The CARES Act allows the Thrift Savings Plan (TSP) to offer temporary loan and withdrawal options to TSP participants who are affected by the coronavirus. On May 14, 2020, the TSP announced that the loan options will be available no later than June 22, 2020 and that the withdrawal options will be available in mid-July 2020.
This column discusses what loan options and withdrawal options will be available for participants affected by COVID-19. It should be emphasized that these options are available to a TSP participant only if the participant qualifies and meets one or more of the following criteria:
· The TSP participant has been diagnosed with the virus SARS-CoV-2 or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention.
· The TSP participant’s spouse or dependent, as defined in section 152 of the Internal Revenue Code of 1986, has been diagnosed with such virus or disease by such a test.
· The TSP participant is experiencing adverse financial consequences as a result of being quarantined, being furloughed or laid off, or having work hours reduced due to such virus or disease. Or being unable to work due to lack of child care due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).
Only a qualified individual receiving a coronavirus-related distribution is allowed to take advantage of the favorable tax treatment below. Also, a qualified individual must designate TSP withdrawal(s) as a coronavirus distribution when he or she files their tax returns. To do that, IRS Form 8915-E is to be used. The IRS is expected to make the form available before the end of 2020.
Early withdrawal penalty waived
A TSP participant younger than age 55 who designates a TSP withdrawal as a coronavirus-related distribution at the time of filing his or her 2020 federal income tax return (using IRS Form 8915-E) will not be subject to the 10 percent additional tax on early withdrawals from the TSP. Early withdrawals are pre-age 55 TSP withdrawals for employees who retired from federal service before age 55, with the exception of law enforcement officials, firefighters, and air traffic controllers.
CARES Act withdrawal
An eligible TSP participant can make a one-time withdrawal of up to $100,000 from a civilian or uniformed services TSP account. For those participants who are still in federal service, the usual requirements that the participant be at least age 59.5 (in order to make an “age-based” withdrawal) or that the participant meet specific financial hardship criteria are waived.
The withdrawal is subject to federal and state (if applicable) income taxes. Although a TSP participant may request that the TSP withhold money from the withdrawal for federal income tax purposes, the TSP will not automatically do that. The tax liability resulting from the TSP withdrawal made by a qualified individual may be paid spread over a three-year period, starting with the year in which the TSP participant receives the distribution.
The following example illustrates:
Ryan, age 52, is a federal employee and has been diagnosed with COVID-19. Ryan withdraws $30,000 from his TSP account as a coronavirus-related distribution on May 18, 2020. Ryan could report $10,000 of taxable income on each of his 2020, 2021 and 2022 federal income tax returns.
A qualified individual who made a coronavirus-related distribution from an eligible retirement plan such as the TSP may repay all or part of the distribution to any eligible retirement plan, including the TSP, a 401(k) or a 403(b) retirement plan, within three years after the date the individual received the distribution. In the example above, Ryan could repay the $30,000 distribution between now and May 18, 2023 back to his TSP account.
If a coronavirus-related distribution is repaid, the original distribution will be treated as though it were repaid in a direct plan-to-plan transfer so that the individual will not owe federal and state (if applicable) income taxes on the distribution.
Increased TSP loan amount
The maximum TSP loan amount is increased from $50,000 to $100,000 and the portion of an eligible TSP participant’s balance he or she can borrow is raised from 50 percent to 100 percent. The deadline for applying for a loan with this increased maximum will be in September 2020. The TSP will soon announce the exact cutoff date.
An eligible TSP participant may suspend his or her obligation to make payments on his or her TSP loan or loans for 12 months. This will also extend the term of the loan for 12 months. The loan extension applies to existing loans and loans taken out for the remainder of 2020. The TSP will make a new form available to request this extension. The deadline to apply for TSP loan extensions is Dec. 31, 2020.