Edward A. Zurndorfer, Certified Financial Planner

On November 21, 2012, the Thrift Savings Plan (TSP) announced temporary changes to the financial hardship in-service withdrawal rules for participants affected by Hurricane Sandy.

These changes allow participants who were affected by the hurricane, or who had a family member living in the area affected by Hurricane Sandy, to take a TSP hardship in-service withdrawal. But unlike the normal TSP hardship in-service withdrawals in which participants who make such withdrawals are not permitted to contribute to the TSP for the six month period following the hardship in-service withdrawal, a hardship in-service withdrawal requested because of Hurricane Sandy will not result in a six month contribution suspension following the hardship withdrawal.

A TSP hardship in-service withdrawal applies to current employees younger than age 59.5 with a TSP account. Note that current employees age 59.5 or older with a TSP account are permitted to request a one time age-based in-service withdrawal via form TSP-75. An age-based in-service withdrawal need not be "justified". Withdrawn TSP funds via an age-based in-service withdrawal can be used for any purpose, including paying for losses caused by Hurricane Sandy. The TSP participant will have to pay full federal and state income taxes on the amount withdrawn but no 10 percent early withdrawal penalty.

Under the normal rules for a TSP hardship in-service withdrawal, a TSP participant who is approved to make a hardship in-service withdrawal must pay federal and state income taxes on the amount withdrawn, a 10 percent early withdrawal penalty, and is suspended for contributing to the TSP for the six month period flowing the withdrawal. But those TSP participants who are eligible to make a TSP hardship withdrawal because of Hurricane Sandy will not be barred from contributing to the TSP for the six month period following the hardship withdrawal. This also means that FERS-covered employees will not miss their agency TSP matching contributions following the six month hardship in-service withdrawal.  However, participants who make in-service hardship withdrawals will have to pay federal and state income taxes and a 10 percent early withdrawal penalty.

If an employee wants to stop their TSP contributions for any reason, they need to complete Form TSP-1, Election Form (TSP-U-1 for uniformed services) or use their agency or service's automated system.

As of November 21, 2012, the TSP will treat any financial hardship in-service withdrawal request via form TSP-76 as a qualifying hardship withdrawal provided the TSP participant meets all of the following criteria:

1.       A TSP participant's primary residence or place of employment must be located in a covered disaster area and the participant must have incurred a loss as a result of Hurricane Sandy. Covered disaster areas are those areas of the US identified by the Federal Emergency Management Agency (FEMA) for individual assistance due to Hurricane Sandy. These areas of the US include:

• In Connecticut: Fairfield, Middlesex, New Haven and New London counties, and the Mashantucket Pequot Tribal Nation located within New London County.
• In New Jersey: The counties of Atlantic, Bergen, Burlington, Camden, Cape May , Cumberland, Essex, Gloucester, Hudson, Hunterdon, Mercer, Middlesex, Monmouth, Morris, Ocean, Passaic, Salem, Somerset, Sussex, Union and Warren.
• In New York: The counties of Bronx, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Sullivan, Suffolk, Ulster and Westchester.
• In Rhode Island: Newport and Washington counties

Or

2.       A TSP participant's hardship in-service withdrawal will be used to assist an eligible family member who lives or works in a covered disaster area and who incurred a loss as a result of Hurricane Sandy. An eligible family member includes a son, daughter, parent, grandparent or other dependents who lived or worked in the disaster area.

The IRS allows the TSP to ignore the limitations that normally apply to financial hardship in-service withdrawals, thus allowing the TSP hardship withdrawal to be used, for example, to pay for food and shelter.

• SPOUSES' RIGHTS: For those employees who are married (even if separated from a spouse), spouses'    rights apply to the financial hardship in-service withdrawal from your account as follows:

If an employee cannot obtain a spouse's signature (FERS and uniformed services), or if an employee does not know a spouse's whereabouts (CSRS), then the employee must provide the spouse's Social Security number on the form and submit Form TSP-16, Exception to Spousal Requirements (or TSP-U-16 for uniformed services), along with the required documentation.

A TSP participant affected by Hurricane Sandy can also apply for a general purpose loan and use the loan proceeds to help pay for damages and losses caused by Hurricane Sandy. With a TSP general purpose loan, a TSP participant has up to five years to pay back the loan and can continue regular contributions to their TSP account. The participant would pay interest to himself or herself at the current Government Securities (G) fund interest rate, currently less than two percent.

Posted: 11/26/2012

About the Author

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD -- and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD.  Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.