning the use of accrued benefits 
to reimburse expenses of last illness or burial); or
    (ii) The expenses are deducted as unreimbursed medical expenses 
under paragraph (b) of this section.

Authority: 38 U.S.C. 1503(a)(3), (4))


    (d) Educational expenses. VA will deduct educational expenses from 
a veteran's or surviving spouse's countable annual income. For purposes

[[Page 54798]]

of this educational expense deduction, educational expenses include 
payments a veteran or surviving spouse makes for his or her own course 
of education, vocational rehabilitation, or training. It includes 
tuition, fees, books, and materials. If the veteran or surviving spouse 
is in need of aid and attendance, it also includes unreimbursed unusual 
transportation expenses associated with the pursuit of the course of 
education, vocational rehabilitation, or training. VA considers 
transportation expenses ``unusual'' if they are greater than the amount 
a person without a disability would reasonably spend on an appropriate 
means of transportation (public transportation, if reasonably 
available). Scholarships and grants are not considered income for VA 
purposes when used specifically for educational expenses, thus these 
two items are not deductible for educational expenses. See also Sec.  
5.411(c)(2) (deducting a child's educational expenses from his or her 
earned income).

(Authority: 38 U.S.C. 1503(a)(9))


    (e) Gambling income and losses. VA will deduct from gambling gross 
winnings any gambling losses to arrive at net gambling income. Only net 
gambling income is countable.

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


    (f) Expenses and awards or settlements for death or disability. VA 
will deduct from income received based on an award or settlement for 
death or disability any medical, legal, or other expenses that are 
incident to such death or disability or are incident to the collection 
or recovery of such an award or settlement. However, medical expenses 
cannot be deducted under this paragraph (f) if they are paid after the 
date that the award or settlement payment was received. Medical 
expenses paid after that date may be deducted under paragraph (b) of 
this section as unreimbursed medical expenses. VA will not deduct the 
same medical expenses under paragraph (b) of this section that it 
deducts under this paragraph (f). For purposes of this paragraph (f), 
the award or settlement may be from any of the following sources:
    (1) Commercial insurance (disability, accident, life, or health).
    (2) The Office of Workers' Compensation Programs of the U.S. 
Department of Labor.
    (3) The Social Security Administration.
    (4) The Railroad Retirement Board.
    (5) Any worker's compensation or employer's liability statute.
    (6) Legal damages collected for personal injury or death.

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


    (g) Business, farm, or profession--(1) Necessary operating 
expenses. VA will deduct from income from a business, farm, or 
profession necessary operating expenses such as the cost of goods sold 
and payments for rent, taxes, upkeep, repairs and replacements. The 
value of an increase in stock inventory of a business is not income.
    (2) Depreciation. Depreciation of a farm, business, or profession 
is not deductible from income produced by that farm, business, or 
profession.
    (3) Business and investment losses. Losses sustained in operating a 
business, farm, profession, or from transactions involving investment 
property, may be deducted only from income derived from the source that 
sustained the loss.

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

Sec.  5.414  Net worth determinations for Improved Pension.

    (a) Definition of net worth. For Improved Pension purposes, ``net 
worth'' means the market value of the claimant's or beneficiary's real 
and personal property, minus mortgages or other encumbrances. VA 
excludes the claimant's or beneficiary's residence (single-family 
unit), which also includes a reasonable lot area. VA also excludes the 
value of personal effects suitable to and consistent with the 
claimant's or beneficiary's reasonable mode of life, such as appliances 
and family transportation vehicles.
    (1) Personal residence. Because the value of a residence is not 
considered, VA will not consider mortgages on that property as a 
deduction under paragraph (a) of this section.
    (2) Reasonable lot area. VA will evaluate a ``reasonable lot area'' 
by considering the size of other residential lots in the vicinity. If 
the claimant or beneficiary 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.
    (3) Proof of ownership. VA will consider the terms of the recorded 
deed or other evidence of title to be proof of ownership.
    (4) Asset transfers. (i) If a claimant or beneficiary gives 
property to a relative living in the same household, VA will include 
the value of the property as part of the claimant's or beneficiary's 
net worth. This also applies if the claimant or beneficiary sells the 
property to a relative in the same household at such a low price that 
it amounts to a gift.
    (ii) If a claimant or beneficiary gives property to someone other 
than a relative living in the same household, VA will include the value 
of the property as net worth unless it is clear that the one who gave 
the property has given up all rights of ownership, including the right 
to control the property.
    (b) How net worth affects veteran and surviving spouse Improved 
Pension awards. (1) A veteran's net worth includes the net worth of the 
veteran and the net worth of the veteran's spouse. A surviving spouse's 
net worth includes that of the surviving spouse only.
    (2) VA must deny or discontinue Improved Pension if VA determines 
it is reasonable to expect that some part of the net worth should be 
used for the claimant's or beneficiary's living expenses. VA must 
consider the veteran's or surviving spouse's adjusted annual income 
when determining whether net worth is a bar to Improved Pension under 
paragraph (d) of this section.
    (c) How a child's net worth affects Improved Pension awards--(1) 
Child in custody of veteran or surviving spouse. Increased pension 
payable to a veteran or surviving spouse on account of a child will be 
denied or discontinued when the net worth of the child is such that 
under all circumstances including consideration of the veteran's or 
surviving spouse's adjusted annual income, it is reasonable that some 
part of the child's net worth be consumed for the child's maintenance.
    (2) Surviving child. VA must deny or discontinue Improved Death 
Pension to a surviving child if VA determines that some part of the 
child's net worth should be used for the child's living expenses.
    (i) Surviving child not in custody or in custody of an institution. 
If a surviving child has no personal custodian or is in the legal 
custody of an institution, VA will consider only the child's net worth 
and adjusted annual income when determining whether net worth is a bar 
to Improved Death Pension under paragraph (d) of this section.
    (ii) Surviving child in custody of a person legally responsible for 
the child's support. If the child is living with a person who is 
legally responsible for the child's support, the child's net worth 
includes that person's net worth. If the child is in joint custody as 
provided in Sec.  5.417(e), the child's net worth also includes the 
stepparent's net worth. VA must consider the adjusted annual income of 
the child as provided in Sec.  5.435(b) when determining whether net 
worth is a bar to Improved Death Pension under paragraph (d) of this 
section.

[[Page 54799]]

    (3) Child educational exclusion. When calculating the amount of a 
child's net worth, VA will exclude reasonable amounts for actual or 
estimated future educational or vocational expenses. VA will exclude 
only the amount needed to cover the child's education or vocational 
expenses until he or she reaches age 23.
    (d) Determining whether net worth is a bar to Improved Pension. In 
determining whether net worth is a bar to Improved Pension, VA will 
consider the claimant's or beneficiary's adjusted annual income as 
defined in Sec.  5.370, along with all of the claimant's or 
beneficiary's living expenses. However, in considering the claimant's 
or beneficiary's living expenses, VA cannot consider expenses it 
excluded or deducted in determining adjusted annual income. In addition 
to considering these income and expense factors, VA will also take the 
following factors into account:
    (1) Value of liquid assets. The value of liquid assets (assets that 
the claimant or beneficiary can readily convert into cash).
    (2) Number of family members. The number of family members (as 
defined in Sec.  3.250) who depend on the claimant or beneficiary for 
support.
    (3) Life expectancy. The claimant's or beneficiary's average life 
expectancy and the potential rate of depletion of the claimant's or 
beneficiary's net worth.
    (e) Statutory exclusions from net worth. A claimant's or 
beneficiary's net worth does not include the following resources 
excluded by statute:
    (1) Radiation Exposure Compensation Act payments. Payments under 
Section 6 of the Radiation Exposure Compensation Act of 1990.

(Authority: 42 U.S.C. 2210 note)


    (2) Ricky Ray Hemophilia Relief Fund payments. Payments made under 
section 103(c) and excluded under 103(h)(2) of the Ricky Ray Hemophilia 
Relief Fund Act of 1998.

(Authority: 42 U.S.C. 300c-22(note))


    (3) Energy Employees Occupational Illness Compensation Program 
payments. Payments made under the Energy Employees Occupational Illness 
Compensation Program.

(Authority: 42 U.S.C. 7385e(2))


    (4) Payments to Aleuts. Payments made to certain Japanese-Americans 
or Aleuts under 50 U.S.C. Appx. 1989b-4 or 1989c-5.

(Authority: 50 U.S.C. Appx. 1989b-4(f)(2) or 1989c-5(d)(2))


    (5) Other payments. Other payments excluded from net worth listed 
in [regulation that will be published in a future Notice of Proposed 
Rulemaking].

(Authority: 38 U.S.C. 1522, 1543)

Sec.  5.415  Effective dates for Improved Pension awards based on a 
change in net worth.

    (a) Effective date for reduction or discontinuance of Improved 
Pension award when net worth increases. If an increase in a 
beneficiary's net worth requires VA to discontinue Improved Pension, VA 
will discontinue the Improved Pension award effective the first day of 
the year following the year that net worth increased. If an increase in 
a child's net worth requires VA to reduce or discontinue Improved 
Pension under Sec.  5.414(c), VA will reduce the payment amount or 
discontinue the Improved Pension award effective the first day of the 
year following the year that net worth increased.

(Authority: 38 U.S.C. 5112(b)(4)(B))


    (b) Claims previously denied or awards previously discontinued 
because of net worth. When a claim for Improved Pension has been denied 
or an award of Improved Pension has been reduced or discontinued due to 
net worth, Improved Pension may be paid if there is a reduction in net 
worth. If the date net worth ceased to be a bar occurs before the 
previous denial or discontinuance has become final, the effective date 
of resumption of pension benefits will be the date that net worth 
ceased to be a bar. If the date net worth ceased to be a bar occurs 
after the previous denial or discontinuance has become final, the 
effective date of resumption of pension benefits will be assigned under 
Sec.  5.383 (Improved Disability Pension) or Sec.  5.431 (Improved 
Death Pension).

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


    Cross reference: Finally adjudicated claims. See Sec.  3.160(d).


Sec.  5.416  Persons considered as dependents for Improved Pension.

    (a) Criteria for a dependent spouse. A veteran's spouse is a 
dependent spouse for Improved Disability Pension purposes if at least 
one of the following criteria apply:
    (1) The veteran lives with the spouse.
    (2) The veteran and the spouse live apart but are not estranged.
    (3) The veteran and the spouse live apart and are estranged, but 
the veteran reasonably contributes to the spouse's support. Whether 
support contributions are reasonable is a factual matter that VA 
determines.
    (b) Criteria for a dependent child. Unless paragraph (c) of this 
section applies, a child is a dependent child for Improved Pension 
purposes if at least one of the following criteria apply:
    (1) The child is in the veteran's or surviving spouse's custody. 
The term ``custody'' for Improved Pension purposes is defined in Sec.  
5.417. The child need not be living with the veteran or surviving 
spouse to be in custody; or
    (2) The veteran reasonably contributes to the child's support. 
Whether support contributions are reasonable is a factual matter that 
VA determines.
    (c) When a child's net worth bars dependency status. If a child's 
net worth is a bar under Sec.  5.414(c)(1), that child is not a 
dependent child for Improved Pension purposes.

(Authority: 38 U.S.C. 1521, 1522(b), 1541, 1543(a)(2))

Sec.  5.417  Child custody for purposes of determining dependency for 
Improved Pension purposes.

    This section applies to determinations of eligibility and 
entitlement to Improved Pension.
    (a) Definition of child custody. If a veteran, surviving spouse, or 
person legally responsible for the support of a child has the legal 
right to exercise parental control and has responsibility for the 
welfare and care of the child, that person has custody of the child.
    (b) Child custody presumed. A child of the veteran who is residing 
with the veteran, with the surviving spouse of the veteran who is the 
child's natural or adoptive parent, or with the person legally 
responsible for the child's support, shall be presumed to be in the 
custody of that individual.
    (c) What if the child does not live with the persons listed in 
paragraph (b)? If the child does not live with a person listed in 
paragraph (b) of this section, VA still considers the child to be in 
the custody of that person unless there is a legal determination 
removing custody.
    (d) Definition of person legally responsible for the child's 
support. A person who is legally responsible for a child's support is a 
person who is under a legal obligation, such as by law or court order, 
to provide for the child's support. Such person includes a natural or 
adoptive parent unless child custody has been legally removed from the 
natural or adoptive parent. Such person may also include the natural or 
adoptive parent's spouse as provided in paragraph (e) of this section.
    (e) Joint custody. If a child's natural or adoptive parent is 
married, the child is presumed to be in the joint custody of the 
natural or adoptive parent and stepparent unless:

[[Page 54800]]

    (1) The child's stepparent and natural or adoptive parent are 
estranged and living apart; or
    (2) Legal custody has been removed from the natural or adoptive 
parent.
    (f) Custody retained after the age of majority. A person who has 
custody of a child before the child's 18th birthday will be presumed to 
retain custody of the child on and after the child's 18th birthday, 
unless legal custody is removed. This applies without regard to when a 
child reaches the age of majority under applicable State law. This also 
applies without regard to whether the child was eligible for pension 
prior to age 18, or whether increased pension was payable to a veteran 
or surviving spouse on behalf of the child prior to the child's 18th 
birthday.
    (g) Successor custodian after the age of majority. If a child's 
custodian dies after the child's 18th birthday, VA will consider the 
child to be in the custody of a successor custodian if the successor 
custodian has the legal right to exercise parental control and has 
responsibility for the welfare and care of the child. If there is no 
successor custodian, the child may be eligible for benefits in his or 
her own right.

(Authority: 38 U.S.C. 501, 1521, 1541)

Sec. Sec.  5.418-5.419  [Reserved]

Improved Pension--Income Reporting Periods, Payments, Effective Dates, 
and Time Limits


Sec.  5.420  Reporting periods for Improved Pension.

    When calculating adjusted annual income, VA counts income that is 
anticipated or received during a specific period, called a ``reporting 
period.'' There are two types of reporting periods: the initial 
reporting period and the annual reporting period.
    (a) Initial reporting period--(1) General Rule. Except as provided 
in paragraphs (a)(2) and (a)(3) of this section, the initial reporting 
period begins on the latest of the following:
    (i) The date VA receives a pension claim; or
    (ii) The date VA receives an election under Sec.  5.460 or Sec.  
5.461; or
    (iii) The date the claimant becomes eligible to receive Improved 
Pension.
    (2) Retroactive awards. For Improved Pension claims where an 
effective date before the date of claim is assigned pursuant to Sec.  
5.383(b), the initial reporting period begins on the date the veteran 
became permanently and totally disabled if that would be to the 
veteran's advantage. If it would not be to the veteran's advantage, 
then the initial reporting period begins on the date of the pension 
claim.
    (3) Improved Death Pension claim received within one year after 
date of veteran's death. When VA receives an Improved Death Pension 
claim within one year after the date of the veteran's death, the 
initial reporting period begins on the day that the veteran died. This 
is true even though the effective date under Sec.  3.20 is the first 
day of the month of death. See Sec.  5.431 for effective dates and rule 
applicability.
    (4) End of period. The initial reporting period ends one year after 
the last day of the month in which the period began.
    (b) Annual reporting period. For Improved Pension purposes, the 
annual reporting period is each calendar year. The first annual 
reporting period is the calendar year in which the initial reporting 
period ends.

(Authority: 38 U.S.C. 1506, 1521, 1541, 1542)

Sec.  5.421  How VA calculates an Improved Pension payment amount.

    VA calculates payments of Improved Pension (``Improved Pension 
payment amounts'') as provided in this section. See Sec.  5.370 for the 
definitions of ``adjusted annual income,'' ``annual Improved Pension 
amount,'' and ``maximum annual pension rate,'' which are used below.
    (a) How VA calculates a monthly Improved Pension payment amount. To 
determine the monthly Improved Pension payment amount, VA divides the 
annual Improved Pension amount by 12 and rounds down to the nearest 
whole dollar.
    (b) What if the maximum annual pension rate changes? When there is 
a change in a beneficiary's maximum annual pension rate (because of a 
cost-of-living adjustment or some other reason), VA recalculates the 
annual Improved Pension amount using the new maximum annual pension 
rate and the amount of adjusted annual income on the effective date 
that the maximum annual pension rate changes. VA then determines the 
new monthly payment amount as specified in paragraph (a) of this 
section.
    (c) What if adjusted annual income changes? If a beneficiary's 
adjusted annual income increases or decreases, VA recalculates the 
annual Improved Pension amount using the new adjusted annual income 
amount. VA then determines the new monthly payment amount as specified 
in paragraph (a) of this section. See Sec.  5.422, ``Effective dates 
for changes to Improved Pension payments due to a change in income.''

(Authority: 38 U.S.C. 1521, 1541, 1542, and 5123)

Sec.  5.422  Effective dates for changes to Improved Pension payments 
due to a change in income.

    (a) Effective dates for changes to payments due to a change in 
income--(1) Income change requires an increased annual Improved Pension 
amount. If an income change requires an increased annual Improved 
Pension amount, the effective date of the increased amount is the date 
that the income changes, subject to Sec.  5.424, ``Time limits to 
establish entitlement to Improved Pension or to increase the annual 
Improved Pension amount based on income.'' VA generally cannot pay an 
increased amount of Improved Pension based on a change in income until 
the first day of the month following such an income change. See Sec.  
3.31 of this chapter (concerning dates for increased payments and 
exceptions).
    (2) Income change requires a reduced annual Improved Pension amount 
or discontinuance of Improved Pension. If an income change requires a 
reduction of an annual Improved Pension amount or the discontinuance of 
Improved Pension, the effective date of the reduced amount or 
discontinuance is the first day of the month following the income 
change.
    (b) Income and dependents--exceptions to income-counting rules. (1) 
VA will stop counting a dependent's income on the same date it removes 
the dependent from the Improved Pension award.
    (2) If a beneficiary gains a dependent and this results in an 
increased annual Improved Pension amount, the effective date of the 
increase will be the date of the addition of the dependent if the 
required evidence is received within 1 year of the addition. If the 
required evidence is not received within 1 year, then the effective 
date will be the date such evidence is received.
    (3) If a beneficiary loses a dependent and this results in an 
increased annual Improved Pension amount, the effective date of the 
increase will be the date VA receives notice of the loss of the 
dependent if the required evidence is received within 1 year of the 
loss. If the required evidence is not received within 1 year, then the 
effective date will be the date such evidence is received.

(Authority: 38 U.S.C. 501, 5110, 5112)


    Cross reference: See also Sec.  5.177(g) of this chapter 
(concerning reducing or discontinuing pension payments because of a 
change in disability or employability status).

[[Page 54801]]

Sec.  5.423  Improved Pension determinations when anticipated annual 
income is uncertain.

    (a) Uncertain anticipated annual income. If a claimant or 
beneficiary is uncertain about the amount of his or her anticipated 
annual income or if there is evidence indicating more anticipated 
annual income than the amount the claimant or beneficiary reports, VA 
will do all of the following:
    (1) Count the greatest amount of anticipated annual income the 
claimant or beneficiary estimates or that is indicated by the evidence. 
If that amount is greater than the maximum annual pension rate, 
Improved Pension will not be paid;
    (2) Notify the claimant or beneficiary concerning the time limit 
provisions of Sec.  5.424, ``Time limits to establish entitlement to 
Improved Pension or to increase the annual Improved Pension amount 
based on income;'' and
    (3) Adjust or pay benefits when complete income information is 
received, according to the provisions of Sec.  5.424.
    (b) Uncertain dependent information. If a dependent's anticipated 
annual income is expected to be greater than the difference between the 
increased maximum annual pension rate based on the addition of the 
dependent and the maximum annual pension rate without the dependent, 
but the claimed dependent's relationship has not yet been established 
by required evidence, VA will do the following:
    (1) Determine the maximum annual pension rate without consideration 
of the claimed dependent;
    (2) Count the claimed dependent's income as income of the claimant 
or beneficiary for purposes of determining entitlement to Improved 
Pension and determining the annual Improved Pension amount; and
    (3) Adjust the annual Improved Pension amount using the applicable 
maximum annual pension rate when evidence necessary to establish the 
dependent has been received. (For the evidence necessary to establish 
dependency, see Subpart D of this part.)

(Authority: 38 U.S.C. 501, 1503)

Sec.  5.424  Time limits to establish entitlement to Improved Pension 
or to increase the annual Improved Pension amount based on income.

    (a) Scope. This section provides time limits for establishing 
entitlement to Improved Pension or for increasing the monthly Improved 
Pension payment amount based on adjusted annual income. If the 
claimant, beneficiary, or former beneficiary submits additional 
evidence within the time limits in this section, VA may award or 
increase benefits for prior periods as set forth in this section.
    (b) Expected or actual income--(1) Pension not paid. When VA does 
not pay a pension claim based on actual or expected adjusted annual 
income during the initial reporting period, the claimant may submit 
evidence that supports entitlement for all or part of that period. If 
the claimant submits additional evidence on or before December 31 of 
the calendar year that follows the calendar year in which the initial 
reporting period ends, VA may award benefits effective from the 
beginning of the initial reporting period, subject to the provisions of 
Sec.  5.383, ``Effective Dates for Awards of Improved Disability 
Pension'' or Sec.  5.431, ``Effective Dates for Improved Death 
Pension.'' If the claimant does not submit evidence of entitlement 
within this time limit, VA may only pay benefits effective from the 
date it receives a new claim.
    (2) Pension paid at a lower amount or discontinued. When VA pays 
pension at a lower amount or discontinues pension benefits for all or 
part of a reporting period based on the claimant's or beneficiary's 
actual or expected adjusted annual income, the claimant, beneficiary, 
or former beneficiary may submit evidence that supports entitlement or 
increased entitlement for all or part of that period. If the claimant, 
beneficiary, or former beneficiary submits additional evidence on or 
before December 31 of the calendar year that follows the calendar year 
in which the reporting period ends, VA may award, resume, or increase 
benefits effective from the date entitlement arose but not earlier than 
the beginning of the reporting period. If the claimant, beneficiary, or 
former beneficiary does not submit evidence of entitlement within this 
time limit, VA may only pay or increase benefits effective from the 
date it receives a new claim, except as provided in paragraph (c) or 
(d) of this section.
    (c) Payment following nonentitlement for one reporting period. This 
paragraph (c) applies if the claimant or beneficiary's adjusted annual 
income does not permit payment for the initial reporting period or 
requires VA to discontinue payment for an entire reporting period. In 
such cases, VA may award Improved Pension effective from the date 
entitlement arose but not earlier than the beginning of the next 
reporting period (the new initial reporting period), if the claimant, 
beneficiary, or former beneficiary submits evidence before that 
reporting period ends. If the claimant, beneficiary, or former 
beneficiary does not submit evidence of entitlement within this time 
limit, VA may only pay benefits effective from the date it receives a 
new claim, except as provided in paragraph (d) of this section.
    (d) No time limit to submit income evidence to reduce overpayment. 
There is no time limit to submit income evidence, including deductible 
expenses, for the purpose of reducing an overpayment. However, the 
evidence submitted must relate to the initial or annual reporting 
period for which the overpayment was created.

(Authority: 38 U.S.C. 501, 5110(h))

Sec.  5.425  Frequency of payment of Improved Pension benefits.

    VA issues payments of Improved Pension as provided in this section. 
Except as provided in paragraph (e) of this section, a beneficiary may 
choose to receive monthly payments if other Federal benefits would be 
denied because pension payments are issued less frequently than 
monthly.
    (a) Monthly if $228 or more. VA will make a payment every month if 
the annual Improved Pension amount is $228 or more.
    (b) Every three months if $144 but less than $228. VA will make a 
payment every three (3) months if the annual Improved Pension amount is 
at least $144 but less than $228. Payment dates will be on or about 
March 1, June 1, September 1, and December 1.
    (c) Every six months if $72 but less than $144. VA will make a 
payment every six (6) months if the annual Improved Pension amount is 
at least $72 but less than $144. Payment dates will be on or about June 
1 and December 1.
    (d) Once a year if less than $72. VA will make a payment once a 
year if the annual Improved Pension amount is less than $72. The 
payment date will be on or about June 1.
    (e) Payments of less than one dollar are not made. VA will not make 
a payment of less than one dollar.

(Authority: 38 U.S.C. 1508)

Sec. Sec.  5.426-5.429  [Reserved]

Improved Death Pension Marriage Date Requirements and Effective Dates


Sec.  5.430  Marriage date requirements for Improved Death Pension.

    (a) General rule. A surviving spouse may qualify for Improved Death 
Pension if the marriage to the veteran occurred before or during his or 
her service or, if married to him or her after his or her separation 
from service, the marriage meets one of the criteria in paragraphs 
(a)(1) through (3) of this section.

[[Page 54802]]

    (1) The veteran and surviving spouse were married for 1 year or 
more (multiple marriage periods may be added together to meet the 1-
year requirement);
    (2) A veteran of one of the following wartime periods and the 
surviving spouse were married before one of the following delimiting 
dates:
    (i) Mexican Border Period or World War I-December 14, 1944.
    (ii) World War II--January 1, 1957.
    (iii) Korean Conflict--February 1, 1965.
    (iv) Vietnam Era--May 8, 1985.
    (v) Persian Gulf War--January 1, 2001; or
    (3) A child was born of the marriage or before the marriage.
    (b) More than one marriage to veteran. If a surviving spouse has 
been legally married to the same veteran more than once, VA will use 
the date of the original marriage to decide whether the surviving 
spouse has met the marriage date requirements (delimiting date).

(Authority: 38 U.S.C. 103(b) and 1541(f))

Sec.  5.431  Effective dates for Improved Death Pension.

    (a) Nonservice-connected death after separation from service--(1) 
Claim received not later than 1 year after the date of death. If VA 
awards Improved Death Pension based on a claim received no later than 1 
year after the date of the veteran's death, the effective date of the 
award is the first day of the month in which the death occurred.
    (2) Claim received more than 1 year after the date of the veteran's 
death. If VA awards Improved Death Pension based on a claim received 
more than 1 year after the date of the veteran's death, the effective 
date of the award is the date VA received the claim.
    (b) Death in service. In certain instances, Improved Death Pension 
eligibility may be established if the veteran died in service.
    (1) Claim received within one year of death. If VA receives a claim 
for Improved Death Pension not later than 1 year after the date of 
death fixed by the veteran's service branch report or finding of actual 
or presumed death, the effective date is the first day of the month 
that the Secretary concerned establishes as the date of death.
    (2) Claim not received within 1 year of death. If VA does not 
receive the claim within 1 year of the date provided in paragraph 
(b)(1) of this section, the effective date is the date VA receives the 
claim.
    (3) Death benefits not to be paid concurrently with military 
benefits. VA will not pay benefits to a claimant on a report of actual 
death for periods that the claimant has received, or was entitled to 
receive, any of the following military benefits of the veteran:
    (i) An allowance;
    (ii) An allotment; or
    (iii) Service pay.

(Authority: 38 U.S.C. 5110(a), (d), (j))

Sec.  5.432  Deemed valid marriages and contested claims for Improved 
Death Pension.

    (a) Definition of contested claim. For the purposes of this 
section, a claim is a ``contested claim'' when a claimant seeking 
recognition as a surviving spouse under the provisions for a deemed 
valid marriage in Sec.  3.52 of this chapter and a legal surviving 
spouse eligible for Improved Death Pension both submit claims for 
Improved Death Pension.
    (b) VA adjudication of contested claims. VA will take the following 
steps in adjudicating a contested claim:
    (1) Develop the claims of both the legal surviving spouse and the 
claimant seeking recognition as the surviving spouse; then
    (2) Afford each claimant the applicable time period provided in 
Sec.  5.424(b) to show his or her adjusted annual income is less than 
the maximum annual pension rate; and then
    (3) If the legal surviving spouse does not establish entitlement to 
Improved Death Pension before the applicable time limit of Sec.  
5.424(b) has expired, VA will recognize the claimant seeking 
recognition as a surviving spouse of a deemed valid marriage and award 
Improved Death Pension if that claimant meets eligibility and 
entitlement requirements. If the legal surviving spouse later claims 
Improved Death Pension and establishes entitlement, VA will then 
process the claim under Sec.  5.433.

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

Sec.  5.433  Effective date of discontinuance of Improved Death Pension 
payments to a beneficiary no longer recognized as the veteran's 
surviving spouse.

    (a) Purpose. This section applies when VA is paying Improved Death 
Pension to a surviving spouse (identified in this section as, ``former 
surviving spouse'') and another claimant (identified in this section as 
``new surviving spouse'') establishes that he or she is the true legal 
surviving spouse eligible to receive Improved Death Pension.
    (b) Effective date for discontinuance of payments to former 
surviving spouse--(1) Discontinuance date of the award to the former 
surviving spouse where the award to the new surviving spouse is 
effective before the date VA received the new surviving spouse's claim. 
If benefits are payable to the new surviving spouse from a date before 
the date VA received the new surviving spouse's claim, VA will 
discontinue the award to the former surviving spouse effective the date 
of the award to the new surviving spouse.
    (2) Discontinuance date of the award to the former surviving spouse 
where award to the new surviving spouse is effective the date VA 
received the new surviving spouse's claim. If benefits are payable to 
the new surviving spouse from the date VA received the new surviving 
spouse's claim, VA will discontinue the award to the former surviving 
spouse effective the later of the following:
    (i) The date of receipt of the new surviving spouse's claim.
    (ii) The first day of the month that follows the month for which VA 
last paid benefits.
    (3) Exception where discontinuances are due to a change in, or 
change in interpretation of, the law or an administrative issue. When 
VA must discontinue payments to a former surviving spouse because of a 
change in the law or an administrative issue or because of a change in 
the interpretation of law or an administrative issue, VA will 
discontinue the award to the former surviving spouse effective the 
first day of the month that follows the end of the 60-day notice period 
to the former surviving spouse concerning the discontinuance.

(Authority: 38 U.S.C. 5112(a) and (b)(6))

Sec.  5.434  Award, or discontinuance of award, of Improved Death 
Pension to a surviving spouse where Improved Death Pension payments to 
a child are involved.

    (a) Legal custodian of child establishes eligibility as surviving 
spouse. When VA finds Improved Death Pension eligibility for the legal 
custodian of a child receiving Improved Death Pension, VA will award 
Improved Pension to the surviving spouse and discontinue the child's 
eligibility for Improved Death Pension as follows:
    (1) Annual Improved Pension amount for surviving spouse higher than 
amount for child.
    (i) If the surviving spouse is entitled to a higher Improved 
Pension payment amount than the child was receiving, the surviving 
spouse's pension award is effective the date provided by Sec.  5.431, 
``Effective dates for Improved Death Pension.''
    (ii) The initial pension amount payable to the surviving spouse is 
the difference between the child's Improved Pension payment amount and 
the surviving spouse's Improved Pension

[[Page 54803]]

payment amount. VA will pay to the surviving spouse the full Improved 
Pension payment amount effective the first day of the month after the 
month for which VA last paid benefits to the child. VA will discontinue 
the child's pension award effective the same day.
    (2) Annual Improved Pension amount for surviving spouse equal to or 
less than amount for child. When the child is receiving an Improved 
Death Pension payment amount equal to or higher than the Improved 
Pension payment amount that the surviving spouse is entitled to 
receive, VA will pay Improved Death Pension to the surviving spouse 
effective the first day of the month after the month for which VA last 
paid benefits to the child, and discontinue the child's pension award 
effective the same day. Section 3.31 of this chapter does not apply in 
such a situation.
    (3) Effective date of discontinuance of child's pension award when 
the surviving spouse is not entitled to payments. When a surviving 
spouse establishes eligibility for Improved Death Pension but is not 
entitled because his or her adjusted annual income is greater than the 
maximum annual pension rate or because his or her net worth bars 
entitlement, VA will discontinue the child's pension award effective 
the first day of the month after the month for which VA last paid 
benefits to the surviving spouse.
    (b) Child establishes eligibility but surviving spouse has received 
Improved Death Pension payments after his or her own eligibility ended. 
If a surviving spouse continued to receive Improved Pension payments 
after becoming ineligible for Improved Pension, and that surviving 
spouse has custody of a child who establishes eligibility for Improved 
Pension payments, VA will award Improved Pension to the child and 
discontinue the surviving spouse's eligibility as follows:
    (1) Improved Pension payment amount for the child is lower than the 
payment amount for the former surviving spouse. When the former 
surviving spouse, who is the child's custodian, receives pension after 
eligibility ends and the child is entitled to a lower Improved Pension 
payment amount than the former surviving spouse is receiving, VA will 
amend the award to the former surviving spouse to pay the child's 
Improved Pension payment amount. This amended award will be effective 
the date VA should have discontinued the former surviving spouse's 
pension award, thereby establishing a debt owed to VA by the former 
surviving spouse. VA will award pension to the child effective the 
first day of the month after the month for which it last paid benefits 
to the former surviving spouse and discontinue the former surviving 
spouse's pension award effective the same day. Section 3.31 of this 
chapter does not apply in such a situation.
    (2) The Improved Pension payment amount for the child is equal to 
or higher than the former surviving spouse's amount. This paragraph 
(b)(2) applies when the former surviving spouse receives pension after 
eligibility ends and the child is entitled to an equal or higher 
Improved Pension payment amount than the payment amount the former 
surviving spouse is receiving.
    (i) In such cases, the effective date of the child's pension award 
is the date VA should have discontinued the former surviving spouse's 
pension award.
    (ii) The initial amount of pension payable to the child is the 
difference between the child's Improved Pension payment amount and the 
former surviving spouse's Improved Pension payment amount. VA will pay 
the full Improved Pension payment amount to the child effective the 
first day of the month after the month for which VA last paid benefits 
to the former surviving spouse and discontinue the surviving spouse's 
pension award effective the same day.

(Authority: 38 U.S.C. 501(a), 5110(a), 5112(a))

Sec.  5.435  Calculating annual Improved Pension amounts for surviving 
children.

    (a) Surviving child not in custody or in the custody of an 
institution. If a surviving child has no personal custodian (a person 
legally responsible for the child's support), or a surviving child is 
in the custody of an institution, VA calculates the surviving child's 
annual Improved Pension amount by subtracting the surviving child's 
adjusted annual income from the surviving child's maximum annual 
pension rate.
    (b) Surviving child in the custody of a person legally responsible 
for the child's support--(1) One surviving child in the custody of a 
person legally responsible for the child's support. If the surviving 
child has a custodian, the surviving child's annual Improved Pension 
amount is the lesser of:
    (i) The maximum annual pension rate for a surviving spouse and one 
dependent surviving child, reduced by the adjusted annual income of the 
surviving child and that of the surviving child's custodian; or
    (ii) The maximum annual pension rate for a surviving child alone, 
reduced by the surviving child's adjusted annual income.
    (2) More than one surviving child in the custody of a person 
legally responsible for the children's support. If any surviving child 
has adjusted annual income equal to or greater than the maximum annual 
pension rate for one surviving child, that surviving child (and the 
surviving child's income) is not included in the calculation of the 
annual Improved Pension amount. The remaining surviving child(ren)'s 
annual Improved Pension amount is the lesser of:
    (i) The maximum annual pension rate for a surviving spouse and the 
number of remaining surviving children, reduced by the total adjusted 
annual income of the remaining surviving children and that of the 
custodian; or
    (ii) The maximum annual pension rate for a surviving child alone 
times the number of remaining surviving children, reduced by the total 
adjusted annual income of the remaining surviving children.
    (3) Income of natural or adoptive parent includes that of natural 
or adoptive parent's spouse. If the custodian listed in paragraph 
(b)(1) or (2) of this section is a natural or adoptive parent of a 
surviving child who is in joint custody as provided in Sec.  5.417(e), 
the income of that natural or adoptive parent includes the income of 
that natural or adoptive parent's spouse.

(Authority: 38 U.S.C. 1542)

Sec. Sec.  5.436-5.459  [Reserved]

[FR Doc. E7-18745 Filed 9-25-07; 8:45 am]
BILLING CODE 8320-01-P