Federal Employees Need to Be Careful in Contributing Their Salaries to the TSP
Edward A. Zurndorfer, Certified Financial Planner
Each year, most federal employees decide how much of their salaries they want to
allocate to the Thrift Savings Plan (TSP).
Employees may contribute to the TSP directly (via payroll deduction) in one
of two ways, namely:
(1) "regular" contributions and
(2) "catch up" contributions for those employees who will be at least age 50
by December 31. For the year 2010, every federal employee -- no matter which
retirement system an employee is covered by which are CSRS, CSRS-Offset, or FERS
-- may contribute to the TSP a maximum $16,500 ("regular" contributions). An
additional $5,500 in "catch-up" contributions are allowed for those employees
who will be at least age 50 by Dec. 31, 2010 and who contribute the full $16,500
"regular" contributions during the year.
The $16,500 is termed the IRS' elective deferral limit ($16,500 was the same
limit for 2009). If an employee had elected to contribute the maximum $16,500 to
the TSP during 2009, then the same $16,500 would be automatically contributed
during 2010 without any additional action by the employee. However, an employee
must formally elect each year to make "catch-up" contributions.
Only employee contributions are included in the annual elective deferral
limit. Elective deferrals do not include agency automatic contributions (one
percent of the employee's gross pay), partial agency matching on employee
contributions, or "catch-up" contributions. Note that only FERS employees
receive agency automatic contributions and matching contributions which are not
considered part of an employee's gross salary.
Section 402 of the Internal Revenue Code sets a limit -- called the annual
elective deferral limit -- which an employee may contribute via payroll
deduction to all defined contribution plans that an employee participates in
during any given calendar year. Defined contribution plans include 401(k) plans,
403(b) plans and the TSP.
When the annual elective deferral limit is reached, an employee's
contributions will be suspended for the remainder of the calendar year. The TSP
system will not allow any employee payroll contribution to be processed that
will cause the total amount of employee contributions for the year to exceed the
annual deferral limit. But what happens if an employee participates during the
year in more than one defined contribution plan? For example, a federal employee
is also a member of the Ready Reserve and contributes to the TSP as a federal
employee. The employee also contributes to the TSP as a member of the uniformed
services. In that case, it is the responsibility of the employee to ensure that
the total contributions do not exceed the annual elective deferral limit. For
example, if the employee during 2009 or 2010 contributes $3,000 to the TSP as a
member of the uniformed services, then the employee may contribute during 2009
or 2010 no more than $13,500 to the TSP as a civilian employee.
If an employee has contributed an excess deferral amount to the TSP and to
another defined contribution plan during the year, then the employee needs to
request - in a timely manner - a refund of any excess deferrals from one or more
of the plans in which the employee participates. Any plan that has been
contacted by the employee will return excess deferrals plus associated earnings
by April 15 of the year following the year in which the deferrals were made. To
request a refund of excess deferrals and associated earnings from the TSP, the
employee must request and complete form Request for Return of Excess Employee
Contributions to Participant by calling the TSP at 1-877-968-3778 or
404-233-4400 if the employee lives outside the United States and Canada. The
completed form must be sent to the TSP no later than March 31 of the year after
the excess deferral was made. The return address is on the form. The TSP will
process the refund and reimburse the employee before April 15. Forms received
after March 31 will not be processed.
If an employee contributes more than the elective deferral limit in any one
year through participation in more than one defined contribution plan, then the
excess deferrals must be treated as income in the year the contributions are
made. Note that this is the case whether or not the excess contributions are
refunded. The total amount of retirement plan contributions -- commonly called
deferred compensation -- is reported to the employee in box 13 of the employee's
Form W-2. If the employee has made excess retirement plan contributions
(deferrals) then the employee must report on his or her federal and state income
tax return as taxable wages the total amount of the excess contributions for the
year in which the employee made the excess deferrals.
Those employees who elect to receive excess deferrals as a refund from the
TSP will receive IRS Form 1099-R which indicates the amount of the excess
deferrals that were refunded. Those employees who have filed their income taxes
but who have not reported any excess deferrals as taxable wages will need to
amend their taxes and report the excess deferrals for the year of excess
deferrals.
Earnings that are distributed with excess deferrals are considered taxable
income in the year in which they are distributed. This is unlike the excess
deferrals themselves -- contributions via payroll deduction are considered
taxable income in the year they are contributed. The income which includes
interest, dividends, and /or capital gains will be included on the employee's
tax return for the year the income is received.
The employee's agency will be notified by the TSP of the employee's request
for a refund of the excess deferrals and associated earnings. The agency is then
required to remove from the TSP any agency matching contributions associated
with these excess deferrals.
The distribution of the excess deferrals to the TSP to the employee will not
be considered as an early withdrawal from the TSP if the distribution is made by
April 15 of the tax year following the year in which the excess deferral was
made. It will therefore not be subject to the IRS' 10 percent early withdrawal
(pre-age 59.5) penalty.
If an employee reaches the annual elective deferral limit for the year, then
the employee contributions must be suspended for the remainder of the calendar
year. The TSP system will not allow any employee contributions to be processed
that will cause the total amount of employee contributions for the year to
exceed the annual limit.
FERS employees who reach the annual elective deferral limit before the last
pay date of December will also lose out on any agency matching contributions for
the remainder of the calendar year. Agency matching contributions -- but not the
automatic one percent of an employee's basic pay -- are based upon the amount of
employee contributions that are made each pay date. If there are no employee
contributions on a given pay date, then there can be no agency matching
contributions.
In order for a FERS employee to receive the maximum agency matching
contribution for the year, the employee must contribute at least four percent of
his of her base pay each pay date. There are usually 26 pay dates but sometimes
27 pay dates per year. A FERS employee is entitled to receive agency automatic
one percent of base pay contributions whether or not the employee contributes.
To ensure that the FERS employees do not miss out on matching, the
TSP has provided the following worksheet for these employees. To
download the worksheet (1-page PDF) click here
The worksheet is also found on the TSP website at http://www.tsp.gov
About the Author
Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in
Silver Spring, MD. He is a seminar speaker at federal employee retirement
seminars throughout the country for the National Institute of Transition
Planning, Inc. , and an author of numerous publications on federal employee
benefits.
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