U.S. workers worried about a pending proposal that would eliminate a post-retirement tax-free period for them are understandably upset and confused. Most of them had made that tax-free period part of their retirement financial planning.
The Democratic-controlled House Ways and Means Committee has tentatively approved a Reagan administration plan that affects that tax-free period.
Under current law, contributions to pension plans by federal workers, state government employes and other who pay into their own retirement plans (which have already been taxed as part of salary) aren't subject to federal taxes until the employe has retired and recovered those contributions. For the typical civil servant, that tax-free period lasts about 18 months, but it can run as long as three years.
A provision of the tax reform plan would eliminate that tax-free period.
The Ways and Means Committee said many reports of the plan -- including ours last Tuesday -- caused eligible retirees to worry unnecessarily.
In the Tuesday column we warned employes that they might have to retire as early as Dec. 3 to beat the proposed tax change.
That was based on the assumption that the tax bill would become law and on current civil service retirement rules that make the third of the month an important cutoff time for any retirement.
The confusion dates from a rules change Congress made several years ago solely to give a special pay-pension break to about-to-retire members of Congress. It allows workers, or legislators, to retire on the third day of the month with an annuity commencing the next day. Persons retiring after the third day must wait until the next month before their pension begins.
That change was designed so outgoing members of Congress can stay on the payroll until their successors are sworn in during January and then get an immediate pension. Many federal union experts felt that this provision could trip up employes eager to retire and avoid the pending tax change. But the committee says it has taken that into account in its proposal. Here is the committee's official explanation of what it did and what it means:
"The committee agreed to reverse the ordering rules with respect to distributions . . . ; that is, distributions would be treated as being made first out of taxable amounts (employer contributions plus income) and then out of nontaxable employe contributions. This proposal would be generally effective for distributions made after Dec. 31, 1985, but would not apply to benefits accrued prior to Jan. 1."
So, that is the official explanation of what the committee has done. Translated from its legal language it means a major change in the tax situation for persons retiring next year and in future -- if it becomes law.
Nobody knows when, or if, the tax changes will become law.
Nor does anybody know what final form the bill will take. But if the current House bill becomes law, people who want to escape the tax changes have just over a month to decide whether to retire.
Tomorrow we will talk about what the changes -- if they are made -- would cost you, and about the possible mass exodus it could trigger among senior civil servants.