For military personnel, managing Flexible Spending Accounts (FSAs) during transitions like a PCS can be complex, especially when it comes to adjusting healthcare and dependent care benefits. The ability to adjust your FSAs in response to Qualifying Life Events (QLEs) provides an opportunity to better align your benefits with your current needs, but understanding the timing, eligibility, and impact on funds is crucial for making the most of these adjustments.

How Does A PCS Relate to FSAs?

A Permanent Change of Station (PCS) is a common event for military members, requiring a move from one duty station to another. A PCS qualifies as a QLE, which means you are eligible to make changes to your FSA elections—both for healthcare and dependent care—due to this major life transition.

When you move to a new duty station, you may face different healthcare providers, medical expenses, or childcare needs. A PCS may also affect your dependent care needs based on where you are stationed or the availability of care services. Therefore, it’s essential to review your FSA contributions and adjust them to better reflect your new situation.

What Are Qualifying Life Events (QLEs)?

A QLE is a life change that triggers a window of opportunity to adjust your FSA elections. QLEs are broad and can include events like marriage, divorce, the birth of a child, and, of course, a PCS. The key feature of QLEs is that they allow you to change your FSA elections outside the typical open enrollment period. For military members, PCS is one of the most common QLEs and typically occurs at least once during a service member’s career.

When a QLE like a PCS occurs, the window to adjust your FSA is typically 31 to 60 days after the event. This means it’s important to act promptly to ensure your new FSA elections are in place as soon as possible after the move.

Timing, Eligibility, and Changes to Your FSA

Timing is critical when it comes to adjusting your FSA in response to a QLE like PCS. Changes to your elections must be made within 60 days of the event, and in some cases, the changes may take effect as soon as the first pay period after approval. This is especially important when considering healthcare expenses, as you may be transitioning from one network of providers to another.

You are eligible to adjust your FSA elections after a PCS if the move impacts your medical or dependent care needs. For instance, if your new station requires additional medical care or prescriptions, you may choose to increase your Healthcare FSA contributions. Similarly, if you now have higher childcare needs due to the PCS, you can adjust your Dependent Care FSA to reflect the increased cost.

Qualifying Expenses and Adjustments in Your FSA

When adjusting your FSA, you need to consider the timing and eligibility of the funds that are available. Funds in your FSA are typically “use it or lose it” by the end of the year, unless you have a rollover option. For military members, if you increase your contribution to your FSA during a PCS, the additional funds are available for reimbursement once your elections are processed. However, you must remember that expenses for which you have already been reimbursed cannot be refunded or reversed, so it’s important to track what has already been claimed.

Moreover, the eligible expenses may change after a PCS, depending on the new location and available services. For example, if you move from a location with a robust selection of daycare options to one with fewer choices, your dependent care needs may increase, which means you’ll want to adjust your Dependent Care FSA accordingly. Additionally, if the move introduces new health providers or services not covered under your previous plan, you may need to adjust your Healthcare FSA to accommodate these costs.

When you experience a Qualifying Life Event (QLE)—such as a PCS, marriage, or the birth of a child—you’re allowed to adjust your FSA elections. But it’s important to understand how these adjustments work, especially when it comes to the carryover balance and when the new elections take effect.

Here’s a breakdown of how it works:

1. Timing of the New Election
   After you report a QLE and make changes to your FSA election, your new election amount becomes effective on the first pay period following approval by FSAFEDS. This means that the changes to your contributions won’t take effect immediately, but rather in the next pay cycle as determined by your payroll schedule.

However, any new election amount you choose will only be available to cover expenses incurred after the new effective date of the QLE. So, for example, if your new election is approved on August 15th, your new amount won’t be available to reimburse expenses incurred before that date.

1. The Birth or Adoption Exception
   If the QLE is related to the birth of a child, adoption, or placement for adoption, the effective date of your new election is retroactive to the actual date of the birth, adoption, or placement. This means you can use the new election amount to reimburse any expenses that were incurred from the date of birth or adoption, even if your election wasn’t approved until later.
2. Carryover Balances
   Carryover refers to any unused funds that you have in your FSA at the end of the year, which can be carried over to the next year (up to $660 for Healthcare FSAs). However, the carryover balance will remain in the original election period. For example, if you carry over $200 from the previous year, that $200 is only available for claims incurred in the original plan year (from January 1st to August 14th in our example).

Let’s walk through a detailed example to make this clearer:

Example:

1. Let’s say your original Healthcare FSA (HCFSA) election is $1,000, effective from January 1st. You also have a $200 carryover balance from last year, bringing your total available for the year to $1,200.
2. Now, if you experience a QLE—say, you increase your HCFSA election to $2,000 effective on August 15th—you’ll have a new election period starting on August 15th and running through December 31st. This new election of $2,000 is available for claims incurred from August 15th onward.
3. However, the carryover balance of $200 remains in the original election period (January 1st – August 14th). This means you cannot use that $200 carryover balance for claims incurred in the new election period (August 15th – December 31st). So, if you have a $2,200 eligible expense on September 1st, only $2,000 of that expense will be paid by the FSA. The $200 from the carryover will not be available to cover this expense.

1. Managing Your Carryover and New Elections
   If you want to use your carryover balance in the new election period, you will need to contact FSAFEDS directly. They can help you understand if it’s possible to transfer the carryover balance to the new election period or guide you through other options.

How to Adjust Your FSA Post-PCS

When adjusting your FSA after a PCS, it’s important to ensure your new elections reflect the changes in your family or healthcare needs. Here’s how to approach it:

1. Evaluate Your Needs: Assess whether your healthcare and dependent care expenses will increase or decrease after the PCS. This could be due to new medical providers, different insurance coverage, or increased childcare costs in your new location.
2. Make Adjustments Within 60 Days: After a PCS, you have a 60-day window to make changes to your FSA elections. Ensure you complete this process promptly to avoid missing the window and losing the ability to adjust your contributions.
3. Check Your Current FSA Balance: Be aware of how much you have in your FSA before making changes. Remember, contributions to your FSA are typically deducted from your pay before taxes, but if you’re nearing the end of the year, make sure you account for any unused funds you may need to use.
4. Update Your Eligible Expenses: If your dependent care or healthcare needs change with the PCS, update your elections based on the expected costs in your new location. This ensures that you’re contributing an appropriate amount and can access the funds as needed.
5. Reimbursements and Timing: Any funds in your FSA can be used for qualified medical or dependent care expenses incurred after the effective date of your change. Be aware that the timing of reimbursement may depend on the provider or facility where you seek care.

Key Takeaways:

• New election amounts are only available for expenses incurred after the effective date of the QLE.
• Carryover balances remain in the original election period and cannot be used in the new election period unless specific arrangements are made.
• Birth or adoption-related QLEs allow the new election amount to be retroactive to the date of the birth or adoption.
• If you want to use your carryover balance for a new election period, you’ll need to contact FSAFEDS.

Understanding these nuances will help you plan more effectively and ensure that you make the most of your FSA benefits when a QLE occurs. Always remember to make changes promptly and track your carryover balances to avoid any confusion or missed opportunities.

Need help understanding Qualified Life Events for your FSA and what you should do or have other financial questions?  The MFAA Advisors help military and veterans every day with questions like these and also taxes, investing, insurance, and military and veteran benefits.  Find out who they are and how they can help with your situation by clicking here.

Your Pension and Your Portfolio

So you have a pension, now what?

Retirement income is difficult to imagine. For many folks out there, retirement savings, investing, and future income combines into a blur. Sure, you have a TSP or 401(k), but what about Social Security? Also, you might have deferred comp to consider or some sort of pension (and that’s if you’re lucky). It’s a difficult package to comprehend. In order to best understand how everything fits together, you can either think of each item individually or step back and stack them together as one cohesive unit. I’m sure you can guess what I prefer.

For now, let’s consider only your pension and TSP/401(k) retirement savings. Recently, I’ve talked to many folks about viewing these two separate pieces of retirement a little differently. Pensions and retirement savings are easy to view separately because they are very different (and most people do). However, there is another way. Instead of viewing these retirement tools separately, you can consider your pension as part of your investment portfolio. Rather, as an asset within it. 

Before I get ahead of myself, first let’s talk about a few ideas and concepts.

Asset Allocation

If the term “asset allocation” seems complicated or vague to you, don’t worry; you’re not alone. “Asset allocation” is a perfect example of taking a rather simple idea and saying it in a more confusing or intentionally sophisticated way. Admittedly, the financial advisory field is filled with such things. After all, what are you paying us for?

Simply put, asset allocation refers to the assets (stocks, bonds, etc.) you own in your portfolio. They are hopefully organized with some thought or purpose behind them; hence the term “allocation”. Together, “asset allocation” indicates a selection, curation, and organization of investment assets put together for a certain reason. Whether it be stocks, bonds, real estate, precious metals, crypto, and so on, the hope is these investments ultimately work together to help you achieve a specific goal. For this article, we’re talking about asset allocation in your retirement accounts (TSP, 401(k), IRA, etc.) and ultimately how your pension fits in.

The most common allocation

If you are familiar with the term asset allocation, you’re probably familiar with the most common form of it. The most common asset allocation is a mix of stocks and bonds. These assets tend to move in dissimilar ways, making them a commonly used way to diversify and create a solid allocation for a portfolio.

If someone says “I have a 60/40 portfolio” it usually means they have 60 percent in stocks and 40 percent in bonds. If they say 50/50, you guessed it, even split.

Breaking down the most common allocation

Before bringing your pension into the fold, one more detour. It’s important to understand how these parts of your allocation operate. Sticking with our common use example, we’ll look at stocks and bonds.

Stocks (Equities): These represent actual ownership in companies. The returns you receive are in the form of dividends and the growth of the stock price itself. Stocks can be more volatile, which means the price of the stocks can increase or decrease unpredictably. Further, dividends of stocks may be infrequent or unpredictable. 

Bonds (Income): These represent money lent to a company or government agency. The returns are in the form of interest payments made on the borrowed money as well as a potential increase of the bond price itself. 

More on bonds

Bonds are nicknamed “Income” because of the steady nature of how returns are realized. If you own individual bonds and hold them to maturity, you should experience a steady flow of interest payments from the borrower. Hence, “income”. Since you can count on these payments, they behave much differently than equities. While bonds usually have a lower rate of return, their predictability counteracts the volatility of the stocks and helps smooth out the overall returns.

Pension: The Greatest Income Allocation

Alright, back to our main idea: your pension.

Comparing your pension with the idea of stocks and bonds, do you notice any similarity? Stocks are unpredictable and may or may not pay dividends. Bonds are steadier and (should) pay a steady income of interest payments. Any thoughts?

If your pension is related to either of these ideas, it would certainly be bonds. Since bonds should pay a steady income of interest, your pension has some nice symmetry with them. When holding a bond, you expect regular payments. Similarly, with a pension, you expect regular payments. The regular nature of these payments counteracts the volatile nature of stocks (yes, for bonds and pension payments alike). It’s the behavior of these assets that we’re interested in. The nature of them matters very little. Income is income.

Part of the asset allocation

So, if we view your pension properly, it would be included in the “income” part of your portfolio. That’s easier said than done.

If you own stocks and bonds, their value is easy to compute. You can check stock prices and bond prices daily, making you well aware of how they’re doing. You can then take these prices and determine the balance of your assets.

For instance, if you started the year at a 60/40 allocation and your stocks outperformed your bonds, you might end the year at 65/35. If that happens, you could simply sell stocks and buy bonds until you get back to your 60/40 allocation. Congrats, you now understand rebalancing! 

Valuing your Pension

Pensions are more difficult to value in this way. This typically isn’t a problem because, for many individuals with pensions, they usually don’t include pensions as part of their retirement investment portfolio. Likely, these folks read somewhere that they should have a 70/30 portfolio or similar based on their age or some other variable. These people then allocated their retirement accounts to 70/30 and completely ignored their expected pension benefits. 

Viewed separately, their pension and retirement portfolio seem in great balance. However, viewed together, suddenly things are wildly askew.

Warning: math ahead

For those of you not interested in doing any math today, this is where I leave you. For you math nerds, get your calculators ready.

The present value of a pension

The good news: there is a way to include the value of your pension in your portfolio. 

The bad news: it’s math

First, we need to determine the present value of your pension benefit. The present value of your pension is the present value of all future payments if you were paid today. Sadly, this isn’t simply the value of all payments added together. You also need to consider the idea of investment return and growth of these payments (if applicable). Basically, we need to determine the value of a lump sum received today if you invested in the stock market and withdrew payments each month. In other words, what lump sum today has the same value of all future payments?

The formula (remember, I warned you)

PV = present value of the pension (what we’re solving for)

PMT = initial annual pension benefit (monthly payment x 12)

g = growth of pension payment (if the payment is adjusted for inflation, use 3% or whatever estimate you’re comfortable with. Lower is more conservative)

r = rate of return if you invested the lump sum in the stock market. Traditionally, 8% is a good estimate.

n = number of years you expect to receive the benefit; most common estimate is until age 90.

For example

Let’s say you just retired at age 60 and begin receiving a pension benefit. The benefit will pay you $800 per month ($9,600 a year) and will continue until your death. The payment will adjust annually and you estimate inflation to be around 3% a year. Finally, you expect to live another 30 years and the return you normally get from invested accounts is around 8% a year. 

If you wanted to know the present value (PV) of your pension, your calculation would look like this:

Once calculated, you would find the present value of your pension equals $145,686.75. That’s a nice chunk!

Now make it part of your portfolio

You now have the present value of your pension payment. Now what? 

To continue the example, let’s now imagine you have $400,000 in your IRA and have decided that a 50/50 portfolio will fit your risk tolerance. 50 percent stocks and 50 percent income. You therefore allocate $200,000 to stocks and $200,000 in bonds.

Oops, you forgot to include your pension! Adding your pension benefit to your portfolio, you now have $200,000 in stocks and $345,686.75 in bonds/income. That’s a 37/63 split, not a 50/50! Looks like we need to rebalance your portfolio but how do we do that? It’s pretty straightforward.

First, we add the present value of your pension to the total value of your IRA. We come to a total of $545,686.75. Since we want a 50/50 portfolio, we need to split this total evenly to discover our stock/bond mix. Divided in half, the totals for each should be $272,843.37. 

Since our pension value can only be considered part of our bond/income allocation, we begin with that. We subtract the pension value ($145,686.75) from the bond allocation target ($272,843.37) and arrive at our actual bond allocation number for the IRA: $127,156.62. 

After investing the $127,156.62 in bonds, we’re left with $272,843.38 to invest in stocks.

The totals:

Pension: $145,686.75

IRA Bond allocation: $127,156.62

IRA stock allocation: $272,843.38

To double check our math, we can add our pension and bond allocation together and compare it to our stock allocation. $145,686.75 + $127,156.62 = $272,843.37. 50/50 allocation achieved!

Why this matters

Why should we go through all this?

There is (or should be) a great deal of thought put into your investment allocation. You should consider your risk tolerance, risk capacity, age, time horizon, expected return, and so on. There are lots of things to consider when finding the right balance of assets.

Once you find the right allocation, it’s important to view it as it fits into your real, total retirement situation. Just as with our example, finding the right asset allocation only to ignore a pension benefit will leave your portfolio out of balance. Doing so will make your allocation much more conservative than you intend to be.

What’s wrong with being more conservative? There actually are a few problems with being too conservative. Underperforming overall returns can cause your portfolio to lag inflation and erode over time. This small pull can be unfelt in the short run but implode your plan over the long-term. 

More importantly, you’ve already decided on how conservative you want to be. That is, once you decide on an asset allocation, you have already determined the amount of risk you’re willing to take. And remember, risk is tied to return. The risk you have decided to take reflects the return you need to complete your plan. Ignoring your pension benefit means you actually have less risk (and less return) than you originally decided on. Regarding your pension as part of your portfolio can help. Just remember to keep everything in balance.

Don’t like doing math or need some help with some other aspect of your financial plan?  Talk with one of the MFAA Planners who can help you out.

Financial Boot Camp for New Military Parents

Congratulations on adding a tiny new recruit to your family. Welcome to parenthood, a mission more challenging and rewarding than any you’ve faced in your military career. Just like you prepare for a deployment, navigating parenthood requires careful planning, especially when it comes to your finances.

Now that you have a dependent, you’ll have new expenses, potentially reduced income if one parent leaves their job to become the primary caregiver and increased financial responsibilities.  There is more to this new financial life than just budgeting; it’s about building a secure financial future for your family, a future that can weather the uncertainties of military life and provide peace of mind for your family.  Consider this blog post a financial boot camp for your financial mission as new parents. 

Step 1: Assess the Situation

The first step in any successful operation is a thorough assessment of the terrain. 

• Calculate the Real Cost of a Baby: Beyond the adorable onesies, the real cost lies in recurring expenses like diapers and childcare, plus essential one-time purchases like cribs and car seats. Online calculators can give you a ballpark figure but your best resource may be talking to other new parents in your unit or neighborhood.
• Estimate Child Care Expense: Depending on where you live, the cost of caring for your little one while you and your spouse work may be the single biggest line item in your new budget.  On base child development centers (CDCs) will often provide the most affordable high quality care you can find because installation CDCs are partially subsidized by the DoD ensuring your weekly care rates are calculated based on your total family income.   

If you’re not able to access a CDC either because of extended waitlists or you live too far from a military base, investigate your service’s childcare fee assistance program which is designed to help offset the cost of quality care in your local community. You can also explore options like the Dependent Care FSA which allows you to set aside pre-tax money to pay a portion of childcare costs.  

• Understand Potential Increases to Your Allowances: Depending on where you’re stationed and your family composition, adding a dependent may have a positive impact on your housing allowance or cost of living allowance.  Consult your unit financial office for details on how your allowances might change when your child is added to DEERS. 
• Consider Changes to Your Taxes: For most military families, adding a dependent to your federal tax return provides an additional tax credit.  The current Child Tax Credit for a child under the age of 17 is $2000 per child; this credit may reduce the taxes owed on your federal return.   
• Understand Your Tricare Coverage: One of the biggest advantages of military service is the comprehensive healthcare coverage provided by Tricare. Understand what your Tricare coverage provides for your new baby, including coverage for well-baby check-ups with your pediatrician and breastfeeding support, including access to lactation consultants.

Step 2: Develop Your Financial Strategy 

Now that you understand the terrain, it’s time to develop your financial strategy. This is your battle plan for achieving your financial goals and financial security.

• Emergency Fund – Your First Line of Defense: An emergency fund is crucial for everyone, but it’s even more important for new parents. Aim for at least 3 months of essential living expenses like your rent or mortgage payment, utilities, groceries, and transportation costs. This fund will protect you from taking on debt to pay for unexpected bills like car repairs or a gap in spouse employment when you PCS. Keep this money in a readily accessible high-yield savings account so it continues to earn interest until needed.
• Life Insurance – Protecting Your Family’s Future: This is non-negotiable for new parents. The Service Members’ Group Life Insurance (SGLI) is a great starting point, but it might not be enough. Consider supplementing SGLI with a term life insurance policy to ensure your family is financially protected in case of your untimely death. Think about how much money your family would need to cover housing, education, and living expenses without your income.  

And don’t forget to add term life coverage for your spouse.  Whether they are employed or the primary care giver, you want enough insurance to cover their lost income and/or the cost of care that they provide your family.  The Family SGLI coverage is an easy place to start, but an additional term life policy can improve your financial security.

• Estate Planning – Stating Your Intention: Estate planning is crucial for new parents to ensure your child will be cared for and financially supported if something happens to you. Most military families can accomplish their basic estate plan – wills, guardian designations, and essential powers of attorney, at the base judge advocate’s (JAG) office.  Check your installation’s website to learn how to make an appointment with your JAG. 

• Retirement Planning – Securing Your Long-Term Mission: Retirement might seem far off, but the sooner you start saving, the easier it will be. Maximize your contributions to the Thrift Savings Plan (TSP), especially if you’re earning matching contributions. Consider consulting with a financial advisor to develop a comprehensive retirement plan that accounts for your military pension and other potential income sources.
• College Savings – Investing in Your Child’s Future: Education costs continue to skyrocket, so starting early is key. Explore options like 529 plans, which allow your savings for college expenses to grow tax-free. Even small contributions can make a big difference over the nearly two decades until your child starts college.  

If you’re eligible for the Post 9/11 GI Bill education benefit, consider transferring at least one month of benefit to your child; this preserves the option to transfer additional benefits to them when they approach college age.  Transferring these education benefits may incur an additional service commitment; it’s important to understand how this service commitment fits into your career plans before you decide to transfer benefits to your dependents. 

Step 3: Maintain Your Financial Fitness – Staying on Course

Having a plan is only half the battle, the real challenge lies in making course corrections as you navigate military life.

• Automate Your Finances: Life is busy, and sleep is rare for new parents; setting your savings on auto pilot can keep you on track.  Set up automatic transfers to your savings accounts, retirement accounts, and bill payments. This will help you stay on track even when life gets hectic.
• Review and Adjust Regularly: The life of a military family is in constant flux and your financial plan needs to adapt. Review your budget and financial goals at least annually, or whenever there’s a major life event, like a PCS move or the addition of another child to your family.
• Manage Your Debt: High-interest debt, like credit card debt, can cripple your financial health. Careful budgeting and a solid emergency fund can help you avoid taking on unnecessary debt in this new phase of life.
• Communicate Openly: Financial planning for a military family is a team sport. Talk openly with your partner about goals, concerns, and progress. Make sure you’re both on the same page and working together to achieve your shared family goals.

Embrace the Journey

Parenthood is a marathon, not a sprint.  There will be challenges and setbacks along the way, but by being proactive, intentional, and disciplined, you can build a strong financial foundation for your family that will provide security and peace of mind.

Working with a financial planner who understands the unique challenges of military families can prove invaluable. The financial planners at Military Financial Advisors Association understand your life and can help you develop a personalized financial plan, navigate complex financial decisions, and stay on track toward your family’s goals.

 

DoD announced that military members will soon have access to a healthcare Flexible Spending Account (FSA).  FSAs allow members to elect to have a portion of their pay put into the FSA prior to taxes being taken out.  This money can then be used tax-free for qualified healthcare expense like co-pays, over-the-counter medicine, dental, and vision care.  This article will provide an overview of the DoD Healthcare FSA benefit, who should consider taking advantage of it, and some things you should watch out for.

What is a Healthcare FSA?

A Healthcare FSA is a valuable legal tax-avoidance tool that allows individuals to set aside pre-tax dollars for eligible healthcare expenses.  When you contribute to an FSA, you don’t pay federal, state, Social Security, or Medicare taxes.  This also reduces your taxable income, which lowers your overall tax liability.

The funds in an FSA can be used for a wide range of medical expenses which are specified by the IRS. They include copays, deductibles, prescription medications, and even some over-the-counter items. Unlike Health Savings Accounts (HSAs), which are typically paired with high-deductible health plans, FSAs are available to a broader range of individuals and do not require a specific type of health insurance plan.  One key feature of FSAs is the “use-it-or-lose-it” rule, which means that any funds not used by the end of the plan year may be forfeited.

The DoD Healthcare FSA

The DoD Healthcare FSA offers a range of benefits specifically tailored for active-duty service members and reservists. The following members are eligible to participate:

• Members of the regular (active) component
• Reserve component members performing Active Guard Reserve (AGR) duty
• National Guard members performing Active Guard Reserve (AGR) duty
• Members of the U.S. Coast Guard Reserve, including Reserve Component Managers, when performing active duty for more than 180 days

The FSA allows participants to contribute between $100 and $3,300 annually.  Each Servicemember can open an account so mil-to-mil couples could contribute up to $3,300 in two separate accounts for a total of $6,600.  Participants can roll over up to $660 in unused benefit to the following year if they are still enrolled in the program.  Enrollment for the DoD Healthcare FSA is managed by FSAFEDS, and there is a special enrollment period in March 2025.  Participants will manage this benefit through the FSAFEDS portal.

After the special enrollment period, normal enrollment periods will typically be in mid-November to mid-December for the following calendar year.  Eligible expenses must occur between 1 January and 31 December of the plan year to qualify for reimbursement.

Qualified Expenses

The IRS maintains the specifics on what are qualified expenses, but here is part of a graphic from the DoD Office of Financial Readiness.  Link to Full Document

Benefits Of An FSA

Without an FSA, you pay for any out-of-pocket medical expenses with after-tax dollars.  The Federal Government, possibly a state government, and Social Security and Medicare benefits have been deducted before you get that money.  Let’s look at an example to see the value of the FSA.

Today without an FSA

Let’s say you have a $70 bill for a co-pay.  You’ll just pay the $70.  If you trace that money back to your paycheck, you’re really paying more than that because you’ve paid taxes on that money.  You actually need to earn almost $100 If you’re in the 22% tax bracket to pay that bill.  $100-$22 Federal taxes – $7.65 Social Security and Medicare tax = $70.35.

With an FSA

Starting with that same $100, you contribute $70 to your account directly from your paycheck without any taxes being withheld.  Once you’ve paid the same $70 bill and submit the receipt, the FSA will reimburse you for the $70.  In this simple example, the other $30 will just go to your pay minus taxes.  $21 would actually hit your account to spend.

That’s not bad.  The estimates are using an FSA will save you about 30% on qualified expenses.  If you’re in a higher tax bracket, it’ll be higher.  If you have $3,300 in qualified expenses in a year, you could save almost $1000.

Other Considerations

You may be thinking an extra $1000 is great, I’m in.  Here are a few things to think about before jumping in.

Review The Qualified Expenses

Make sure you review last year’s qualified expenses and think about healthcare you might need for next year.  Single members in the military get most of their healthcare through DoD.  You may not have $3300 worth of qualifying expenses and this is use it or lose it (minus $660 you can rollover).  You don’t want be the one going to the drug store in late December to buy $150 in Tylenol and cold medicine because you over contributed.

Filing Receipts To Get Reimbursed

Are you someone who tracks expenses and are detailed enough to file to get reimbursements?  It is definitely easier if you have several bigger expenses like a $2000 bill for braces than having to save and file forty $25 receipts.  The Return on Hassle factor is real.  Saving 30% is great, but if you don’t file and end up losing some money by not claiming you’re in a worse situation than if you never signed up.

Retirement and Separation

You’ll want to review how the plan will work in your separation and retirement year to make sure you don’t end up losing money and are still able to fully participate.

Wrap Up

The new Healthcare FSA can be another powerful tool in your financial toolkit if you use it well.  Be on the lookout for signup information in March 2025.  If you’re reading this after that, consider signing up during the open season typically in November/December of each year.

Questions about whether it makes sense for you to opt-in to this other military or retiree benefits.  Talk with one of the MFAA financial planners.

FINRED Resources

DoD Healthcare FSA Site

DoD Healthcare FSA FAQ 

DoD Healthcare FSA Fact Sheet

DoD Healthcare FSA Eligible Expenses

“20 Good Years” 

 

The Basics of a Reserve Component Retirement 

If you’re a traditional or individual reservist or a member of your state’s national guard, you’re consider a member of the reserve component with the potential to earn a military pension and other retirement benefits like those available to active duty servicemembers.  The primary threshold for members of the reserve component to earn retirement benefits is serving at least twenty years of qualifying service, known as “20 good years.” (See this DFAS page for specific details on what qualifies as a good year.)

Throughout this blog we’ll refer to reservists and Guard service members as simply reserve members.  

You’ve made it to “20 Good Years” now what? 

One of your first decisions is if you want to continue to serve or not.  Once you’ve successfully earned twenty qualifying years of service, you have the option to either continue serving with the opportunity to earn additional qualifying years of service, add to your retirement point total, and potentially promotions in rank as a member of the Ready Reserve.  Or you can decide to stop serving or drilling with your unit while you wait to qualify for retired pay.  In this case, if you have not yet reached your 60th birthday, you enter what is known as the gray area.  

What do you mean Gray Area? The Department of Defense defines a Gray Area Retiree as a reserve member who has qualified for retired pay and completed their military service but who is not yet at the age where they can begin receiving their retired pay.  This is an important designation when it comes to both your military pension and your access to benefits like Tricare, space available travel and the commissary which we will detail below.  Let’s start with when you become eligible to receive your military pension and how that pay is calculated before we look at the reserve component survivor benefit and healthcare options. 

How is retired pay calculated for a reservist? The specific calculation of your retired pay benefit depends on many factors including which retirement system you qualify for, either legacy or the blended retirement system, how many good years and service points you have earned, and what rank you have achieved.  The DOD has a comprehensive tool to help you estimate your reserve component retired pay. 

When does Retired Pay start? In most cases, reserve members’ retired pay begins at their 60th birthday; however, since 2008 reserve members have been permitted to reduce their retired pay age from 60 to as early as age 50, when they have completed sufficient qualifying service on active duty orders in support of contingency operations or qualifying national emergencies.  Each 90 days of qualifying active duty service reduces their retired pay age by three months.  

This earlier retired pay start date is known as a Reduced Retired Pay Age (RRPA).  As an example, if a reserve member completed a qualifying 365 day active duty activation in support of contingency operations and successfully completed the verification of this active duty service with their service, they could reduce their retired pay age by four 3 month increments, reducing their retired pay age by 12 months or from age 60 to 59.

Importantly, a reserve member should verify any qualifying active duty orders with their personnel center well in advance of applying for their retired pay.  In fact, reserve members can verify orders while they are still serving, and their orders and personnel documents are still readily available. Fair warning, each service component’s verification process differs and can require substantial lead time to ensure accuracy. 

There are rare instances where a reserve member might continue to serve beyond their 60th birthday.  In these cases, the retired pay age is delayed until they complete their service.   

Is retired pay automatic? No. It’s also important to remember that reserve members need to apply for their retired pay using DD Form 2656.  This application is made no earlier than 12 months and no later than 6 months prior to the retiree’s 60th birthday or RRPA, each service has their own specific instructions for applying for retirement pay.

What about the Reserve Component Survivor Benefit Plan? 

In a previous post, I detailed the importance of an active duty servicemember’s Survivor Benefit Decision.  While there are many similarities between the active duty and reserve component SBP, one of the key differences is when you make the decision, known as the SBP election, and when your survivors might be eligible to begin receiving the annuity.   

What is the Survivor’s Benefit Plan?  The most important fact to know about the amazing military pension you’ve earned during your 20+ years of service is that it ends at your death.  The only way to ensure your spouse and/or your dependents continue to receive a portion of your retired pay is to sign up for the Survivor Benefit Plan.  

In the event you pass away before your spouse or your dependent children, SBP continues to pay an inflation adjusted monthly benefit, known as an annuity payment, to your survivors.  If you’re married and/or have dependent children, chances are they rely on your military pay or pension for a portion of their monthly living expenses.   

If your family depends on your income, then your Reserve Component SPB decision is critical to your financial plan.  

What is the Reserve Component Survivor Benefit Plan?  The Reserve Component SPB is like the active duty SPB in that it pays an inflation adjusted annuity to your surviving beneficiaries if you have earned a military pension.  Because a reserve member could qualify for a military pension at an age substantially earlier than they would be entitled to receive their reserve military pension, the key differences between the Reserve Component and Active Duty SBP center around this Gray Area gap. 

When is the Reserve Component SBP Decision Made?

The first important difference between the active duty and reserve component SPB is when you make your decision.  Because reserve component members might complete their military service years or even decades before they qualify to begin receiving their military pension, they are required to make their RCSBP election when they first become eligible for military retirement, when they reach “20 good years.”

The 20-Year Letter.  When a reserve member reaches twenty years of qualified service and becomes eligible to retire, they received an official Notification of Eligibility (NOE), often referred to as the “20-year letter.”  The window of opportunity to make an RCSBP decision begins upon receipt of this letter and lasts for 90 days.  Failure to make an election within this 90-day timeframe results in a default election of an immediate annuity (Option C below) based on your full retirement pay.  In other words, the default option is the maximum benefit, which is the only option available without notarized spousal consent.

Irrevocable Decision.  It is important to remember that your RCSBP decision is an irrevocable election, making this one of the most important decisions you’ll make in your career.  If you’re married and decide to decline RCSBP or accept less than the full RCSBP benefit, your spouse will need to sign off on that decision.  The rationale behind requiring your spouse’s concurrence is he or she has the most to lose if you decline the RCSBP benefit. 

What are the Three RCSBP Benefit Options?  Because a reserve member’s retirement from the military and the date they begin receiving their military pension could be decades apart, the RCSBP decision offers three different options for when or if your dependent(s) would begin to receive the annuity in the event of your death.  

What are the Election Options?  When a reserve member makes their RCSBP decision, they must first decide if they will provide their beneficiary a survivor annuity and when that annuity might begin. The RCSBP election centers around three options:

Option A: Decline  With Option A, a reserve member declines to make an election until reaching age 60 or their reduced retired pay age (RRPA).  In this case, the reserve member declines to accept the Reserve Component SBP and delays their SBP decision until they apply to begin receiving their military retired pay.  Because they have declined the RCSBP, if they die before reaching their retired pay age, their beneficiaries do not qualify to receive an annuity, ever. 

Option B: Defer  With Option B, a reserve member elects to defer the annuity until age 60 or their RRPA.  In this option, if the member dies before reaching their retired pay age, their beneficiaries will begin receiving the annuity at what would have been their member’s 60th birthday or their RRPA.  In this case, the dependents are protected by an annuity, but there is a delay in the start of the payments until the member’s retired pay age.

For example, if a reserve member (who did not reduce their retirement age) dies at age 51, their dependents would begin receiving the annuity when this member would have become eligible for retired pay at age 60. 

Option C: Immediate  With Option C, the member elects to begin RCSBP coverage immediately, even if they die before reaching age 60 or their RRPA.  In this case, if a reserve member makes this election at age 43 and dies at age 45, their beneficiaries begin receiving the annuity payment immediately without waiting until age 60.  

Spousal Concurrence.   If a married reserve member selects Option A or Option B, their spouse is required to sign off on their decision prior to the end of the 90 day election window.  Spousal consent is also required if the reserve member selects a base amount of less than the full retired pay.  In both cases, the DD Form 2656-5, RCSBP Election Certificate, must be signed by the spouse and notarized.  

Active Duty Retirement.  If a reserve member eventually achieves a full active duty retirement after making their RCSBP decision, the RCSBP decision is invalidated.  The member then qualifies under the active duty SBP rules and must make a new declaration when they retire from active duty. This is true whether the reserve member qualified for active duty retirement due to their length of service or for a medical disability.

What about Tricare? 

Lifetime access to health insurance is one of the most substantial benefits of military retirement.  Members of the Reserve Component can ensure continuity in healthcare coverage for their families throughout their transition through the gray area and into military retirement in three key age based phases.

Prior to Age 60. Once a reserve member enters the gray area, they have the option to access Tricare through the Retired Reservist Tricare program until reaching their 60th birthday.  It is important to note that Tricare eligibility is based solely on a member’s 60th birthday without regard to a reduced retired pay age.  The most noticeable difference between Tricare coverage for serving reservists and gray area retirees is the substantially higher monthly premium for coverage.  As an example, the monthly premium for a single Tricare Retired Reservist in 2024 is $585/month compared to only $52/month for a drilling reservist enrolled in Tricare Reserve Select. 

At Age 60. When a gray area retiree reaches age 60, they move to the Tricare Retired Select program with the substantially reduced premium available to active duty retirees.

At Age 65.  Finally, when a retired reserve member turns 65, they qualify for Tricare for Life in combination with their Medicare benefit.  

What about other military benefits? 

Retired reserve members including gray area retirees have access to many of the same great benefits that active duty retirees enjoy including access to the commissary and exchanges and depending on local policies, MWR facilities like the base gym. Gray area retirees can take advantage of Space A travel on military aircraft, but they are limited to flights within the continental US and only the member may travel.  

Concluding Thoughts

 

Earning a reserve component military pension and the healthcare benefits that come with can have a substantial positive impact on your financial plan and quality of life in retirement.  Working with a financial planner who understands your military benefits from firsthand experience can help you frame your reserve retirement decisions within the context of your family’s financial plan.  

If you’ve got questions about Reserve Retirements or other financial questions, consider setting up a meeting with one of the MFAA financial advisors.

The information provided in this blog is simply that, information.  It is not intended to serve as an individual recommendation and should not be relied on as investment or tax advice.

 

PCS Season: Organize Your Financial Life

 

Whether you’re motivated by an upcoming PCS or it’s simply time for a little desk drawer cleaning, the occasional purge of unwanted household items can feel like a fresh start. When you’re done cleaning out the closets, remember that same sense of accomplishment can be had when it’s time to tidy up your financial documents.  

If you’re setting out to “Marie Kondo” the piles of financial paperwork in your file cabinet and all that snail mail stacking up on your kitchen counter, the classic KonMari question – “does this bring me joy?” — won’t necessarily apply to your financial and tax paperwork.  (Even as a financial planner, taxes never bring me joy.)  

Do I really need 10 years’ worth of utility bills? 

By following a few simple rules, you can tackle the piles of paper and send your financial documents off to the shredder with a little gratitude.

Keep forever. Important life documents, especially those that are difficult to replace, should be kept in a “forever” file, preferably in a fire safe box or similarly protected.  

• Life documents: birth certificates, marriage certificates, death certificates, adoption papers, social security cards;
• Military service documents:  DD 214, VA disability certifications, and overseas deployment orders; 
• Education documents: diplomas, transcipts, certificates.

Keep “permanently.” Key financial and legal documents should be protected in a similar way to your forever documents, but these documents might need to be updated or replaced over time.  

• Estate planning documents: wills, powers of attorney, medical directives;
• Legal filings: trusts, inheritance, court orders, contracts, etc.
• Financial documents: mortgage/loan pay off documentation, life insurance documentation, etc.
• Investment documents: End of year statements serve as a historical record of all your contributions, distributions, and investment gains which could prove useful if you ever need to establish basis in an investment many years in the future.
• IRA Tax Form 5498: Your IRA trustee publishes this important documentation of your contributions, conversions and account balances each May;  
• Deeds & titles: deeds to property, titles of vehicles, certificates of authenticity, appraisals of artwork, antiques, jewelry, etc.
• Medical documents: your medical records, including your vaccination record.

For estate planning reasons, it’s helpful to keep all the “forever” and “permanently” documents in a safe place like a fire safe box.  It is also important to be sure your family members and potential executor know where and how to access them if necessary.  

“What about my tax documents?”

Keep At Least 7 years. The IRS can audit tax returns going back either 3 or 7 years, depending on their reason for the audit.  That makes at least seven years the better safe than sorry choice for tax related documents. 

• Tax returns including proof of your payment to the IRS and your state tax documents.
• Important tax documents like your W2, 1099’s, 1098’s, etc.
• Retirement contribution documents including your IRS Form 8606 if you have Traditional IRAs. 
• Supporting documents related to expenses written off including confirmation letters from charities you donated to, donation related credit card statements and canceled checks. This includes health care receipts if deducted on your tax return.
• Records for any business-related expenses including utilities, taxes, travel, purchases, etc.

Home ownership/rental properties: Documents related to the purchase, improvement or disposal of a home, property or business should be kept for at least seven years after the tax year during which you dispose of the property.  

This includes mortgage, title and tax documents, closing documents, loan pay off documents and any receipts for substantial improvements like additions or remodels that increase the value of the property.

Keep 1 year. Most monthly bills and bank/investment documents are accessible online, so there is little benefit to keeping them in paper form.  If you prefer to keep them in your physical file cabinet, you need only keep them for one year.  As mentioned earlier, end of year investment statements should be kept with your important documents.

Keep less than a year. Utility bills and credit card documents can be discarded once you’ve reviewed your bill for errors and paid the account.  You only need to keep these longer if you write them off as a business expense or otherwise take a tax deduction for them (see 7 years above). 

When in doubt, SHRED it!

Now that we know what to keep, let’s look at which documents need to be shredded instead of tossed in the garbage.  To protect your identity from the teams of fraudsters out there, you should shred any document with your social security number, account number, or any other combination of personally identifiable information including your name, address, date of birth or driver’s license details.  

Even “junk mail” contains an inordinate amount of PII; especially mail from banks and unsolicited credit card offers.  To help stem the flow of these annoying offers, the Federal Trade Commission provides several methods to “opt out” of specific types of junk mail and unsolicited offers.  

When in doubt, shred it.  You can either do this with a home shredder or take your pile of documents to a local commercial shredder.  Both the UPS Store and FedEx Store will shred your mountain of documents for a reasonable price, saving you the trouble of cleaning up the dusty mess yourself. You can also take advantage of free community and base wide shredding opportunities. 

An ounce of prevention … go paperless!

Now that you’ve tackled your collection of twenty-year-old canceled checks, it’s time to take this tidying up one step further – go paperless!  Your banks, lenders, and investment companies offer a wide variety of paperless record keeping options. Simply log into your account and subscribe to their paperless option.  At the end of the year, simply download copies of the important annual documents for your records.  Keeping important financial documents out of your mailbox is an important first step toward protecting your identity and simplifying your life. 

Happy sorting:)

Need help organizing your financial life.  The MFAA advisors can help and you can find them here.