Exceeding the Annual Contribution Limit to the TSP and to Another Tax-Deferred Retirement Plan

The Internal Revenue Code (IRC) imposes an annual limit (called the “elective deferral” limit) on elective deferrals of tax-deferred traditional TSP contributions and after-tax Roth TSP contributions made from a federal employee’s salary).

This column explains how the elective deferral limit may apply to federal employees who contribute to both the TSP and to another qualified retirement plan such as a 401(k), 403(b), or a 408(k)-retirement plan. It is important to note that annual contributions to a contributory IRA (traditional, Roth or to both) are not part of elective deferrals. IRA have separate annual contribution limits as set by the IRS.

This column is composed of two parts:

The first part presents annual limits on federal employee contributions to their TSP account in which the employee does not contribute to any other retirement plan.

The second part presents limits on contributions to the TSP and to another tax-deferred retirement plan when a federal employee participates in the TSP and another retirement plans during the year..

Limits on Contributions to a Federal Employee’s TSP Account

In order to understand limits on employee contributions to a TSP account, it is important to discuss elective deferrals. Elective deferrals are amounts that a federal employee voluntarily asks his or her agency to deduct from the employee’s paycheck and contribute to the TSP. All tax-deferred traditional TSP contributions and all after-tax Roth TSP contributions that an employee elects to contribute during the calendar year to the TSP are considered elective deferrals.

The combined total of an employee’s tax-deferred traditional and after-tax Roth TSP contributions (excluding contributions toward the “catch-up” limit) cannot exceed the elective deferral limit in any year. As will be discussed below, “year” refers to the calendar year (January 1 – December 31).

For those employees who are age 50 or older during the tax year, IRC section 414(v) allows those employees to make additional contributions called “catch-up” contributions. The catch-up contributions are in addition to the elective deferrals and also have annual contribution limits.

The following table presents 2022 and 2023 elective deferral and “catch-up” contributions limits for the TSP.

“Calendar Year” Versus “Leave Year”

A federal employee’s annual salary, as shown on his or her SF-50 (Notice of Personnel Action), is based on the “leave year” in which the “leave year” rarely coincides with the “calendar year” (January 1 – December 31). For example, the 2021 leave year started on January 3,2021 and ended January 1, 2022. Most federal employees are paid bi-weekly, and their annual SF-50 salary is paid evenly spread over 26 pay dates within the calendar year.

The fact that federal employees are paid on a “cash basis” and have their elective deferrals and catch-up contributions spread over 26 pay dates within the calendar year means that an employee is able to contribute for all 26 pay periods during the leave year, as the following example illustrates:

Example 1.

Dan is a 45-year-old federal employee. During calendar year 2022, employees under age 50 were allowed to contribute a maximum $20,500 to the TSP. Dan contributed the full $20,500 to the TSP in which he contributed $20,500/26, or $788.46 each pay date. His final pay date in December 2022 was December 23, 2022. For calendar year 2023, the elective deferral limit increased to $22,500. Dan in early December made the election to contribute $22,500/26, or $865.38 to the TSP, starting with his first pay date in January 2023. Note that pay period 26 of leave year 2022 started on December 18,2022 and ended December 31, 2022.

Since federal workers who worked pay period 26 of leave year 2022 were paid for pay period 26 in early January 2023 (the first “pay date” of calendar year 2023) employees like Dan who reached the elective deferral limit of $20,500 (for calendar year 2022) in late December 2022 were able to contribute to the TSP during pay period 26 of leave year 2022. Dan therefore had $865.38 deposited into his TSP account in early January 2023, his first contribution to his TSP account for calendar year 2023.

What Happens to Employee TSP Contributions When the Annual Limit is Reached?

An employee who was younger than 50 during 2022 and who reached the elective deferral limit of $20,500 before his or her last pay date of the year will not be able to contribute to the TSP from the day he or she reached the $20,500 through the remainder of the calendar year.

The TSP system will not allow any employee TSP contributions to be processed that will cause the total amount of contributions for the year to exceed the annual excess deferral limit. The employee’s payroll office must ensure that an employee’s contributions automatically resume the first pay date in the following calendar year.

A FERS employee’s agency matching contributions will also be suspended when an employee reaches the elective deferral limit. This is because agency matching contributions are based on the amount of employee contributions that an employee makes each pay period.

For employees who were older than age 49 during 2022, once the elective deferral limit of $20,500 was reached, employee TSP contributions will automatically continue towards the $27,000 “catch-up” contribution limit.

What Happens to Agency Automatic (1 percent) Contributions When Employee Contributions are Suspended?

When a FERS employee’s TSP contributions are suspended, the employee’s Agency’s Automatic (1 percent of the employee’s current year SF 50 salary) contribution will continue even though the employee’s contributions are suspended but ads explained above, the Agency Matching contributions are suspended. This is because a FERS employee is entitled to receive Agency Automatic (1 percent) Contribution whether or not the employee contribution to the TSP. On the other hand, Agency Matching contributions depend on whether the employee is contributing via payroll deduction to either the traditional TSP or to the Roth TSP.

In summary, if a federal employee (CSRS or FERS) contributed only to the TSP and not to any other qualified retirement plan during 2022, then it is not possible that the employee will be able to make excess elective deferrals. But that is not the case if the employee participated in both the TSP and another qualified retirement plan during 2022, as is discussed next.

Participating in the TSP and Another Tax-Deferred Retirement Plan

This discussion relates to excess deferrals in which federal employee contributions (made via payroll deduction) are made to the TSP and to another qualified retirement plan (such as 401(k), 403(b), 408(k) or 501(c)(18) plan) in the same calendar. The combined annual contributions to the two retirement plans exceed the relevant annual limit on elective deferrals and, if an employee is age 50 or older, additional contributions toward the catch-up limit.

Some federal employees may have participated in another retirement plan and the TSP during 2022, in which case the elective deferral limit applies to the combined total of all elective deferrals made to both retirement plan for the year.

The following examples illustrate:

Example 2. Janet, age 45, worked for a private company from January 1,2022 through April 30,2022 and entered federal service on May 1, 2022. During the four months of 2022 in which Janet worked for the private company, Janet contributed $12,000 to the company’s 401(k) retirement plan. During the other eight months of 2022 that Janet was in federal service during 2022, she contributed $20,500 to the TSP. Janet’s combined contribution to the 401(k) plan and the TSP during 2022 totaled $12,000 plus $20,500, or $32,500. Janet’s elective deferrals for the year exceeded the limit of $20,500 by $32,500 less $20,500, or $12,000.

Example 3. Clark, age 62, retired from federal service on June 30,2022 with 32 years of federal service. Before he retired from federal service, Clark was eligible and did contribute the maximum $27,000 to his TSP account during the period January 1st through June 30, 2022. Shortly after retiring from federal service, Clark got a job in private industry. The company offered a 403(b)-retirement plan. Clark contributed a total of $18,000 to the 403(b) plan between August 1,2022 and December 31, 2022. Clark’s combined contributions to the TSP and the 403(b) retirement during 2022 totaled $27,000 plus $18,000, or $45,000. Clark’s elective deferral and catch-up contributions limit for 2022 was exceeded the limit of $27,000 by $45,000 less $27,000, or $18,000.

What An Employee Can Do If They Are Contributing to the TSP and to Another Retirement Plan and the Combined Contributions Exceed the Annual Limit

A federal employee can request a refund of any excess deferrals from one or more of the retirement plans in which he or she participates. Each plan then has the option of returning the employee’s excess deferrals plus associated earnings by April 15th of the year following the year in which excess deferrals were made.

The TSP Refund Process

To request a refund of excess deferrals made to the TSP in addition to another tax-deferred retirement plan during 2022, a TSP participant must log onto his or her TSP account and use the Form TSP -44 (Refund Request). The TSP participant must submit Form TSP-44 to the TSP no later than March 15,2022 in order that the excess deferral refund is processed by April 15, 2023. Those TSP participants who have difficulty accessing Form TSP-44 when they log onto their TSP account should contact the ThriftLine Service Center.

Tax Consequences of Contributing More to Retirement Plans than the Annual Limit in Any Year

Excess deferrals are treated as income in the year an employee made the contributions, whether or not they are refunded to the employee. TSP participants should note that the total amount of deferred income is reported by each employer in Box 12 on the employee’s W-2 form for the year the employee made the contributions. Those employees who have made traditional TSP excess deferrals during 2022 must report the total amount of the excess deferrals as taxable wages for 2022. Roth TSP excess deferrals are also taxable wages for the year 2022, but the amount that is required to be reported is included in Box 1 of the 2022 Form W-2.

Those TSP participants who elect to receive excess deferrals as a refund from the TSP will receive from the TSP IRS Form 1099-R (Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts) which will indicate the amount of the excess deferral that was refunded to the TSP participant. Those TSP participants who already filed their 2022 federal and state income tax returns and who did not include the excess deferrals on their 2022 income tax return will need to file an amended 2022 income tax return.

Treatment of Earnings on Excess Deferrals for Tax Purposes

Earnings distributed with excess deferrals are considered taxable income in the year in which they are distributed. This is unlike the excess deferrals themselves which are considered taxable income in the year they are contributed. If a TSP participant has Roth TSP contributions as part of excess deferrals, the TSP participant will owe taxes on the Roth TSP earnings as well, even if the TSP participant meets the IRS requirements to receive Roth TSP earnings tax-free. That is, it has been five years since January 1st of the year since the TSP participant made his or her first Roth TSP contribution, and the TSP participant is at least age 59.5 or permanently disabled.

The following examples illustrate:

Example 4. Caryn, age 42, was a federal employee during 2022 and contributed a total of $17,000 to the traditional TSP. Caryn also worked for a private company during 2022 and contributed $6,000 to the company 401(k) plan and received a full company matching contribution. Caryn’s combined contributions to the traditional TSP and to the traditional 401(k)) plan totaled $17,000 plus $6,000, or $23,000, which exceeds the 2022 elective deferral limit of $20,500, by $2,500. In late January 2022, Caryn filed Form TSP-44 and requested a refund of the $2,500 she contributed to the traditional TSP. She will add the $2,500 to her taxable wages when she prepares her 2022 federal income tax return. The TSP also distributed to Caryn in late January 2023 $127 of earnings associated with the $2,500 traditional TSP contribution she made during 2022. Caryn will include the $127 of earnings on her 2023 federal income tax return.

Example 5. Leonard, age 60, is a federal employee and contributed $27,000 to the Roth TSP during 2022. Leonard also worked for a private company during 2022 and contributed $3,000 to the company’s Roth 401(k) plan. Leonard’s combined Roth TSP and Roth 401(k) contributions totaled $30,000, exceeding the 2022 elective deferral limit and catch-up limit of $27,000 by $3,000. Leonard filed Form TSP-44 in late January 2023 requesting a refund of $3,000 of his 2022 Roth TSP contributions. He does not have to add the $3,000 to his taxable wages earned during 2022 because the $3,000 was already included on his 2022 W-2 Box 1 (Taxable Wages, Tips, and Other Compensation). The TSP sent Leonard a check for $82 in late January 2023 which represented the earnings associated with the Roth TSP contributions. Leonard will include the $82 on his 2023 federal income tax return.

Three other items of importance associated with a TSP participant who has excess deferrals as a result of participation in another qualified retirement plan:

• Agency Matching Contributions associated with excess deferrals that are returned to the TSP participant. The TSP participant’s agency will be notified of the return of these excess deferrals and income associated with the excess deferrals. The agency is required to remove the agency matching contributions associated with these excess deferrals.

• IRS tax penalty associated with an early TSP withdrawal. The distribution associated with a request to refund excess deferrals is not subject to an IRS early withdrawal penalty (10%) provided the distribution is made by April 15.

• After April 15, 2023, a TSP participant cannot request to have the 2022 excess deferral amount refunded. Instead, the distribution will remain in the account. If the distribution is traditional TSP (pre-tax), the TSP participant will be taxed twice on the distribution – once for the year 2022, and then again when the TSP participant separates and withdraws the traditional TSP account. If the distribution is Roth TSP (after-tax), then the Roth excess deferrals will not be treated as after-tax 2022 contributions. This means that the double-taxation rule will also apply to excess Roth TSP contributions.