The landmark settlement follows a suit filed by the American Civil Liberties Union of New Mexico on behalf of 181 service members who were dismissed under the military's "Don't ask, don't tell" policy, The Hill reported.
Federal law entitles service members to separation pay if they have been involuntarily and honorably discharged after completing at least six years of service, the ACLU said.
However, the Department of Defense decided to cut separation pay in half for any service member discharged for homosexuality.
Laura Schauer Ives, managing attorney for the ACLU of New Mexico, said those service members were subjected to "a double dose of discrimination" by being removed from the armed forces and then denied full separation pay.
An average payout of $13,000 will go to each of the 181 service members, the ACLU said.