Yes, then you've paid off your original subsidy and qualify for the new one when you re-up. So you'd pay the standard $99, $199, $299 depending on model.
They're essentially splitting the difference. Unsubsidized price of the 32GB phone is $699. 3G owners who are not currently upgrade-eligible get half the subsidy at $499, if they sign up for another 2 years. New buyers get it all at $299.