Who is an Active Duty Servicemember?
An active duty servicemember is an individual serving full-time in the active military service of the United States. This includes members of the Reserve Components serving on active duty but doesn't include servicemembers serving on full-time duty in the National Guard. All military servicemembers, regardless of duty status, are classified either as officers (including warrant officers) or as enlisted. It's important to recognize that U.S. military personnel are entitled to different benefits than individuals in the civilian sector and thus have different financial planning needs and expectations.
Benefits for Active Duty Servicemembers
Active duty members of the United States military forces are entitled to numerous government benefits. The term benefits, as used here, includes military pay as well as other programs set up to improve the lives of military personnel. Although many benefits are available to all servicemembers regardless of their rank and grade, some are available only to certain military members, and the amount of benefits received sometimes depends on pay grade. Because the scope of military benefits is enormous and ever-changing, this is only intended to be a broad overview of the subject. Servicemembers seeking more specific information should contact the appropriate military source, such as the Defense Finance and Accounting System (DFAS) or the Office of Personnel Management (OPM). Active duty servicemembers should know how to contact on-post representatives of these agencies.
Identifying Military Rank (Grade)
When dealing with military personnel, it's important to know the branch of service to which they belong, whether they serve as officers or enlisted, and their rank (grade), because military pay and benefits are based on these factors. Insignia on a servicemember's uniform (if he or she is wearing one) can reveal all these things. Military insignia is located on the hat, the shoulder, the sleeve, or on the collar of the uniform, depending on what uniform is being worn. Although it's not essential that a financial professional recognize the status of a military servicemember by sight, it's useful to have some idea of where the servicemember fits into the military world. To familiarize yourself with military insignia, see the Department of Defense website, defense.gov.
Military Base Pay
An active duty servicemember's pay depends on his or her pay grade, the number of years of service he or she has, and whether the servicemember is entitled to any allowances or special pay. It may also depend on whether or not the servicemember has dependents (a spouse or dependent children). Servicemembers may elect to receive their pay once or twice per month (in equal installments). Every month, the servicemember receives a pay statement showing essential financial information, such as pay grade, the amount of the servicemember's base pay and allowances, and deductions from pay for income taxes and Social Security taxes. The pay statement also provides financial information on other debt such as child support and installment loans, year-to-date tax information, and amount of leave time accrued.
Tip: A servicemember's net pay may vary from month to month, depending on whether he or she is receiving special pay or allowances.
What is Pay Grade?
The amount of a servicemember's base pay depends on his or her pay grade. Pay grade is a pay scale based on rank and number of years of service, and it's expressed as a letter-number combination. Pay grade is sometimes used interchangeably with rank when discussing pay; for example, a U.S. Army major may be referred to as a major or as an "O-4." In addition, two servicemembers who have the same pay grade designation (i.e., O-4) may earn somewhat different amounts, depending on how many years of service they have.
Base pay is the amount of monthly pay a servicemember is entitled to receive even if he or she does not qualify for any allowances or special pay. Base pay depends on the servicemember's pay grade and the number of years of military service the servicemember has. Base pay normally increases annually (although Congress must approve such an increase) to account for increases in cost of living. A chart showing the basic pay rates for all pay grades can be found on the Defense Finance and Accounting Service website dfas.mil.
Basic Allowance for Subsistence (BAS) refers to a tax-exempt allowance paid to servicemembers to offset the cost of food. All enlisted servicemembers are entitled to a full monthly BAS payment once they complete basic training, and pay for their own meals. Officers receive a monthly fixed BAS payment.
The Basic Allowance for Housing (BAH) is a tax-exempt monthly allowance that offsets the cost of civilian housing for
servicemembers living in the U.S. who do not receive government housing. The amount of BAH a servicemember receives is based on how much a typical servicemember of his or her grade and dependent status pays out-of-pocket towards his or her housing costs. BAH rates are set by surveying the cost of rental housing in each geographic location.
Servicemembers living overseas receive an Overseas Housing Allowance (OHA) if they have to rent a civilian apartment or house. OHA is designed to compensate servicemembers for the majority of their housing expenses and is made up of three components: a rental ceiling that covers the cost of rent, a utility/recurring maintenance allowance, and a move-in housing allowance that covers the cost of initial rental costs. Rent ceilings are set to cover rent paid by 80 percent of servicemembers with dependents, so most servicemembers will find that OHA will cover the total cost of rent.
A cost-of-living allowance (COLA) is paid to servicemembers stationed in high cost areas in the United States and overseas to compensate servicemembers for nonhousing-related expenditures. Overseas, COLA is designed to equalize purchasing power between members overseas and their continental U.S. (CONUS) based counterparts. CONUS COLA is designed to equalize purchasing power between military members based in the continental U.S., considering that some areas in the U.S. have a much higher cost of living than others.
Depending on their grade, family status, and circumstances, servicemembers may be entitled to various other allowances, such as uniform allowances, dislocation allowances, and travel allowances.
Servicemembers may receive extra pay in certain circumstances to compensate them for special duty or as an incentive. Special pay includes flight pay, diving pay, special pay for doctors, hazardous duty pay, and hostile fire pay.
Other Military Benefits
A financial services provider must recognize that the U.S. military is a generous employer. As a reward for service to their country, military servicemembers often have access to a number of low-cost and no-cost services and programs that civilians generally must pay for. This must be accounted for when evaluating the financial standing of a servicemember, as well as planning for his or her financial future.
Active duty servicemembers are provided medical care, dental care, and hospitalization at no cost. Qualified family members (dependents) receive medical care at no cost and low-cost hospitalization, and they may receive dental care, if available. Active duty servicemembers and their qualified family members receive health insurance coverage through TRICARE, the medical program for the U.S. military.
Military servicemembers are entitled to buy life insurance from the Servicemember's Group Life Insurance (SGLI) program. This low-cost life insurance may be continuable as Veterans Group Life Insurance (VGLI) after the servicemember separates from active duty.
Long-term Care Insurance
Military servicemembers can apply for coverage under the Federal Long Term Care Insurance program. For more information, visit the program's website at ltcfeds.com.
Federal Thrift Savings Plan
The Federal Thrift Savings Plan (TSP) is a tax-deferred retirement savings and investment plan set up to help federal civilian employees and military personnel save for retirement. Both active duty and reserve members of the Army, Air Force, Marine
Corps, Navy, and Coast Guard can participate.
Servicemembers may be eligible for education benefits under several programs. The newest program, the Post-9/11 GI Bill, is available to active duty servicemembers and veterans who have served on active duty on or after September 11, 2001. Other benefit programs include the Montgomery GI Bill, the Reserve Educational Assistance Program (REAP), and the Veterans Educational Assistance Program (VEAP). More information on these benefit programs is available on the Department of Veterans Affairs (VA) website.
Although there may be a waiting list for care, military servicemembers often have access to on-post child care facilities. On-post child care is generally less expensive than off-post care, although the cost varies from post to post and may depend on
servicemember's pay grade and number of children.
On-post Shopping and Activities
Active duty military servicemembers are entitled to shop at special on-post shopping facilities. The post exchange (PX) usually houses a department store and sometimes specialty shops or kiosks, and the commissary is a grocery store where the
servicemember can purchase items at cost plus a small surcharge. Depending on the size of the post, a servicemember can usually find services related to his or her needs, such as a barber, hairdresser, dry cleaner, and tailor, among others. Typical on-post military recreational facilities include centers for activities such as crafts, music, photography, sports, theater (live performances and movies), cafeterias, and clubs.
Counseling is available to active duty servicemembers and their families, ranging from individual therapy, educational counseling, relocation assistance, legal assistance, financial assistance, and assistance locating community resources and services.
Military members are entitled to 30 days annual leave with pay that may accumulate for two years. If the military member separates from active duty service, he or she is entitled to any remaining accumulated annual leave.
Income Tax Considerations
Most military pay is taxable. Military base pay is subject to federal and state income tax, and taxes are withheld from the base pay. Special pay is also usually taxable. However, many allowances (such as BAH, BAS, moving allowances, death allowances, travel allowances, and family allowances) are excludable from gross income and therefore not taxable.
Tip: Military members and their spouses pay state tax income tax (if any) in the state that they legally reside, not the state in which they are stationed temporarily (unless the same). This means that military servicemembers living overseas must also pay state income tax if they're legal residents of a state that has a state income tax.
Estate Tax Considerations
Estates of military servicemembers may be taxable at the federal and state level. Estate tax rules for servicemembers are the same as for the civilian population.
Social Security and Medicare tax
Participation in Social Security has been mandatory for active duty servicemembers since 1957. Since 1957, servicemembers pay the same tax as civilians (7.65 percent), and their tax contribution is matched by the government. Servicemembers who served on active duty (or active duty for training) between 1957 and 2001 can also have their Social Security earnings records credited for special extra earnings. These extra earnings may help them qualify for Social Security or increase their Social Security benefits.
The Social Security Administration will add these extra credits to the earnings records of individuals who served between 1957 and 1967 when they apply for benefits. Individuals who served between 1968 and 2001 have already had the credits applied to their earnings records.
Tip: Retired servicemembers can collect both Social Security benefits and military retirement pay. In general, there is no offset of Social Security benefits because the servicemembers receive military retirement pay. However, retired servicemembers (like other Social Security recipients) may receive Social Security benefits only up to a certain maximum.
Advising the Active Duty Servicemembers
Active duty servicemembers often seek the advice of financial professionals, particularly when they are contemplating separating or retiring from the service. Servicemembers generally need the same types of advice as civilians but may also need special advice in certain areas.
Basic Financial Planning
Like other clients, servicemembers may need help understanding the financial impact of life events such as marriage, parenthood, divorce, or homeownership. They may also need help managing lump-sum payments or bonuses they receive. Active duty servicemembers (especially reservists recalled to active duty) may also need information about laws that protect them against civil actions that threaten their homes or their finances.
Clients who are servicemembers may be more concerned about estate planning than civilian clients due to their dangerous occupation. They want to make sure that their spouses, dependent children, and/or parents will have adequate resources to pay off their debts in the event that they die, and they may need help understanding what benefits their survivors will receive. A
servicemember married to another active duty servicemember may need special help nominating a guardian for his or her child, in the event that both parents are sent away on duty at the same time.
Servicemembers who retire from active duty service under the legacy system will receive a monthly retirement benefit equal to a percentage of their monthly base pay (40 percent at minimum). They may also have contributed to a TSP.
Servicemembers who join the military on or after January 1, 2018 are covered under the Blended Retirement System (BRS). The BRS combines the traditional legacy retirement pension benefit with a defined contribution component, similar to a 401(k), using the TSP. Under the BRS, servicemembers can not only make TSP contributions, but will receive matching contributions from the government (subject to certain limits and requirements). They will also receive an automatic service contribution of 1% of their basic pay (whether or not they contribute to their own TSP). This means that servicemembers covered under the BRS can potentially leave the service with substantial retirement savings from their TSP, even if they have not met the length of service required to receive a military pension.
Under certain conditions, servicemembers who joined the military before January 1,2018 could opt into the BRS during 2018. More information on BRS and military retirement pay can be found at dfas.mil.
Servicemembers will also likely be eligible for Social Security benefits when they reach age 62. Most servicemembers who retire from active duty service will be in their 40s or 50s, young enough to pursue another career or start a business, and they will need advice on these matters.
Planning for Separation
Separating from service can be a stressful event, whether the servicemember is separating voluntarily or involuntarily. The servicemember who separates voluntarily may face having to start a new career. He or she may need retirement planning advice, especially if he or she will not be eligible to receive military retired pay in the future. A servicemember who separates involuntarily (usually due to a reduction in force) will often receive a lump-sum separation pay or a monthly annuity and may need investment planning advice. Both types of servicemembers who have been in the military for years may face a financial crisis, in part because they have been receiving generous military benefits. Although servicemembers have experience dealing with many financial and consumer issues that civilians typically face, they may be accustomed to dealing with companies and individuals with military connections. In particular, they may need advice about job-hunting (many are looking for a job for the first time in many years), becoming a business owner, buying health and life insurance, finding affordable housing, managing retirement accounts, etc.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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