The Federal Retirement Thrift Investment Board (FRTIB), which administers the Thrift Savings Plan (TSP), plans to switch to the “spillover” method for catch-up contributions beginning with the first pay period of 2021.
Participants will continue using the TSP’s current catch-up program through the final pay period of 2020. Spillover, which is used by many retirement plans and is available under current law, will apply to all active civilian and uniformed services members turning age 50 or older.
How does spillover work?
The spillover method will streamline the catch-up contribution process for eligible participants. The TSP’s current catch-up contribution program requires participants to make an affirmative catch-up election each year, certify that they will meet the annual IRC 402(g) elective deferral limit (EDL), and spend considerable effort figuring out how to time their contributions. Spillover will eliminate the need for these steps, dramatically simplifying the process.
- Participants turning 50 or older will no longer need to make a separate catch-up election. Once they reach the EDL, their regular contributions will automatically start counting toward the IRC 414(v) catch-up contribution limit.
- Recordkeeping will be simpler. Payroll offices and the TSP will no longer need to use separate catch-up records. For participants turning 50 or older, contributions toward the EDL and the catch-up limit will use the same record. This will not pose any issues for tax reporting as the two are already combined on participant W-2s.
- For eligible members of the Federal Employees Retirement System (FERS) and the Blended Retirement System (BRS), contributions “spilling over” toward the catch-up limit will be matched up to the 5% of basic pay to which participants are already entitled.
When does spillover take effect?
The TSP is targeting January 2021 with spillover being fully operational by late December 2020 so that participants can make their elections for the first pay period of 2021. (Since the IRS sets limits for catch-up contributions each year, spillover must take effect at the beginning of a new calendar year.)
Important note: Spillover changes cannot take effect until after the final pay period of 2020, since participants will need access to the current catch-up process until then.
How will spillover benefit TSP participants?
The TSP’s current catch-up contribution program requires participants to make an affirmative catch-up election each year, certify that they will meet the EDL, and spend considerable effort figuring out how to time their contributions to meet each limit at the right time.
This has led to some confusion: Some participants choose to make catch-up contributions improperly (because they have not met the EDL), and others fail to take advantage of the ability to contribute more. Additionally, a significant number of catch-up eligible participants contribute too much toward the EDL and “max out” before the year is over. When this happens, participants miss out on the matching their regular contributions would have received.
Spillover makes it easier for eligible participants to take advantage of the chance to contribute more toward their retirement. Rather than making a separate election and trying to time contributions to reach the EDL, participants will keep contributing through their normal payroll deductions up to the catch-up limit. Spillover will also help prevent participants from missing out on the matching they’re already entitled to.
With spillover, participants can receive matching on contributions toward the catch-up limit. What does this mean?
Spillover helps prevent people from missing out on money they’re already entitled to.
This largely applies to two groups:
- Participants who make catch-up contributions but do not reach the EDL. Some participants use catch-up without maximizing their regular contributions and thus miss out on the matching their additional regular contributions would have received. Post-spillover, it will not be possible to contribute toward the catch-up limit without first meeting the EDL.
- Participants who reach the EDL early and are eligible for catch-up. Currently, the TSP cannot accept additional regular contributions once a participant reaches the EDL. Therefore, if participants reach the EDL early, they miss part of their match for the year.For example: In our current environment, if Sam, a 53-year-old participant, reaches the EDL in October and switches to catch-up for November and December, he won’t get any matching during those last two months of the year. Post-spillover, matching will continue in November and December, on the first 5% of his basic pay.
Since eligible participants are currently entitled to receive matching contributions on 5% of their basic pay, spillover will essentially have no impact on agency/service matching costs.
With spillover, participants will contribute more through their regular contributions. How does that affect the match?
Spillover helps prevent participants from missing out on what they’re already entitled to receive in matching.
For example, if Sally was contributing $730 per biweekly pay period in regular contributions to get to $19,000, and she suddenly starts contributing $960 biweekly to get to $25,000 (the combined EDL and catch-up limits), the match she gets does not change. Her match is based on her basic pay rather than the amount of her contribution.
In other words, as long as participants are contributing at least 5% of their basic pay, the match they’re entitled to will not change, regardless of how much they increase their contributions.
Does spillover affect participants younger than 50 who reach the EDL early?
No. The spillover method relates to catch-up contributions, which are only available for those who are turning 50 or older in a calendar year.