Government workers could get their pension plan contributions back in a tax-free lump-sum payment when they retire, under a little-noticed provision in a bill signed Friday by President Reagan that creates a new retirement program for 400,000 recently hired civil servants.
The bill, which contains an amendment to the current civil service retirement law, could help millions of federal, state and local government workers who stand to lose a major benefit -- a tax-free period after retirement -- under the tax reform bill approved by the House and pending in the Senate.
Under current law, persons who contribute to their own pension plans -- and this includes 20 million federal, state and local government workers plus some private industry employes -- are not taxed on their pensions until they have recovered all the money they paid into the system. Those contributions have already been taxed while the individuals worked. The recovery period can last for three years, but the typical federal retiree gets back all contributions in about 18 months.
The tax reform bills in Congress would eliminate the recovery period. The Senate plan would phase it out beginning in January 1988. The House-passed bill would eliminate the recovery period next month. If that provision of the tax reform act eventually becomes law, it would mean that persons retiring after the effective date would have to begin paying taxes immediately on a prorated share of the government's contribution to their pension plans. The Federal Government Service Task Force estimates that eliminating the recovery period would mean a $10,000 tax bite in the first three years of an individual's retirement.
Federal agencies report an upsurge in June retirements as many employes decided to play it safe and retire this month, to beat the deadline called for in the House tax reform bill.
The amendment in the new pension tax bill would allow employes the option of getting their contributions back when they retire in a tax-free lump-sum payment. By doing so, Senate sources estimate, the retiree would be reducing his or her own annuity on average by between 8 and 10 percent.
That new option, however, may be short-lived. The Senate Finance Committee's tax reform proposal would apply the prorated tax to lump-sum pension payments. The House bill does not contain that provision.
When the Senate finally approves a tax reform bill, the bill will go to a Senate-House conference. The conference will attempt to come up with a compromise tax reform package.
Until the final version is cleared by Congress, federal workers won't know whether the recovery period is to be eliminated and, if it is, what the effective date will be. Nor will they know whether the new amendment, permitting workers to elect lower pensions in return for tax-free lump-sum payments of their contributions, will be allowed to stand.
Sour (Signing) Note
Federal and postal organizations that worked on the new pension plan were not invited to the White House signing ceremony Friday. Union officials say a senior White House aide barred them because members of the National Treasury Employees Union have been picketing periodically at Lafayette Park to protest administration policies toward federal workers.
Uninvited employe groups had their own ceremony at the Democratic Club. Joining the "outs" were Reps. Steny H. Hoyer (D-Md.), Mary Rose Oakar (D-Ohio) and William D. Ford (D-Mich.), who declined invitations to the White House.