Rule Change Will Facilitate Borrowing from TSP During Shutdowns

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By on February 6, 2019 in Pay & Benefits with 0 Comments

Empty nest with a yellow post it note sitting in the middle of it that reads 'IOU' depicting a TSP loan

The Federal Retirement Thrift Investment Board has issued an interim rule that will allow certain Thrift Savings Plan participants to request a loan during government shutdowns without regard to whether they are in pay status.

The new rule was published in the Federal Register and went into effect on February 5. It is currently open to comments, however, comments must be received by March 7, 2019.

About the Rule Change

Under the rule change, TSP regulations will be amended to allow certain TSP participants to request a loan during government shutdowns without regard to whether they are in pay status. In order to qualify, TSP participants have to be furloughed due to a partial government shutdown or excepted from furlough (i.e. working without pay) due to a partial government shutdown.

The FRTIB will permit TSP participants to request a suspension of loan payments to the extent a suspension is permitted under the IRS’s interpretation of the Internal Revenue Code.

Basis for the Rule Change

TSP participants are allowed to borrow against their retirement savings accounts. The FRTIB is required to report loans to the IRS as taxable income subject to a 10% penalty after a certain number of loan payments are missed.

However, loan payments cannot be made through payroll deduction if the participant is not receiving a paycheck. For this reason, the FRTIB regulations contain a provision that makes loan eligibility contingent on pay status.

The FRTIB notes that loans are not an ideal way for federal employees to raise money and were not designed to replace federal workers’ income. It stated in the Federal Register announcement, “TSP participants who take loans may miss out on the investment earnings that would have accrued if that money had remained [in] their retirement accounts. A TSP loan will still have to be repaid in order to avoid the loan being declared a taxable distribution.”

However, in deciding to issue the new rule, the FRTIB said that it hopes the change “might provide some assistance to TSP participants in the event of another government shutdown.”

About Interim Rules

The Federal Register says the following about interim rules issued by agencies:

An interim rule is a way to make a rule effective immediately, without public comment, when doing so is necessary to respond to an emergency situation. Interim rules are usually followed by a more permanent rulemaking which confirms that the interim rule will be adopted as final. Although this rule is effective immediately, the FRTIB will consider public comments before publishing the final rule.

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About the Author

Ian Smith is one of the co-founders of FedSmith.com. He enjoys writing about current topics that affect the federal workforce.

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