Federal Employees 50 and Older Are Encouraged to Make TSP “Catch-Up” Contributions

“Catch-up” contributions are supplemental tax deductible contributions that federal employees age 50 and older (or turning age 50 during the calendar year) can make to the Thrift Savings Plan (TSP).

TSP catch-up contributions are an addition to the maximum amount that employees can contribute through regular contributions. During 2010, all federal employees (CSRS and FERS) may contribute a maximum $16,500 in “regular” contributions and $5,500 in “catch-up” contributions.

In order to make TSP catch-up contributions, an employee must be:

• age 50 or older during the calendar year in which the catch-up contributions are made. This is the case no matter what time of the year the employee becomes age 50. For calendar year 2010, this means that employees born on or before Dec. 31, 1960, are eligible to make catch-up contributions throughout 2010;

• currently employed and in pay status; and

• making regular contributions to a civilian or uniformed services TSP account or both, and/or equivalent employer plan such as a 401(k), 403(b) or 408 plan, that will equal the maximum allowed by the IRS (the “elective deferral limit”) which is $16,500 for 2010.

  “Catch-up” contributions are supplemental and do not count against the IRS’ elective deferral limit of $16,500 during 2010. This means that the combination of regular and “catch-up” contributions cannot exceed $22,000, which includes the $16,500 elective deferral limit plus the $5,500 “catch-up” contribution limit.

Those employees 50 and older who have made a hardship withdrawal from the TSP are ineligible to make “catch-up” contributions within six months of their making a hardship withdrawal.

“Catch-up” contributions can be made only via a deduction from an employee’s gross pay. Bonuses or special/incentive pay (applicable to members of the uniformed services) cannot be used for “catch-up” contributions.

“Catch-up” contributions apply to the year in which the employee made the contribution — even if the contributions are posted to the account in the following year. This means that if a retiring employee’s last pay date is in December and he or she has reached the maximum contribution limit for the year ending Dec. 31, then no “catch-up” contribution may be made from the employee’s last paycheck. This is true even if the check is dated sometime in January.

Consider the following example.

Ellen intends to retire from federal service on Dec. 31, 2010 at which time she will be 57 years old. During 2010, Ellen intends to contribute the maximum $16,500 regular contributions and $5,500 “catch-up” contribution to her TSP account. Ellen will not be able to elect to any of her final paycheck contributed to the TSP. This is because even though she is retiring Dec. 31, 2010 and her final paycheck will be dated in January 2011, Ellen would have reached the maximum $22,000 TSP contribution limit by the time she retires on December 31.

“Catch-up” contributions may only be made through payroll deductions and are made prior to federal and in most cases, state tax deductions. Employees must submit to their agency or service branch a Catch-Up Contribution Election Form TSP-1-C, or Form U-1-C for members of the uniformed services. The employee or uniform service member must include the dollar amount – not a percentage of gross pay – to be deducted from their gross pay. The employee or service member must also certify that the employee or service member expects to contribute the maximum amount of regular contributions for the calendar year. If an agency or service branch uses an electronic version of the form, such as Employee Express, PostalEase, EBIS or MyPay, then the employee may be required to submit his or her election electronically.

A “catch-up” contribution election can be made anytime during the year. An election becomes effective the first full pay period after the employee’s agency receives the employee’s election request. The election will only be valid through the end of the calendar year in which it is made. This means that employees will have to submit a new Catch-Up Contribution Election form each year.

When the TSP receives an employee’s catch-up contributions, it will post the contributions upon receipt and allocate it to the employee’s account according to the employee’s current contribution allocation. An employee cannot make a separate contribution election for “catch-up” contributions. Once the “catch-up” contributions are posted to an employee’s TSP account, they become part of the employee’s account balance and are subject to the same rules as other tax-deductible and tax-deferred employee contributions. The employee is immediately vested in these contributions.

An interfund transfer has the same effect on “catch-up” contributions as on the rest of the money in the employee’s account. The contributions are available for loans and withdrawals and spouses’ rights also apply with respect to withdrawals.

Employees can start, change or stop making “catch-up” contributions at any time during the year. To start, request a change, or to stop making “catch-up” contributions, employees have to submit Form TSP-1-C or make their request via their agencies’ electronic enrollment process. Once “catch-up” contributions are stopped, they will not resume automatically. The employee must complete and submit another Form TSP-1-C in order to restart the contribution process. This can also be done electronically.

“Catch-up” contributions are reported like regular TSP contributions to the IRS on an employee’s Form W-2, Wages and Tax Statement.