Starting Jan. 1, 2021, the Federal Retirement Thrift Investment Board (FRTIB) will implement a new method for “catch-up” contributions, called the “spillover” method. Spillover of TSP contributions will apply to all active civilian and uniformed services members age 50 or older during the current calendar year. The spillover method will help simplify the TSP catch-up program for both participants and agencies or services.
This column explains how the spillover method will work starting Jan. 1, 2021.
Current TSP Catch-Up Contributions Program
Under the current catch-up TSP program, TSP participants have to make a separate affirmative catch-up election every year by submitting Form TSP-1-C (Catch-Up Contribution Election) (Form TSP-U-1-C for uniformed services members) or electing to make catch-up contributions through their electronic payroll systems. Payroll offices then submit catch-up contributions to the TSP on special payroll records indicating that the contributions are specifically designated as catch-up contributions..
In addition, TSP participants are required to certify that they plan on meeting the Internal Revenue Code (IRC) 402(g) elective deferral limit for the year ($19,500 during 2020) in order to make the catch-up contributions; however, this requirement is not always clear to participants or agencies.
One associated problem is when FERS-covered participants make catch-up contributions without meeting the IRC elective deferral limit, they could miss out on agency matching contributions.
New TSP Catch-Up Contributions Program Starting Jan. 1, 2021
Therefore, starting Jan. 1, 2021, the TSP will no longer use forms Form TSP-1-C and TSP-U-1-C or the special payroll records that designate contributions as catch-up.
Participants will no longer separate catch-up elections in electronic payroll systems either. Employing agencies will submit catch-up contributions on the same payroll records used to submit the equivalent record for regular contributions.
Those contributions will continue until catch-up eligible participants reach the combined annual elective deferral and catch-up limits for the year. For the year 2021, the TSP recently announced that for the year 2021, the annual elective deferral limit will be $19,500 and catch-up contributions will be limited to $6,500 for a total of $26,000 for employees over age 49 at some time during 2021.
The TSP system will determine if a TSP participant is eligible to make additional contributions toward the catch-up limit based on the participant’s date of birth. A participant is eligible to make catch-up contributions in any year in which the participant is age 50 or older, including the year in which the participant is age 49 at the beginning of the year, but becomes age 50 anytime during the year.
The following example illustrates:
Karen, age 49, is a FERS-covered employee earning $130,000 during 2021. Karen will become age 50 in September 2021. In late December 2020, Karen elects through her agency’s electronic payroll enrollment process to have $1,000 withheld from her paycheck to be contributed to Karen’s TSP account, effective with Karen’s first pay date in January 2021. During the 20th pay date of 2021, a total of $20,000 will have been withheld from Karen’s pay of which $19,500 is regular contributions and $500 in catch-up contributions. For the remaining pay dates in 2021, the $1,000 deducted from Karen’s paycheck will spill over”until the $6,500 catch-up limit is reached.
In short, if a TSP participant is eligible to make catch-up contributions, anything contributed to the TSP beyond the elective deferral limit will automatically start counting toward the annual catch-up contributions limit. These additional contributions will spill over until the participant meets the annual catch-up limit for those age 50 or older.
Contributions spilling over toward the catch-up limit will be matched but only on up to the 5 percent of salary which participants are already entitled. Each pay date, a participant who is eligible for agency or service matching contributions must contribute at least 5 percent of his or her salary to the TSP (either to the traditional TSP or to the Roth TSP) in order to receive the maximum 4 percent match from the agency or service.
An employee or service member younger than age 50 who contributes the maximum for the year (the annual elective deferral limit) before the last pay date of the year will lose matching contributions, as the following example illustrates:
Ken, age 48, is a FERS-covered employee, earning $104,000 during 2020. Ken contributes $1,000 to the TSP every pay date during 2020. On pay date number 20 (September 25, 2020), Ken’s cumulative TSP contribution for 2020 is $19,500. Therefore, for the remainder of 2020, Ken cannot contribute to the TSP and will not be able to receive any matching TSP contributions from his agency.
Returning to Example 1, although Karen reaches the $19,500 elective deferral limit also at pay date 20, her agency matching contribution will continue because her “spillover” of $1,000 as catch-up contributions are used as the basis for agency matching contributions.
Some additional information and guidance for TSP participants related to the new rules on TSP catch-up contributions starting Jan. 1, 2021:
Eligible participants who do not wish to contribute towards the catch-up limit.
After spillover, the TSP will no longer reject contributions beyond the annual elective deferral limit for those participants age 50 or older during the year. If participants do not wish to contribute past the elective deferral limit, they should adjust the amount of their biweekly contributions accordingly. This adjustment should be made ideally as close to the first pay date in January as possible so as the correct amount of contributions are made starting with the first pay date in January and continuing for the rest of the year.
Those TSP participants who plan to retire before the end of the year should make adjustments in their contributions so as to contribute a sufficient amount each pay date to reach their desired contribution amount for the year in which they plan to retire.
Participants who contribute to both a civilian and a uniformed services TSP account.
If a participant contributes to both a civilian and a uniformed services member TSP account, the annual elective deferral limit applies to the total contributions the participant makes during the year to both accounts. It works the same way for contributions toward the annual catch-up limit.
Participants who want their contribution toward the catch-up limit to be traditional, Roth, or a mix of both.
Eligible participants have one payroll election. Thus, whatever they elect for their contributions up to the annual elective deferral limit (to the traditional TSP, Roth TSP or both accounts) would spill over and start counting toward the catch-up limit. For uniformed service members serving in a combat zone and who reach the annual elective deferral limit with tax-exempt compensation, members should allocate any spillover beyond the annual addition limit to the Roth TSP, with nothing to the traditional TSP. This is because the TSP cannot accept any tax-exempt traditional TSP contributions toward the catch-up limit.