The Federal Retirement Thrift Investment Board (FRTIB) published a proposed rule earlier this month in the Federal Register expanding hardship withdrawal options in the Thrift Savings Plan (TSP).
The new rule would allow participants to take hardship withdrawals for expenses related to natural disasters.
Current regulations permit in-service withdrawals from TSP accounts based upon four different types, or conditions, of financial hardship experienced by participants:
(1) Negative monthly cash flow;
(2) certain medical expenses of participant and his or her spouse or dependents;
(3) payments for repairs or replacement of property resulting from personal casualty losses; and
(4) attorney’s fees and court costs associated with a participant’s separation or divorce.
In the past, expenses and lost income resulting from natural disasters were not one of the four authorized hardship expenses.
Instead, in order to allow participants to take hardship withdrawals based on natural disaster expenses and losses, the TSP relied on relief and guidance issued by the Internal Revenue Service (IRS), which made disaster relief announcements to allow participants in private sector 401(k) plans to take hardship withdrawals for natural disaster expenses and losses.
The IRS recently announced that it will discontinue its practice of issuing disaster relief announcements. Rather than issuing such an announcement after a natural disaster to permit plans to authorize such hardship withdrawals, it amended its regulation to add to its safe harbor list of financial hardship expenses a new type of expense incurred as a result of certain disasters.
Because the TSP has relied on the IRS’ disaster relief announcements to authorize hardship withdrawals for expenses and lost income relating to natural disasters, and because those announcements will no longer be made by the IRS in light of its amended regulation, the FRTIB is proposing to add to its list of authorized hardship expenses, the expenses and losses (including loss of income) resulting from a natural disaster as declared by the FEMA in order to allow TSP participants to make financial hardship withdrawals for such natural disaster expenses.
Comments on the proposal are currently being accepted until March 16, 2020.