After the House passed the Defending Public Safety Employees’ Retirement Act (H.R. 2146) last month, the Senate passed its version of the legislation on June 4. However, an amendment was added to delay the bill’s start date by a year, sending it back to the House. Given that the Senate has passed it and the House had passed a previous version, it seems more promising that it might eventually be signed into law.
What would this legislation mean for federal employees in law enforcement? Dan Jamison of FERSGUIDE, a subscription based service for law enforcement officers, described it this way:
Beginning with TSP withdrawals made after 12/31/2015, LEO/FFs will be able to withdraw funds from the TSP in the amount of their choosing as long as they are 50 years of age and retired. This is similar to the current “55 rule,” in that your funds must remain at the TSP until age 59 ½ for you to take advantage of this new law. If you retire at age 50 and transfer your TSP funds to another custodian, you will lose the benefit of this legislation. Under the “55 rule” you have to work into your 55th year of birth and retire to benefit from the rule. Under this law, you are eligible for the benefit when you turn age 50. This will help those LEO/FFs that retired before age 50 with 25 years of service – as soon as they turn 50, this benefit will be theirs even though they didn’t work until age 50.
The new law is also written to benefit folks who are already taking payments from the TSP in the form of a life-expectancy withdrawal. If you are currently taking a life-expectancy withdrawal, you can change over to an amount of your choosing under the new legislation and it will NOT be considered a change of methodology. Normally, any change away from the life-expectancy-based payments would trigger the 10% penalty on all monies you’d withdrawn.
Before this law, LEO/FFs under the age of 55 at retirement could still get funds from the TSP penalty-free by using the life-expectancy payments, but these payment amounts are prescribed by law and you’re locked-in for the longer of 5 years of the number of years until you’d reach age 59 ½. After 12/31/2015, the retiree will be able to select the amount of their choosing and not be locked into a payment plan. In addition, a whole new option opens up for these folks; the LUMP-SUM Payment. Now, a retiree that is age 50 will be able to tap the TSP for a one-time lump-sum payment.
The big question is, how will the TSP implement this legislative change? I do not know, but my guess is that the TSP (in its usual stance of not being helpful to LEO/FFs) will not be proactive and will not make any changes to its 1099 system to accommodate us. All that means is that although the TSP should send certain folks 1099s with the Box 7 checked for Code 1, an early distribution that is not penalized due to an exception. I predict they will send a 1099 with Box 7 checked for Code 2, an early distribution with no known exception. I predict that the TSP will say that they do not have the records to indicate who is a LEO/FF and who’s not, so they have no responsibility to code this correctly. It will be up to the retiree to file a Form 5329 with their Form 1040 to show that their distributions were not subject to penalty. The updated FERSGUIDE will have further guidance on this.