The recent proposal from the Federal Retirement Thrift Investment Board to simplify the catch-up contribution process for Thrift Savings Plan participants age 50 and older will go into effect next year.
The Current Catch-Up Contribution Process
TSP participants eligible to make catch-up contributions currently are required to submit an election form called “TSP-1-C/TSP-U-1-C, Catch-up Contribution Election” (or electronic equivalent) to their employing agency. The catch-up contribution election form is separate, and in addition to, any other contribution election that a participant may already have on file.
Upon receipt of a catch-up contribution election form, the participant’s employing agency begins submitting catch-up contributions to the TSP on the participant’s behalf, using special payroll records designed specifically for catch-up contributions. The payroll records that employing agencies use for submitting catch-up contributions are separate, and in addition to, the payroll records that employing agencies use for submitting other types of contributions.
The TSP said that under this current system, plan participants were required to certify that they planned on meeting the IRC 402(g) elective deferral limit in order to make catch-up contributions, but this requirement was not always clear to participants or agencies/services. Also, when participants made catch-up contributions without meeting the elective deferral limit, they could miss out on matching contributions.
The current system will remain in effect through the end of 2020.
What’s Changing Under the New Catch-Up Contribution Process
Starting January 1, 2021, the new catch-up contribution process for the TSP will go into effect.
Known as the “spillover” method, the new process means that participants will no longer have to make separate catch-up elections in their electronic payroll systems. Employing agencies/services will submit catch-up contributions on the same payroll records used to submit the equivalent record for regular contributions. Those contributions will continue until catch-up eligible participants reach the combined elective deferral and catch-up limits for the year. Once this limit is reached, contributions that go beyond the limit will automatically start counting toward the catch-up contribution limit for eligible participants.
As part of the new process, the TSP system will determine whether or not a participant is eligible to make additional contributions toward the catch-up limit based on the participant’s date of birth. Participants are eligible to make catch-up contributions in any year in which they are 50 or older, including the year in which a participant is age 49 but will turn age 50 by the end of the calendar year.
For 2020, the standard annual contribution limit for the TSP is $19,500, and the catch-up contribution limit is $6,500 for federal employees aged 50 and older. Federal employees who meet these eligibility requirements can save up to $26,000 per year into their TSP accounts under the 2020 limits. The annual limits are announced by the IRS in the fall.