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) href="http://www.myfederalretirement.com/public/TSP-oc91-13-worksheet.pdf"

target=_blank>click here

The worksheet is also found on the TSP website at href="http://www.tsp.gov">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.