The Working Families Tax Relief Act of 2004, passed by Congress Sept. 23, provides only temporary relief from reduced tax benefits for an estimated 10,000 military members serving in Iraq, Afghanistan, and other combat areas.

Combat-zone tax exclusions typically boost take-home pay of those fighting overseas, but some military families recently have seen a net loss in tax breaks. The reason is that wartime tax exclusions disqualify them for more valuable tax breaks offered through the Earned Income Tax Credit (EITC).

Recent victims of the lost tax benefits—more than $4,200 a year for some—have been lower-grade enlisted members or junior officers who served at least seven months in a combat zone, were married with children, and had little or no other family income.

The new law brings two years of relief—for tax years 2004 and 2005—from loss of EITC.

“It’s a victory, but there’s still more work to be done,” said a staff member for Sen. Mark Pryor (D-Ark.). Pryor was primary sponsor of the original Tax Relief for Americans in Combat Act (S. 2419), which got rolled into the larger tax bill.

Income earned in war zones is tax-exempt for enlisted members. Officer exemptions are capped, for 2004 at $6,315.90 a month. The exemptions affect EITC by lowering the service member’s taxable income below qualifying thresholds. For example, earned and adjusted gross income must be below $33,692 for a worker with more than one qualifying child (or $34,692 if married, filing jointly).

EITC eligibility not only lowers tax bills but can provide refundable tax credits. Because lower-income military families don’t pay income taxes anyway, eligibility for combat tax exclusions can wipe out tax credits which otherwise would have boosted family incomes.

The new law reverses this effect by allowing tax-exempt combat pay to be counted as earned income for purposes of EITC. Because the change is not permanent, however, lower-income members who serve in combat zones in 2006 and later would again lose EITC unless Congress acts.

“Too Offensive”

The House in September took steps to block the sale of questionable financial products to military members after a hearing by a House Financial Services subcommittee confirmed reports of scams and abuses.

The Military Personnel Financial Services Protection Act (H.R. 5011), a bill offered by Rep. Max Burns (R-Ga.), would end on-base sales to service members of high-priced securities and controversial life insurance products.

The bill specifically would ban “mutual fund contractual plans,” an investment option that “disappeared from the civilian market 20 years ago,” Burns said, but continues to be “pawned off on unsuspecting young service people as part of ‘approved’ savings and insurance plans.”

Such investments carry sales commissions as high as 50 percent on first-year contributions by buyers. Most reputable mutual fund charges are less than six percent annually.

H.R. 5011 also would allow state insurance laws to apply on federal military property, removing a protective bubble for insurance companies that have sold overpriced policies to service members as investments.

Finally, the bill would mandate that insurers conducting business on base disclose to service members the availability of government-subsidized life insurance instead of more costly products. Insurers who fail to comply with the new law could be barred from bases and see their state insurance licenses revoked.

Panel chair Rep. Richard H. Baker (R-La.) called the peddling of high-priced financial products to service personnel “almost too offensive for words.”

Full-committee chairman Michael G. Oxley (R-Ohio) said the abuses are not isolated incidents but involve “some of the biggest names in the mutual fund business.”

He said it is unconscionable if, as reported, firms use retired military officers to make sales pitches for mutual funds with inflated commissions.

Elizabeth W. Jetton, president of the Financial Planning Association, said young service members with families can buy government-subsidized coverage known as Servicemembers’ Group Life Insurance. For those who want more coverage, Jetton noted, $167 a year in premiums can buy for a young enlisted member another $250,000 twenty-year term policy. By contrast, the “seven-pay, twenty-year term” policy marketed on military bases has a death benefit of less than $30,000 and first-year premium of $900.

Oxley said it’s “a systemic problem that needs to be fixed.”

Unlimited Mobilizations?

Facing critical personnel shortages for a protracted war on terrorism, defense officials recently considered removing a 24-month cumulative limit on the length of time individual Guard and Reserve members can be mobilized involuntarily, the Government Accountability Office revealed.

In a lengthy report on a range of mobilization and demobilization issues, GAO auditors explained that partial mobilization authority for a national emergency has limits. It allows involuntary call-ups of not more than a million reserve component members at a time, and for not more than 24 consecutive months of service.

Soon after the Sept. 11, 2001, terrorist attacks, DOD issued more specific guidance, telling the services to limit initial mobilizations to 12 months and allowing service secretaries authority to extend orders an additional 12 months—as long as “cumulative service” for individuals did not exceed 24 months.

The demands of Iraq and Afghanistan are high. GAO said it is possible that, if DOD continues the more relaxed 24-month cumulative rule, it “will run out of forces.”

One way to expand the pool of available reserve personnel would be to drop the cumulative rule. If it did, DOD could mobilize forces for fewer than 24 consecutive months, send them home for an unspecified period, and remobilize them, over and over. Repeating this cycle would essentially produce an unlimited flow of forces, said GAO.

However, defense officials told auditors they have decided to retain the 24-month cumulative ceiling for involuntary mobilizations.

GAO suggested that is not a good idea. Because availability of reserve component forces “is greatly influenced” by how partial mobilization authority is used, GAO said, it’s time for DOD to replace its piecemeal approach, with its focus on short-term service needs, with a broader strategic framework aimed at meeting longer-term personnel requirements for a long global war on terrorism.

Reserve Retirement

Another GAO report has tossed cold water on potential legislation to lower the age at which reserve retirement begins.

Faced with a slew of bills to drop the threshold age for payment of reserve annuities from 60 to 55 or younger, Congress asked GAO to weigh potential costs against the benefit of retaining more reservists.

GAO concluded that it cannot determine whether the services are keeping enough reserve members for 20 years or more because DOD doesn’t collect adequate reserve attrition data. However, GAO believes Congress should move cautiously, or perhaps not at all, in changing reserve retirement. It listed five reasons:

Costs. Lowering the age at which annuities start would boost retirement fund obligations and defense budgets a combined $4 billion to $35 billion over 10 years. The totals include both the cost of providing earlier annuities and earlier health benefits.

Few Gain. Because only one out of four reservists serves long enough to retire, earlier annuities won’t benefit most reservists serving in Iraq and Afghanistan. At the same time, many reservists who never deployed for war would see the value of their retirement raised.

Better Alternatives. There are more efficient ways to raise compensation of deployed reservists, including hazardous duty pay, family separation allowances, and a new, still unused special deployment allowance for military personnel who see frequent or longer deployments.

Shifting Skills. DOD is shifting skills previously concentrated in the Guard and Reserve to active duty forces. This should relieve operational stress for reservists in high-demand occupations, GAO said, thus reducing the need for improved retirement.

Side Effects. Changing reserve retirement could have unintended consequences on the services’ ability to keep active duty forces. For example, if reserve retirement is changed to provide immediate annuities after 20 years—as one bill proposes—some members who planned to remain on active duty until retirement might leave to finish careers as reservists.

Part B Fix Pleases, Baffles

Tricare and the Centers for Medicare and Medicaid Services moved in September to implement the Medicare Part B waivers that Congress enacted last December. But a requirement that younger retirees with Medicare-eligible disabilities pay Part B premiums for the first time caught some retirees by surprise.

The government granted relief in September to 60,000 military beneficiaries who faced financial penalties or loss of Tricare eligibility because they delayed enrollment in Medicare Part B after reaching age 65 or after qualifying for Medicare and Social Security disability payments.

Changes mandated by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 impact a mix of retirees, family members, survivors, and un-remarried former spouses. They fall into three categories:

As welcome as surcharge relief is for many Medicare-eligible retirees, automatic Part B enrollment confused and even angered some under-65 retirees. What some disabled retirees didn’t understand, say officials, is that, by law, they were ineligible to use Tricare, despite the access granted in error, until they enrolled in Part B. The government was complicit in the error, doing a poor job tracking and communicating with this group.

When the magnitude of the glitch was discovered last April, defense officials initially moved to cut off Tricare access. Under pressure from service associations, Tricare eligibility for the disabled retirees was restored. They now are enrolled automatically in Part B, and, from now on, Tricare and Medicare will cross-match data on this beneficiary population at least monthly.

USFSPA Court Challenge

Federal District Court Judge James C. Cacheris of Alexandria, Va., heard arguments Sept. 10 on a government motion to dismiss a court challenge to the 1982 Uniformed Services Former Spouses Protection Act, which claims the law is unconstitutional. (See “Action in Congress: Divorced Retirees File Lawsuit,” August, p. 23.)

The judge, acknowledging much public interest in the case, said he might need up to eight weeks to rule on the motion. If he denies the motion, the litigants will present fuller arguments on the merits of the case at a future date.

The legal challenge in Adkins, et al vs. Rumsfeld is brought by 58 divorced service members and retirees who formed the ULSG (USFSPA Litigation Support Group). They charge widespread violations of “due process” and “equal protection” rights in the way the law is written and enforced.

The USFSPA allows state courts to divide military retirement as marital property in divorce settlements.