Edward A. Zurndorfer, Certified Financial Planner

Under the provisions of Public Law 111-31 -- the Thrift Savings Plan Enhancement Act of 2009 -- new and rehired federal employees will be automatically enrolled in the Thrift Savings Plan (TSP).

This automatic enrollment becomes effective at federal agencies during the first full pay period in August 2010. Both CSRS and FERS-covered employees are subject to the automatic enrollment rules. Those employees who are on an agency's employment rolls prior to implementation of automatic enrollment will retain their TSP eligibility status and will not become automatically enrolled in the TSP if they do not have a TSP election on file with the agency. Automatic enrollment also applies to re-employed annuitants.

Unless a new or rehired employee, or a rehired annuitant, makes his or her own TSP contribution elections, their agencies must enroll them in the TSP at a contribution rate of three percent (3%) of their basic pay each pay period. Employee contributions and agency matching contributions in the case of FERS-covered employees will be invested in the Government Securities Investment (G) fund until the employee makes a formal fund allocation request with the TSP. The employee's agency must also ensure that a FERS-covered employee receives the appropriate one percent (1%) and agency matching contributions.

New and rehired employees are encouraged to read the information provided by their agency regarding their automatic enrollment status and eligibility to participate in the TSP. They should access the TSP website at http://www.tsp.gov to obtain the latest information about the TSP. The booklet, Summary of the Thrift Savings Plan, is especially informative and useful.

Employees who are automatically enrolled in the TSP and who wish to cancel their enrollment may request a refund of the contributions deducted from their basic pay. This includes earnings associated with the first 90 days of automatic enrollment. To request a refund of contributions, TSP Form TSP-25 -- Automatic Enrollment Refund Request -- must be submitted directly to the TSP Service Office. It must be received by the TSP Service Office no later than 90 days after the receipt of the first automatic enrollment contribution to the TSP. This is known as the "refund deadline" date. The refund deadline date is provided to employees in the "TSP Welcome Letter" sent to all employees upon receipt of their first contribution.

Other information related to the automatic enrollment refund request:

• Form TSP-25 must be received no later than the refund deadline date provided in the TSP Welcome Letter. The TSP will honor a timely request for a refund even if the participant has made a contribution election, contribution allocation, or inter-fund transfer or subsequently separated from federal service. The TSP will also honor a refund request if the participant has taken other actions that could be construed as "active" participation in the plan, such as a loan or in-service withdrawal. While the refund from the TSP is considered as "ordinary income" to the employee for federal and state income tax purposes, the refund is not subject to the Internal Revenue Code's 10 percent early withdrawal penalty tax.

• For FERS participants who are eligible to request a refund of automatic enrollment contributions and who submit Form TSP-25, the participant will also forfeit the agency matching contributions and associated earnings at the time the refund of employee contributions is made. But the agency automatic one percent contribution will remain in the participant's TSP account.

• If a TSP participant who requests a refund of TSP contributions leaves federal service and is subsequently rehired, then he or she will be automatically enrolled in the TSP. The newly rehired employee may not be eligible for another opportunity to request a refund of automatic enrollment contributions from the period of re-employment. Under rules mandated by the IRS, a new 90-day refund period is not allowed unless one full calendar year (January through December) has passed since the employee's last automatic enrollment contribution. The TSP Welcome Letter will provide rehired annuitants with their refund deadline date (which may be a previous date) and information regarding their eligibility to receive a refund of automatic enrollment contributions after being rehired. If one full calendar year has passed since the participant's last automatic enrollment contribution, the TSP Welcome Letter will include a new refund deadline date.

Those new and rehired employees and rehired annuitants hired on or after Aug. 1, 2010, should be sure to check that three percent of their gross salary has been deducted and contributed to the TSP. For FERS-covered employees, the automatic one percent contribution and three percent matching contribution should have also been contributed by the employee's agency. New and rehired employees and rehired annuitants are encouraged to make their fund allocation election at the time of their hire. Otherwise, as stated above all monies will be contributed to the "G" fund.

About the Author

Edward A. Zurndorfer is a Certified Financial Planner, 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.  He is an instructor at federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. and writes numerous columns and books on federal employee benefits.

Posted on 7/29/2010

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