New TSP Hardship Withdrawal Option Likely Coming Soon

February 15, 2020 8:14 AM , Updated March 3, 2020 11:55 AM
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The Federal Retirement Thrift Investment Board has published a proposed rule in the Federal Register that would expand hardship withdrawal options in the Thrift Savings Plan.

Under the proposal, TSP participants would be allowed to make hardship withdrawals for expenses and losses (including loss of income) related to natural disasters.

Regulations currently allow in-service withdrawals from TSP accounts based upon four different types, or conditions, of financial hardship experienced by participants:

  1. Negative monthly cash flow;
  2. Certain medical expenses of participant and his or her spouse or dependents;
  3. Payments for repairs or replacement of property resulting from personal casualty losses; and
  4. Attorney’s fees and court costs associated with a participant’s separation or divorce.

In the past, the TSP has had to rely on relief and guidance issued by the Internal Revenue Service (IRS) which made disaster relief announcements to allow participants in private sector 401(k) plans to take hardship withdrawals for natural disaster expenses and losses. When the IRS issued these announcements, TSP participants could then make hardship withdrawals for natural disasters as well.

However, the IRS recently announced that it will discontinue its practice of issuing disaster relief announcements and has instead added natural disasters to its safe harbor list of financial hardship expenses if the incident is declared by the Federal Emergency Management Agency (FEMA) to be a natural disaster and the participant’s principal residence or principal place of employment at the time of the disaster was located in an area designated by FEMA for individual assistance with respect to the disaster.

Because of this history and the change by the IRS, the FRTIB proposes to follow suit with the TSP and include expenses and losses resulting from natural disasters permissible for hardship withdrawals if the disasters meet the aforementioned IRS guidelines.

Comments on the proposal are currently being accepted until March 16, 2020.

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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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