Several retirement plans associated with the federal government are considered nonqualified retirement payment plans. That’s because they do not fall under the Employment Retirement Income Security Act of 1974 (ERISA). For this reason, military pensions are nonqualified pension plans.
Qualified vs. Nonqualified Retirement Payment Plans
Typically, qualified retirement payment plans are usually established by employers and recognized by the IRS. These plans meet the conditions the IRS sets concerning their structure and how they operate. The conditions in question affect vesting, funding of plans and the benefits coverage related to the retirement plans.
In addition, they must meet the standards that ERISA sets to guide the formulation of employer-sponsored retirement plans. As a result, they can offer tax advantages. Qualified plans can either be defined contribution or benefit plans. Some examples include pension plans, 401(k)s and IRAs.
On the other hand, nonqualified retirement payment plans don’t fall under ERISA guidelines. These plans tend to meet the special needs of employees, act as a supplemental retirement savings plan and may not offer the tax advantages of their qualified counterparts.
Military pensions tend to fall under the federal retirement payment plans that are not associated with ERISA. As a result, they are nonqualified. However, government plans such as the Civil Service Retirement System (CSRS), Federal Employee Retirement System (FERS) and Thrift Savings Plan (TSP) annuities fall under qualified retirement plans.
Defined vs. Contribution Retirement Plans
Qualified and nonqualified plans usually fall either under the defined contribution or benefit plan. And military pensions are not any different.
A defined contribution plan is a retirement plan where both you and the employer contribute funds that are then invested. These funds enjoy tax advantages, such as tax deferrals until it is time for you to withdraw them. In addition, these plans do not offer a specific amount at retirement. Instead, what you get depends on the performance of investments after subtracting the necessary transaction fees.
Defined contribution plans are popular because they enable employees to take a more active role in saving for their retirement.
On the other hand, a defined benefit plan promises you a specified amount of money at retirement. The benefit may be given as an exact dollar amount or calculated based on a specified formula. And the amount may be given as a regular payment, lump-sum or some combination of the two payment methods.
Are Military Pensions Defined Benefit Plans?
A military pension falls under the category of defined benefit plans. Members of the armed forces do not need to contribute any monies to military retirement plans. And both reserve and active retirees are usually eligible for these benefits. Instead, they earn them due to their years of service.
However, multiple factors affect the total benefits pension retirees or the disabled get. These include:
- Basic pay at retirement
- Annual cost-of-living-adjustments (COLA)
- The number of years one serves
- Whether the retiree has a disability
Military Retirement Payment Systems
Below are the available nonqualified pension plans for the military.
- The High-36/ High-3 Plan: You must have served at least 20 years to be eligible for the plan. And the benefits are calculated based on your highest 36 months’ worth of basic pay.
- REDUX Plan: Your highest 36 months' of basic pay are used to calculate the plan’s benefits. But in exchange for a cash bonus of $30,000, you will receive a reduced retirement pay until the age of 62.
- Blended Retirement System (BRS) Plan: You will receive a lifetime of annuity payments after 20 years of service. You will also receive one to four percent government TSP matching contributions.
- Disability Plan: Given to anyone with at least a 30 percent DoD disability rating that is medically unfit to continue serving.
- Final Pay Plan: The main retirement plan for reserve members. It considers the number of years of service and the final basic pay on retirement day.
Final Thoughts on Military Plans
While military retirement plans are nonqualified, they are still pretty good. But it would help if you remembered that your payments will differ from others in the military due to your basic pay at retirement and the number of years of service you served. In addition, you will need to pay your fair share of taxes on retirement income, and those vary based on location.
- Investopedia: Qualified Retirement Plan
- Annuity: Qualified Retirement Plan
- Bankrate: Qualified retirement plan
- Investopedia: Nonqualified Plan
- TheHartford: Key Considerations for Participating in a Nonqualified Plan
- OPM.GOV: Frequently Asked Questions - Retirement
- SHRM: Designing and Administering Defined Contribution Retirement Plans
- Forbes: What Is A Defined Benefit Plan?
- FAS.ORG: Military Retirement: Background and Recent Developments
- Defence.GOV: Military Compensation
- DFAS:MIL: CSB/REDUX
- USA:GOV: Military Pay and Pensions
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.