Defense officials have decided to allow military careerists who gain a chance to shift to the Redux retirement plan to delay their election until 2001 so they can shelter some of the plan's $30,000 bonus from taxes under the military's new Thrift Savings Plan.
Beginning in August 2001, about 800 officers and 3,000 enlisted members each month will reach 15 years of service and face a critical choice: stay under the High-3 retirement plan, which pays 50% of base pay after 20 years of service with full cost-of-living adjustments, or shift to Redux, which will provide lower annuities and smaller cost-of-living adjustments but also will deliver an immediate $30,000 "career status bonus."
Over time, almost all careerists who first entered service on or after 1 August 1986 will face the same choice. Those who do not elect Redux will stay under High-3, said Tom Tower, Assistant Director of Military Compensation for the Secretary of Defense. But the decision will be irrevocable.
Officials now can only guess at the percentage of careerists who will be enticed by the cash at 15 years in return for reduced retired pay later and a commitment to serve five more years. Tower said his early estimate is that 40% to 50% will shift to Redux.
The $30,000 becomes more attractive if members can shelter a portion of it, up to $10,500 presently, in a tax-deferred Thrift Savings Plan (TSP). That is why defense officials have acted to ensure that roughly 20,000 members offered Redux, from August through December 2001, can use a TSP to protect the value of the bonus.
The problem they faced is that the first "open season" for enrollment in a military TSP is not expected to begin until 1 October 2001, and the establishment of individual accounts to accept payroll deductions and bonuses would not begin until I January 2002. By then, more than 4,000 officers and 15,000 enlisted members will have been offered the $30,000, with no TSP available to shelter any of it.
To avoid such an arbitrary penalty, defense officials have decided to allow careerists who reach the 15-year mark in 2001 to delay transfer to Redux for up to 60 days after a military TSP begins accepting deposits. If the present startup schedule for TSP holds, careerists who reach 15 years on 1 August 2001 will be able to delay their retirement choice until 1 March 2002.
Tower said the policy will save the typical enlisted careerist at least a few thousand dollars in taxes and will save officers, who generally are in a higher tax bracket, a little more. "If that money (saved] goes into the thrift plan, and it builds tax-deferred earnings that compound over the years, it's quite a bit of difference," said Tower.
For months, the services have been checking data banks to identify persons who entered service after 31 July 1986, and to verify, given occasional breaks in service, when they will complete 15 years. The first wave will do so on 1 August. Six months before that date (by 1 February 2001), the first group of careerists to pick their own retirement plan will be mailed information packets for doing so. The packets will explain their options in detail as well as the deadline for making a decision and where to turn in their "career status bonus election form," which could vary by service, said Tower.
Not every member at 15 years will be offered the bonus, Tower cautioned. The services will not make it available, for example, to persons who have earned rank so slowly that they face separation short of 20 years for violating "high-year tenure" rules. The bonus also will not be offered to persons whose performance or misconduct makes discharge, or even imprisonment, more likely than military retirement.
Bonus takers will have to commit to completing at least 20 years. The government plans to recoup any bonuses not earned, with amounts determined by how close members came to completing 20 years. For instance, a member who leaves after 18 years would have served only three years, or 60%, of the five-year obligation. So the government would go after 40% of the $30,000, or $12,000.
For those who will have the choice between the two plans, their decisions will be shaped largely by individual circumstances. But officials generally expect most enlisted and lower-ranked officers to favor Redux while officers, with their higher salaries, will pass on the $30,000 bonus and determine they are better off, in the long term, under High-3.
Tower encourages visits to a website set up to explain the retirement options. There, careerists will find a software program that, when they plug in rank, age at retirement, and other information and assumptions, will calculate the lifetime value of benefits under Redux and High-3. The website's address is http://pay2000.dtic.mil.