Legislation has been introduced that is intended to help federal employees financially during the partial government shutdown in the event it lasts more than a few days.
The Emergency Relief for Federal Workers Act (S. 2966) was introduced by Senator Tim Kaine (D-VA) and would allow federal employees to withdraw from their TSP accounts without penalties and ensure that the funds could be put back at a later date. Companion legislation was introduced in the House (H.R. 5674) by Congressman Don Beyer (D-VA).
Main Features of the Emergency Relief for Federal Workers Act
Automatically Classify Shutdowns as Financial Hardships
Under current regulations, Thrift Savings Plan (TSP) participants must certify—under penalty of perjury—that they are experiencing a financial hardship and that their withdrawal request does not exceed the hardship amount. This bill simplifies that process by automatically recognizing government shutdowns lasting two weeks or more as qualifying financial hardships, removing the need for additional documentation or justification.
Eliminate the 10% Early Withdrawal Penalty
Presently, federal employees age 59½ or younger face a 10% penalty for early withdrawals from their TSP accounts. The proposed legislation would waive this penalty during qualifying shutdowns, although standard income taxes would still apply to the withdrawn funds.
Enable Recontributing Withdrawn Funds
To help federal workers safeguard their retirement savings, the bill allows them to put back some or all of the funds they withdrew during the shutdown once normal government operations resume.
Guarantee Access to TSP Loans During Shutdowns
Existing rules restrict access to TSP loans if a shutdown is expected to last more than 30 days. This bill overrides that limitation, ensuring federal employees who miss paychecks due to a shutdown can still apply for and receive TSP loans.
Pause Loan Repayments and Deduct from Back Pay
Because TSP loan repayments are typically made via payroll deductions, the bill proposes an automatic suspension of these payments during a shutdown. Once the government reopens, any missed payments would be deducted from the employee’s back pay.
Prevent Missed Payments from Becoming Taxable Events
To protect employees from additional financial penalties, the bill prohibits missed loan payments during a shutdown from being treated as taxable distributions—thus avoiding the 10% early withdrawal penalty that would otherwise apply.
How Do TSP Loans Work?
Under normal circumstances, the Thrift Savings Plan (TSP) allows active federal employees and members of the uniformed services to borrow money from their TSP accounts through two types of loans: general purpose loans and primary residence loans.
A general purpose loan can be used for any reason and does not require documentation. It has a repayment term ranging from 12 to 60 months and includes a one-time processing fee of $50.
In contrast, a primary residence loan is specifically for the purchase or construction of a primary home and requires supporting documentation. Its repayment term ranges from 61 to 180 months, and it carries a $100 processing fee.
To be eligible for a TSP loan, participants must have at least $1,000 of their own contributions and earnings in their account, excluding any investments in the TSP’s mutual fund window.
The loan amount is repaid with interest, which is set at the G Fund rate from the month prior to the loan request and remains fixed for the life of the loan. Repayments are typically made through payroll deductions for those still in federal service. If a participant separates from federal service, he or she must repay the loan via direct debit, check, or money order.
Important Considerations Before Taking a TSP Loan
It’s important to consider the impact of a TSP loan on retirement savings.
The TSP notes that although participants repay the loan to themselves with interest, withdrawing funds temporarily reduces the account balance and therefore limits the potential for compound earnings. This becomes even more detrimental the longer the funds are out on loan. Over the course of several years, this can amount to thousands or even tens of thousands of dollars in lost growth.
Here’s a quick example using a hypothetical $30,000 TSP loan over 5 years, assuming an average annual return of 10%.
| Year | Value if Invested | Value if Loaned Out |
|---|---|---|
| 0 | $30,000 | $30,000 |
| 1 | $33,000 | $30,000 |
| 2 | $36,300 | $30,000 |
| 3 | $39,930 | $30,000 |
| 4 | $43,923 | $30,000 |
| 5 | $48,315 | $30,000 |
Lost growth over 5 years: $18,315
Even though the loan is repaid with interest, the borrowed funds miss out on market gains during the loan period which can be significant.
Consequences for Failing to Repay a TSP Loan
It is also important to consider that a TSP loan must be repaid, and there are financial consequences for not doing so. You are responsible for ensuring payments are accurate and timely, even if your agency misses a deduction.
The TSP notes that if your loan becomes delinquent, the IRS treats the taxable portion of the unpaid balance and interest as income. If you’re under 59½, you may also face a 10% early withdrawal penalty.
For active federal employees, a delinquent loan becomes a “taxed loan,” which permanently reduces your TSP balance unless repaid. It also counts toward your loan limit and affects how much you can borrow in the future. You can repay a taxed loan only while still in federal service.
If you separate from federal service, there are three options:
- Keep the loan active by setting up monthly payments by check, money order, or recurring direct debits.
- Pay off the loan by the required deadline.
- Allow the loan to be foreclosed and accept any taxable portion of the outstanding balance and accrued interest as taxable income.
The purpose of the Emergency Relief for Federal Workers Act is to address some of these financial consequences in the event that the current government shutdown lasts more than a few days. This table highlights the differences.
| Feature | Current TSP Loan Rules | Proposed Changes Under the Emergency Relief Act |
|---|---|---|
| Access During Shutdowns | Loans unavailable if shutdown expected to last over 30 days | Loans remain available even during extended shutdowns |
| Loan Repayment | Payroll deductions continue unless manually adjusted | Repayments automatically paused during shutdown; deducted from back pay afterward |
| Missed Payments | May trigger taxable distribution and 10% penalty if under age 59½ | Missed payments will not be treated as taxable distributions or penalized |
| Hardship Withdrawals | Must certify financial hardship under penalty of perjury | Shutdowns lasting 2+ weeks automatically qualify as financial hardship—no extra documentation needed |
| Early Withdrawal Penalty | 10% penalty applies if under age 59½ | Penalty waived during qualifying shutdowns (taxes still apply) |
| Recontribution of Withdrawn Funds | No formal mechanism to recontribute hardship withdrawals | Allows recontribution of withdrawn funds after shutdown ends to preserve retirement savings |
Emergency Savings – A Better Alternative
If possible, it is preferable to turn to cash savings in emergency situations rather than borrowing money from other sources. Having an emergency fund is always prudent for situations that can arise, whether it’s a government shutdown, an unexpected car repair, or a surprise medical bill.
Most financial planners recommend having 3 to 6 months of normal expenses saved in a separate savings account so it can be easily accessed in the event of an emergency. Depending on your circumstances, you might find you need more. A financial planner can help you determine what is best for your needs.
It can be challenging to build an emergency fund, especially if someone is struggling to pay off debts that he or she might owe. Developing a financial plan to create a budget, pay off debt, save an emergency fund, and then begin saving for the future (home purchase, kids’ college, retirement, etc.) can turn this goal into a reality. A financial planner can help with this as well, plus there are other resources, such as books, articles or online courses to help you get started. These are a few examples:
- Article: Keep Your Emergency Fund Out of Sight to Forget About It
- Article: 27 Proven Ways to Save Money
- Article: 5 Essential Steps to Start and Grow Your Emergency Fund
- Online Resource: How to Get Out of Debt
Once a government shutdown concludes, federal employees are guaranteed back pay, but unfortunately they may not receive their paychecks on a normal schedule until it is over. Having adequate emergency savings can help to weather the storm until it passes without having to resort to borrowing money from the TSP or elsewhere.
