How is Continuation of Pay Calculated
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Find out more about the Blended Retirement System on militarypay.defense.gov or http://www.militaryonesource.mil/
By Carol Church
Q. What is continuation pay?
A. Continuation Pay is one of the elements of the new Blended Retirement System coming to the U.S. military. As a reminder, the BRS is available as an opt-in to service members who joined after Dec 31, 2005, but before January 1, 2018. The BRS is also available to Reserve members in a paid status with less than 4,320 retirement points. Those who joined before Jan 1, 2006 are grandfathered into the legacy plan, and those who join after January 1, 2018 will automatically be enrolled in the new BRS.
Continuation pay is a lump-sum bonus in the BRS that will be given to service members who have completed between 8 and 12 years of service, calculated from the Pay Entry Base Date. In exchange for receiving continuation pay, the service member must sign on for at least 3 more years of service. (This was originally going to be 4 years, but the number has changed.)
Continuation pay can be thought of as a retention bonus, a raise, or as an incentive to continue to serve. The military plans to use it as a way to retain members whose specialties or skills are particularly needed, but all members are eligible.
Q. How much will service members receive?
A. The amount will be 2.5 to 13 times the amount of one month's pay for active component members and .5 to 6 times the amount of one month's pay for Reserves. This amount can and will vary, but the 2.5/.5 numbers are minimums. More information and guidance will be forthcoming on these amounts.
Q. What happens if a service member leaves the military before completing the required term of service?
A. If a service member receives continuation pay but fails to complete the mandated 3 years, he or she will need to repay at least some of the bonus. The amount due will depend on the reason for separating from the military.
Q. How should service members use their continuation pay?
A. Service members may be tempted to use continuation pay for things like a new car, a mortgage down payment, paying off debt, paying for education, etc. However, it's important to remember that the BRS system will culminate in lower pension payments for those who stay in the military (and if members are receiving continuation pay, they're fairly close to being eligible for retirement). The prudent course of action is to invest most or all of the payment into the TSP, an IRA, or another savings vehicle. (Be aware of contribution limits–$18,000/year for TSP).
Q. Is continuation pay taxed?
A. Yes. Continuation pay is considered earned income by the IRS, and is taxed. Service members who wish to reduce tax liability incurred by receiving the continuation pay as a lump sum can split the amount into installments distributed annually.
Q. How does continuation pay differ from the CSB?
A. The CSB, or Career Status Bonus, was an option under the legacy retirement system; it will be discontinued 12/31/17. It is a one-time lump sum payment of $30,000 offered after 15 years of service. Members must agree to complete 20 years of service to receive it, and taking CSB reduces their pensions.
Continuation pay is different because the amount will vary from member to member and taking it does not cause a reduction in pension. (However, pensions are somewhat lower for everyone who reaches full retirement under the new BRS, in exchange for matching TSP funds contributed by the government starting very early in military members' careers.)
There is, however, a different lump sum option available under the new BRS that does significantly reduce pension pay (until Social Security retirement age). Look for more information on this option in a future post.
More on Blended Retirement from the DoD
Source: https://oneop.org/2017/05/16/faqs-continuation-pay-under-the-blended-retirement-system/
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